ZINC - Horsehead Holding Corp

[cmlber]

@tylerdurden

 

Its getting difficult to trust mngt that the anode replacement will help them match the 60% capacity rates in the cell house, especially with the electrolyte issues.

I don`t really know how long these solutions will take and the debt deadlines are closing in fast. 

 

Say they reach 60% cap by April, which in itself is a miracle. It still dosen`t change the debt scenario. Are you thinking they can extend the loan periods at that point and avoid restructuring?  Add to this the 40% equity dilution thats coming.. its hard to see the silver lining.

 

If they reach ~60% utilization by mid Q1 and are able articulate a solid plan to bump up to 75% utilization over the course of the year, I see no reason why the bondholders (maturing in Q2 '17) would not be willing to refinance under more favorable terms as the likelihood of eventual repayment will be high under these utilization rates.  I highly doubt the debt holders want to force a bankruptcy and liquidation if there is evidence suggesting eventual repayment.

 

Why couldn't a distressed debt investor who was interested in the company come in and pay a premium for the debt? They could essentially force them into bankruptcy and get the company at a cheap price. Just trying to think of ways as to how the equity loses.

 

If the ramp up is progressing and someone would be willing to hold the debt with a maturity two years out, a distressed debt investor can't "force" them into bankruptcy.  They could just issue new debt with a further out maturity date to other holders with the proceeds to be used to pay back the existing debt.

 

Of course, that assumes someone would be willing to hold the debt with a maturity two years out.  In order for that to be the case, we either need very good progress at Mooresboro in the next 9-12 months, or a very significant recovery in zinc prices, or some combination of decent progress at Mooresboro and a decent recovery in zinc prices (more likely).

 

If you put reasonable odds on the likely scenarios, I think it's very easy to say the expected value of the equity is much higher than this price, but a $0 outcome is certainly one of many possibilities.

[SnarkyPuppy]

@tylerdurden

 

Its getting difficult to trust mngt that the anode replacement will help them match the 60% capacity rates in the cell house, especially with the electrolyte issues.

I don`t really know how long these solutions will take and the debt deadlines are closing in fast. 

 

Say they reach 60% cap by April, which in itself is a miracle. It still dosen`t change the debt scenario. Are you thinking they can extend the loan periods at that point and avoid restructuring?  Add to this the 40% equity dilution thats coming.. its hard to see the silver lining.

 

If they reach ~60% utilization by mid Q1 and are able articulate a solid plan to bump up to 75% utilization over the course of the year, I see no reason why the bondholders (maturing in Q2 '17) would not be willing to refinance under more favorable terms as the likelihood of eventual repayment will be high under these utilization rates.  I highly doubt the debt holders want to force a bankruptcy and liquidation if there is evidence suggesting eventual repayment.

 

Why couldn't a distressed debt investor who was interested in the company come in and pay a premium for the debt? They could essentially force them into bankruptcy and get the company at a cheap price. Just trying to think of ways as to how the equity loses.

 

If the ramp up is progressing and someone would be willing to hold the debt with a maturity two years out, a distressed debt investor can't "force" them into bankruptcy.  They could just issue new debt with a further out maturity date to other holders with the proceeds to be used to pay back the existing debt.

 

Of course, that assumes someone would be willing to hold the debt with a maturity two years out.  In order for that to be the case, we either need very good progress at Mooresboro in the next 9-12 months, or a very significant recovery in zinc prices, or some combination of decent progress at Mooresboro and a decent recovery in zinc prices (more likely).

 

If you put reasonable odds on the likely scenarios, I think it's very easy to say the expected value of the equity is much higher than this price, but a $0 outcome is certainly one of many possibilities.

 

This, coupled with the tangible assets and +EBITDA businesses, is a solid articulation of why I am currently long at current prices. 

[hobbit]

if i understand it correctly, the management would not be spending 10 million $ of hard to find cash on replacing anodes if they did not believe the process was becoming more stable. The primary reason given for the anodes going bad is start and stop nature of the plant along with organic impurities in the solution . I believe anodes are being replaced now coz the management have sufficient confidence about the stability of the process. They probably knew that a large portion of anodes needed replacing all along but waited until the plant was stabilized to do it. lets see.....

[hardincap]

In the last CC jim Hensler mentioned they need to replace half the anodes

"Yes, we've got somewhere in the neighborhood of 70 or 74 anodes and cathode peers in the cellhouse right now, that's per cell. So we've got 70 cell times that number. And we estimate that about half of those anodes are going to need to be replaced"

 

now they are seeing 2/3rd need to be replaced..whats going on ?

 

Seems consistent with mgmt's tendency over the past 18 months to over promise and under deliver, though they have become more cautious in the specificity of projections in recent months. One explanation could be that the continued carbon filter problems enabled impurities to affect additional anodes in the cell house, driving up the replacement number.  Hence they must resolve the root cause issues affecting the cell house to achieve normal anode replacement cycles.

 

Even at this stage, whatever they say, probably best to assume a 50%-100% multiplier. If they say 10 weeks to replace the anodes, assume it's 15-20 weeks. From Nov 9th, 10 weeks translated to a target of Jan 15, so adding 5 weeks is Feb 19, and then another 5 weeks is Mar 25.

 

It's rather exasperating the number of times management overpromised and underdelivered. In Q2 they said the pilot bleed treatment should get production up to 330t/day. In the latest call they lowered that number to mid 200s. In Q3 they said half the anodes will need to be replaced, all in 10 wks, but in the latest monthly update that got changed to 2/3rd and Feb-ish timeframe. Someone needs to get on the next cc and call them out, this is starting to border on negligence. 

[abitofvalue]

In the last CC jim Hensler mentioned they need to replace half the anodes

"Yes, we've got somewhere in the neighborhood of 70 or 74 anodes and cathode peers in the cellhouse right now, that's per cell. So we've got 70 cell times that number. And we estimate that about half of those anodes are going to need to be replaced"

 

now they are seeing 2/3rd need to be replaced..whats going on ?

 

Seems consistent with mgmt's tendency over the past 18 months to over promise and under deliver, though they have become more cautious in the specificity of projections in recent months. One explanation could be that the continued carbon filter problems enabled impurities to affect additional anodes in the cell house, driving up the replacement number.  Hence they must resolve the root cause issues affecting the cell house to achieve normal anode replacement cycles.

 

Even at this stage, whatever they say, probably best to assume a 50%-100% multiplier. If they say 10 weeks to replace the anodes, assume it's 15-20 weeks. From Nov 9th, 10 weeks translated to a target of Jan 15, so adding 5 weeks is Feb 19, and then another 5 weeks is Mar 25.

 

It's rather exasperating the number of times management overpromised and underdelivered. In Q2 they said the pilot bleed treatment should get production up to 330t/day. In the latest call they lowered that number to mid 200s. In Q3 they said half the anodes will need to be replaced, all in 10 wks, but in the latest monthly update that got changed to 2/3rd and Feb-ish timeframe. Someone needs to get on the next cc and call them out, this is starting to border on negligence.

 

This is a good point. I am pretty sure they take questions from shareholders so its something you should strongly consider. Just need to press * or whatever the button is to get in the queue to ask questions and wait for them to call on you.

 

 

[str8shot]

In the last CC jim Hensler mentioned they need to replace half the anodes

"Yes, we've got somewhere in the neighborhood of 70 or 74 anodes and cathode peers in the cellhouse right now, that's per cell. So we've got 70 cell times that number. And we estimate that about half of those anodes are going to need to be replaced"

 

now they are seeing 2/3rd need to be replaced..whats going on ?

 

Seems consistent with mgmt's tendency over the past 18 months to over promise and under deliver, though they have become more cautious in the specificity of projections in recent months. One explanation could be that the continued carbon filter problems enabled impurities to affect additional anodes in the cell house, driving up the replacement number.  Hence they must resolve the root cause issues affecting the cell house to achieve normal anode replacement cycles.

 

Even at this stage, whatever they say, probably best to assume a 50%-100% multiplier. If they say 10 weeks to replace the anodes, assume it's 15-20 weeks. From Nov 9th, 10 weeks translated to a target of Jan 15, so adding 5 weeks is Feb 19, and then another 5 weeks is Mar 25.

 

It's rather exasperating the number of times management overpromised and underdelivered. In Q2 they said the pilot bleed treatment should get production up to 330t/day. In the latest call they lowered that number to mid 200s. In Q3 they said half the anodes will need to be replaced, all in 10 wks, but in the latest monthly update that got changed to 2/3rd and Feb-ish timeframe. Someone needs to get on the next cc and call them out, this is starting to border on negligence.

 

This is a good point. I am pretty sure they take questions from shareholders so its something you should strongly consider. Just need to press * or whatever the button is to get in the queue to ask questions and wait for them to call on you.

 

Agreed mgmt should be called out on a conference call but recognize that the sell side firms that are already business partners or candidates for more business (financing) will not call them out publicly. And their buy/sale recommendations should be taken with a grain of salt - t's the classic conflict of interest. That aside, it's painfully obvious to anyone who has been following the Mooresboro story that mgmt has managed the ramp-up and expectations poorly. The critical thing is to aggressively manage risk, and they have failed miserably up to this point. Hopefully the recent SVP hire, giving him direct responsibility for Mooresboro, will help get them over the hump. No surprise that mgmt no longer projects % capacity utilization targets in specific timeframes as they did a few quarters back, and instead keeps it general with the usual caveat of "we cannot guarantee squat".

 

The only way mgmt can begin rebuilding any confidence is by achieving 60% by the end of Feb (or March in the worst case). And if not an ugly situation will get even uglier. Given their track record, I give them a 40-50% shot to achieve 60% cap util by the end of Feb, and a 60-70% shot by the end of March, based on the most recent info. I'm hoping they'll exceed 4000 tons in December to finally demonstrate that they are making real headway.

[kranthi_vic]

Mngt doent know how to operate this plant period. This is why they hired Hatch associates, hopefully hatch has good resources that can speedily resolve the hydrometallergical issues..i wont mind having them onboard for a year to get the plant to 100%, if they are resourceful.

 

Does anyone have info on Hatch?

Also any links to the 2or3 other plants in the world this plant is modelled on? Did they ever reach 100% util. This info maybe be useful to us.

[kranthi_vic]

I joined the conference call before but I think we are in listen only mode...will the operator take a question from us? Do we need to be in a pet approved list..?

 

On a good note  : Further zinc production cuts.. ;D

http://www.mineweb.com/news/base-metals-and-minerals/zinc-gains-as-nyrstar-pledges-cuts-to-us-output/?v=f9308c5d0596

[tylerdurden]

It seems Glencore will be delivering its zinc production cut promises:

http://www.glencore.com/assets/media/doc/speeches_and_presentations/2015/GLEN-Investor-Update-2015-final.pdf

 

On page 12, they give zinc production cost as 41 c/lbs for 2014A and 2015E and 33 c/lbs for 2016. I thought Horsehead's cost would be at 40-45 c/lbs with the new plant working full capacity. These guys are already there and will beat that with a huge margin next year??? I didn't like to see those numbers. I don't know how credible they are though...

[cmlber]

It seems Glencore will be delivering its zinc production cut promises:

http://www.glencore.com/assets/media/doc/speeches_and_presentations/2015/GLEN-Investor-Update-2015-final.pdf

 

On page 12, they give zinc production cost as 41 c/lbs for 2014A and 2015E and 33 c/lbs for 2016. I thought Horsehead's cost would be at 40-45 c/lbs with the new plant working full capacity. These guys are already there and will beat that with a huge margin next year??? I didn't like to see those numbers. I don't know how credible they are though...

 

Tyler, the drop from 41 c/lb to 33 c/lb is because the mines they close are the most expensive ones, not because of some cost improvement on the same mines.  That's not unusual for the lowest end of the cost curve.  It's important to note that this is cash cost, it would be substantially higher if they included a charge for depreciation of the costs to start the mines.  I don't think it's possible to build a new mine with all-in costs anywhere remotely close to 40-45 c/lb, and Horsehead's "mine" never depletes so that's the better comparison.

 

Btw, Glencore upped the production cuts to 500-550k tons in this presentation, it was previously 500k.

[str8shot]

Moody's downgrades Horsehead to Caa1; outlook negative:

 

https://www.moodys.com/research/Moodys-downgrades-Horseheads-to-Caa1-outlook-negative--PR_341112

 

 

[tylerdurden]

It seems Glencore will be delivering its zinc production cut promises:

http://www.glencore.com/assets/media/doc/speeches_and_presentations/2015/GLEN-Investor-Update-2015-final.pdf

 

On page 12, they give zinc production cost as 41 c/lbs for 2014A and 2015E and 33 c/lbs for 2016. I thought Horsehead's cost would be at 40-45 c/lbs with the new plant working full capacity. These guys are already there and will beat that with a huge margin next year??? I didn't like to see those numbers. I don't know how credible they are though...

 

Tyler, the drop from 41 c/lb to 33 c/lb is because the mines they close are the most expensive ones, not because of some cost improvement on the same mines.  That's not unusual for the lowest end of the cost curve.  It's important to note that this is cash cost, it would be substantially higher if they included a charge for depreciation of the costs to start the mines.  I don't think it's possible to build a new mine with all-in costs anywhere remotely close to 40-45 c/lb, and Horsehead's "mine" never depletes so that's the better comparison.

 

Btw, Glencore upped the production cuts to 500-550k tons in this presentation, it was previously 500k.

 

Thanks, cmlber. That makes sense. I was shocked to see that improvement and now I know why. I look forward to see their production update for Q415. That would demonstrate the level of seriousness of these guys to the market. LME stocks are gradually decreasing which is good news as well I guess.

[nafregnum]

Moody's downgrades Horsehead to Caa1; outlook negative:

 

https://www.moodys.com/research/Moodys-downgrades-Horseheads-to-Caa1-outlook-negative--PR_341112

 

Are credit ratings typically tied to "investment criteria" for mutual funds or ETFs that may be holding shares of ZINC and could that mean that ZINC will see a fair amount of selling pressure in the new few days / weeks?

 

[abitofvalue]

Moody's downgrades Horsehead to Caa1; outlook negative:

 

https://www.moodys.com/research/Moodys-downgrades-Horseheads-to-Caa1-outlook-negative--PR_341112

 

Outlook negative is the most concerning part. Anyone have the actual report? Ratings agencies usually will have access to more than just publicly released data. So the fact that they still think the outlook is negative may indicate that more plant issues or longer path to operational plant is likely. Would be interesting to see what's driving the negative outlook if beyond the many issues identified on this board.

[Homestead31]

i don't think you should read too much into the "outlook negative" beyond what negatives are already known. 

 

there is a ton of data showing that analysts base their forecasts on current conditions and are unable to successfully incorporate multipath analysis into their forecasts.

 

there were problems last week, and there will be problems next week, but a moody's analyst saying outlook negative doesn't change a thing.  he doesn't know anymore than anyone else.

[hobbit]

Any input on the recent volatility in price...tax loss selling ?

[tylerdurden]

Any input on the recent volatility in price...tax loss selling ?

 

Zinc prices keep going down. High yield volatility could have been an issue as well since they'll have to renegotiate their debt. Of course there is no shortage of shorts for this thing...

[ERICOPOLY]

Any input on the recent volatility in price...tax loss selling ?

 

Zinc prices keep going down. High yield volatility could have been an issue as well since they'll have to renegotiate their debt. Of course there is no shortage of shorts for this thing...

 

 

The tide is going out for the price of zinc commodity, and you can see who is swimming naked (ZINC).

[Guest roark33]

I am not sure there are a lot of shorts left in this name at this price.  I think the decline in Zinc prices is more of a headwind.  Additionally, the decline in zinc prices isn't merely a function of oversupply, but lack of demand (obviously correlated) in steel, especially in the US.  Lack of demand for steel production in the US will continue to give leverage to steel companies with all of their suppliers.  I think people continue to underestimate how much leverage large customers have with peripheral suppliers.  Take a look at what happened to RYAM when it had a pricing dispute with a large customer.  30% customers always win, especially when a company has debt.

[str8shot]

With no positive catalysts at present and Moody's recent downgrade, a continued move down is not surprising. There remains great uncertainty around the following interrelated risks: 1) Mooresboro capacity ramp-up (what is the trajectory and timing?) 2) zinc prices (have they bottomed? when and to what degree will they rebound?) 3) sufficient liquidity to support the ramp-up and 4) ability to refinance debt maturing in 2017.

 

An asset sale (e.g., Zochem) would lessen the overall risk, providing some cushion, but ultimately the determining factor will be the rate of progress at Mooresboro.

 

Another possibility is a third party could provide a loan convertible to equity, as John Malone's Liberty Media did for Sirius in 2009 (http://www.huffingtonpost.com/2009/02/17/liberty-media-saves-siriu_n_167496.html). But for that to happen HH needs to demonstrate that the Mooresboro asset can achieve its intended objectives.

 

The race is on and time is running short.

[kranthi_vic]

Price would get a little better if the plant shows signs of improvement.

At that point the shorts will really help us get back up quickly..until then there will be no respite.

[finetrader]

If it goes close to 1$/share. I might tempted to buy. But I would buy it like I would buy an option.

 

[SnarkyPuppy]

Any longs buying at these prices?  Nothing has changed since it was $3 a share except the Moody's report - so essentially nothing has changed.

 

I'm not given the fact that I already own the max I want to own and I see this as a binary bet.  Just wish I would've waited til now of course

[luck]

wondering if anyone has heard anything from mohnish pabrai regarding ZINC.  from what i remember, this was once a 22% (ballpark) position.  wondering if anyone knows if he is still in it or has any recent thoughts?  thanks in advance.

[TwoCitiesCapital]

Any longs buying at these prices?  Nothing has changed since it was $3 a share except the Moody's report - so essentially nothing has changed.

 

I'm not given the fact that I already own the max I want to own and I see this as a binary bet.  Just wish I would've waited til now of course

 

I got long recently at $2.30 and sold calls against it for 1/2016 @3 for $0.20. I'll continue to attempt to roll calls at a 30-50% above the current price if it allows me to recoup a good portion of my principle over a month like the original trade.