ZINC - Horsehead Holding Corp

[greatimes]

Horsehead Holding (ZINC) Said in Grace Period After Coupon Miss - Bloomberg, Citing Debtwire

 

http://www.streetinsider.com/Corporate+News/Horsehead+Holding+(ZINC)+Said+in+Grace+Period+After+Coupon+Miss+-+Bloomberg,+Citing+Debtwire/11216870.html

 

[aws]

I don't really get how there was so much option volume on the calls today.  It looks like around 200k calls all sold on the bid, which represents more than 1/3rd of the total shares outstanding.  Clearly the big money is betting on this being a zero, but it just seems so crazy to take unlimited risk by shorting these 5 month duration options for a nickel each.  They could get absolutely destroyed if there was a short squeeze.

 

I think similar call activity took place in ACI right before the bankruptcy, with huge volumes of calls being sold for next to no premium even for 2018 dates.  Maybe someone is trying to repeat the same play here.

[SnarkyPuppy]

Can someone with some experience in distressed situations give a high level summary of different scenarios here?

 

Do the common shares have 0 chance for upside at this point?

 

Obviously missing a coupon is bad news but I'm just curious if there are any "positive" reasons to do so.

[walt373]

I don't really get how there was so much option volume on the calls today.  It looks like around 200k calls all sold on the bid, which represents more than 1/3rd of the total shares outstanding.  Clearly the big money is betting on this being a zero, but it just seems so crazy to take unlimited risk by shorting these 5 month duration options for a nickel each.  They could get absolutely destroyed if there was a short squeeze.

 

I think similar call activity took place in ACI right before the bankruptcy, with huge volumes of calls being sold for next to no premium even for 2018 dates.  Maybe someone is trying to repeat the same play here.

 

Agreed, probably the same guy. These distressed shorts get very interesting when someone is willing to take on the unlimited risk for almost nothing.

[str8shot]

Great comment, thanks!

High risk investment that didn't play out, I just try to see this as a learning experience to learn from my mistakes.

 

If anyone is still interested.. :P, the Boston college just posted a video from Pabrai's conference on the 3rd of Dec. 2015:

 

Not to take a dig at a guy who is down but maybe he should have spent that two hours selling Zinc instead.

 

That's the classic "not to take a dig but.." here comes the dig. But your point is fair. At about the 55:00 mark of the video Pabrai mentions that he's essentially a shameless cloner but that he did have an original idea years ago called Horsehead.. then he says "but we'll have to talk about that at another time".

[kranthi_vic]

Is the equity worth anything at this point? Are all of you selling or is anyone going to waiting for the restructuring?

[BG2008]

The next thing you guys should look for is if a distressed shop, Oaktree, HIG etc starts buying the debt.  Look up their reputation.  If they are known for being aggressive, the equity maybe in the money, but it can quickly become worthless. 

[tylerdurden]

IR is trying to picture this as just a delayed payment under grace period and not a missed payment at all. Lazard is hired for various projects they say. I don't still get how a publicly traded company can get away without informing investors through 8-K in this type of situation.

[Swami X]

I must admit I am a bit shaken with the news today even though I have no position in the stock. I spent a decent amount of time researching this Company over the last 6 months, and have read 10-Ks and earnings transcripts for the 4 years, and looked at the progress of the Namibia plant. I was close to taking a small initial position (20-40bps) over the next few weeks.

 

My thesis was based on the ramp up of the plant over the next 6-12 months. Anglo American initially did a pilot for the Namibia plant that ran from 1999 to 2000, began construction of the new plant in Jan 2001, first production in July 2003, and achieved 95% design capacity in Dec 2004 and full 100% design capacity in July 2005. It took Anglo America two years (post-construction) to fully ramp up the production.

 

Here are the lessons I learnt (noting for my own records):

 

(1) I found the management team to be technically competent. In my opinion, they were very knowledgeable about ongoing technical issues and were open sharing details on the earnings calls.  I am an engineer myself, and was unduly impressed with their technical knowledge and openness.

 

(2) They were extremely poor in managing operational risks and liquidity to see the Company through. They were flying too close to the sun and got burnt. They had so many opportunities to raise equity or debt capital at fair prices but for some unfathomable reason were reluctant to do.

 

(3) There were many red flags of their financial inaptitude. The cost estimates for the plant gradually rose from $375M in July 2012 to $490M in late 2013. There were equipment quality and design issues at the plant. I feel they should have hired someone like Greg Belland in the design phase of the plant - in 2011/12, not in Oct 2015.

 

(4) Despite significant drop in the share price, the insider/management buying was tiny.

 

(5) The management was of course so confident that they dismantled and sold off the old plant even though the new plant was not operational. This gave me the confidence in their ability to ramp up the production at the new plant otherwise why would one do so.

 

(6) On earnings calls and the SEC filings, the management continued to state that they have “not identified any insurmountable technical or operational obstacles that would prevent the facility from operating at full capacity.” According to 10-K, these are “typical operational issues involved with any new plants.”

 

I don’t think the management had bad intentions. I wonder if it was simply be a case of overconfidence.

 

[Green King]

I must admit I am a bit shaken with the news today even though I have no position in the stock. I spent a decent amount of time researching this Company over the last 6 months, and have read 10-Ks and earnings transcripts for the 4 years, and looked at the progress of the Namibia plant. I was close to taking a small initial position (20-40bps) over the next few weeks.

 

My thesis was based on the ramp up of the plant over the next 6-12 months. Anglo American initially did a pilot for the Namibia plant that ran from 1999 to 2000, began construction of the new plant in Jan 2001, first production in July 2003, and achieved 95% design capacity in Dec 2004 and full 100% design capacity in July 2005. It took Anglo America two years (post-construction) to fully ramp up the production.

 

Here are the lessons I learnt (noting for my own records):

 

(1) I found the management team to be technically competent. In my opinion, they were very knowledgeable about ongoing technical issues and were open sharing details on the earnings calls.  I am an engineer myself, and was unduly impressed with their technical knowledge and openness.

 

(2) They were extremely poor in managing operational risks and liquidity to see the Company through. They were flying too close to the sun and got burnt. They had so many opportunities to raise equity or debt capital at fair prices but for some unfathomable reason were reluctant to do.

 

(3) There were many red flags of their financial inaptitude. The cost estimates for the plant gradually rose from $375M in July 2012 to $490M in late 2013. There were equipment quality and design issues at the plant. I feel they should have hired someone like Greg Belland in the design phase of the plant - in 2011/12, not in Oct 2015.

 

(4) Despite significant drop in the share price, the insider/management buying was tiny.

 

(5) The management was of course so confident that they dismantled and sold off the old plant even though the new plant was not operational. This gave me the confidence in their ability to ramp up the production at the new plant otherwise why would one do so.

 

(6) On earnings calls and the SEC filings, the management continued to state that they have “not identified any insurmountable technical or operational obstacles that would prevent the facility from operating at full capacity.” According to 10-K, these are “typical operational issues involved with any new plants.”

 

I don’t think the management had bad intentions. I wonder if it was simply be a case of overconfidence.

what is you value of the company if everything works out ?

[luck]

fyi, this is one of ali alavi's responses from someone that emailed him.  there was another similar response i believe posted before that was slightly different (i think).

 

"I believe the volatility is related to an article published today by Debtwire that reported on a "missed payment" on our convertible notes. There is a 30 day grace period for such payments during which time payment is still considered to be on time. We are still within that grace period so describing it as a missed payment or failure to pay may be viewed as a bit of a mischaracterization in light of the existence of the grace period."

 

i'm skeptical like everyone else.  maybe we'll get a press release sometime soon.

[SnarkyPuppy]

I wouldn't expect much from management

[switesh]

Some of the Directors & Officers seem to be buying shares at $0.01 per share according to the 'Statement of changes in beneficial ownership of securities' on 2016-01-05

 

http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001385544&owner=include&count=40&hidefilings=0

 

Am I wrong in understanding that they're getting a massive upside (with no downside) by doing so?

[str8shot]

I wouldn't expect much from management

 

particularly when you consider that in late October 2015 they said they have sufficient capital, leveraging the ATM program if needed, to fund operations for 12 months.

 

 

[SnarkyPuppy]

Some of the Directors & Officers seem to be buying shares at $0.01 per share according to the 'Statement of changes in beneficial ownership of securities' on 2016-01-05

 

http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001385544&owner=include&count=40&hidefilings=0

 

Am I wrong in understanding that they're getting a massive upside (with no downside) by doing so?

 

These are part of management's compensation and are not open market purchases.  Refer to the "Explanation of Responses" section.  The CFO bought a relatively immaterial amount in November if I remember correctly, but as someone mentioned that could've been purely for legal protection. 

[SnarkyPuppy]

Let's play devil's advocate.  Is there any strategic/positive situation in which they would hold off on a coupon payment in the grace period?  For a short term shortfall in working capital?

 

Management is full of shit - and this latest non-press release and "grace period" with a touch of aloofness is just another drop in that bucket.  I'm just trying to see all sides of the story.

[bigspydee]

Have we looked at the option where the debtwire report is a hoax. Companies donot have to disclose operational activity (specifically payments) unless they are material in nature. Whether its day one payment or day30 payment within the grace period need not be reported. May be IR is right?

[SnarkyPuppy]

Have we looked at the option where the debtwire report is a hoax. Companies donot have to disclose operational activity (specifically payments) unless they are material in nature. Whether its day one payment or day30 payment within the grace period need not be reported. May be IR is right?

 

They didn't pay on time - that's been confirmed by IR (they're not in grace period).  So if you accept that - what potential reasons would they miss the payment and enter grace period?  They literally forgot to make the coupon payment?  Probably not

[cmlber]

Have we looked at the option where the debtwire report is a hoax. Companies donot have to disclose operational activity (specifically payments) unless they are material in nature. Whether its day one payment or day30 payment within the grace period need not be reported. May be IR is right?

 

They didn't pay on time - that's been confirmed by IR (they're not in grace period).  So if you accept that - what potential reasons would they miss the payment and enter grace period?  They literally forgot to make the coupon payment?  Probably not

 

I got incredibly lucky on this one (if you can call selling at $2 for an 80% loss of capital luck...).

 

If they just missed the payment by mistake they would have issued an immediate statement saying yes the report is right, it was a clerical error and is being rectified immediately.  Not the disingenuous response from IR that another poster noted where they said it's not "technically" a default. 

 

The only plausible explanations I can come up with are that something about missing a payment starts the clock for something related to filing for bankruptcy, or they are negotiating to extend the maturities on the debt and by missing a payment and reducing the FMV of the debt (I assume the debt traded down significantly today), they are able to reduce the attractiveness of the creditors selling their debt and make extending the maturities relatively more attractive.

 

I don't think this is a working capital related missed payment.  They have probably $50m+ of liquidity, so extending $1.8m out 30 days does nothing unless it's a monthly payable.  On a semi annual payable like interest, it will only reduce working capital for 30 days and then working capital goes right back up.

 

The fact that there was no comment from management on this is just another example of how terrible this management team is.  We shouldn't be surprised though.  What CFO goes to a private investor meeting (Pabrais California meeting) and comments on a substantially higher break even point then had been disclosed previously?  The stock sold of like 20%+ the Monday/Tuesday after that meeting and many, myself included, only found out why when someone posted about the CFOs comments on this board.

[Swami X]

 

I sent a note and got a reply from IR (Ali Alavi) within a few minutes. They don't intend to issue a press release or 8-K. He did't provide a reason for delaying the payment. Like cmlber, I also find it hard to believe that they do not have $1.8M in cash to pay the bondholders. It may be a negotiating tactic with their creditors.

 

"The payment can be made within the grace period and Lazard is providing us assistance on a number of fronts.  And at this time we have no plans to issue a press release or 8-K. Thanks.

 

Ali"

 

[jason]

I feel for the people invested in Zinc and Posco.  Luckily I never invested in either but I followed both as Im sure most of you did based on the "cloning" strategy ie Pabrai and Spier. 

 

Lesson learned i think after the disaster for both is don't blindly clone based on what "super investors" do. 

[RadMan24]

11 million shares traded today huh? All over a $1.8 million grace period delayed payment?

 

Well, if it goes through Chapter 11, I'll just buy the senior notes as well. At this point, no point in selling till the earnings release. You can get all worked up over what's going on, but that's been the risk all along. Market sentiment right now is not favorable what so ever to anything negative.

 

Disclosure: Totally bought $2 worth today instead of a lotto ticket.

[kranthi_vic]

I broke my own rule to never invest in commodities..so i asked for this. Anyway, why blame mohnish..hes always saying copy someones biggest ideas..even when i copied i didnt allocate a small portion like he did.

 

Mngt during the may, june calls made me believe the rampup is just around the corner.

 

This has been a good learning experience. I know about mcnulty curves...and also know to never break my own rules especially when confronted with my own greed..discipline in investing is paramount. Commodities never again.

 

Sorry for everyone who has to go thru this.

[ERICOPOLY]

I broke my own rule to never invest in commodities..so i asked for this.

 

They are difficult because you don't know what the price is going to be for the commodity.  The prices swing like a wrecking ball on a long pendulum chain, and some combination of demand and extraction price ultimately guides it.  It can swing a long way out, and then take far too long to swing back the other way -- far too long for these high-risk companies.

 

XOM isn't doing too much worse than the general market.  So you can avoid getting completely cleaned out by going with a low-risk commodities company.

 

Anyway, ZINC seems to be a high-risk company, not a low risk company like XOM.  I don't really think it fits the slogan "high uncertainty, low risk".  The risk is certainly not low, otherwise they would be able to ride out a zinc commodity crash just fine (similar to XOM riding out a low oil environment).

 

 

[SnarkyPuppy]

For what it's worth, two separate journalists have told me via email that they received direct answers from the IR represenative Ali that managements full intention is to make the payment within the grace period.

 

Obviously I'm skeptical to the point of assuming everything I hear from management is a lie at this point, and this is not into to base a decision on, but it's info nonetheless.