ZINC - Horsehead Holding Corp

[moody202]

There a several new steel mini-mills that will be coming on-line in the US in the near future. Big River Steel has a new plant in Osceola Arkansas and US Steel has a conversion in Fairfield Alabama. Horsehead may build a new EAF dust processing facility if they can secure a contract for at least 50% capacity for the new plant. They basically have a monopoly on the market so the odds of them getting the contract is very high.

 

 

If the info about new mini mills is correct (I haven't researched it) then opening a new facility maybe the right business strategy for ZINC. The mill operators have to do something with the EAF dust. If Horsehead doesn't figure out a way to be involved, they are opening the door for competitors/alternate offerings. Best thing in the situation would be to get aggressive and open a dust reprocessing facility.

 

If I recall correctly, Pabrai bought some stock when it was in $13-$14 range. If his methodology is to look for a double at a minimum then his valuation would put the stock north of $25. Whether you believe in Pabrai or not is a different story!

[rsmehta]

There a several new steel mini-mills that will be coming on-line in the US in the near future. Big River Steel has a new plant in Osceola Arkansas and US Steel has a conversion in Fairfield Alabama. Horsehead may build a new EAF dust processing facility if they can secure a contract for at least 50% capacity for the new plant. They basically have a monopoly on the market so the odds of them getting the contract is very high.

 

They currently get paid to take on EAF dust from their customers and fill the remaining portion with feedstock purchased at 45-50% of the LME price. A new dust facility could produce an additional 36,000 tons of feedstock per year and would reduce feedstock costs alone by (36,000 tons *$2,150*45%) = $35 million or $22.6 million after tax. The facility would cost $65 million an ROI of 35%. 

 

Excluding a new facility, FCF should be between $115-$130 million per year, (including interest cost) when the new facility is ramped up. A new EAF dust facility could add $22.6 million, refinancing debt could add another $10 million or so. At this point FCF would be $148 - $162. Also zinc prices are depressed and a few of the worlds largest and lowest cost mines (Skorpion Mine) are closing (12.5% of total world production over the next couple years) which will push up the marginal cost on the cost curve). Every $.1 increase in zinc prices results in $30 million in additional EBITDA ($20 million in FCF).

 

After accounting for the new share offering the market cap is $780 million with FCF of $115-$130. So at todays price it’s at 6x FCF. And that is excluding some potential drivers that could increase FCF beyond $150 million per year. That's pretty compelling if you ask me.

 

The downside is very low in my opinion because of Horsehead's position at the bottom of the cost curve. When the Skorpion Mine closes they will be the worlds lowest cost producer. Horsehead is actually still profitable at zinc prices where they were in March of 2009. For example at $.55 zinc prices they are still likely to do $10-$20 million per year in FCF (that's including interest and maintenance capex).  I've owned Horsehead since 2009 when it was trading at less than $3 per share. I think it's worth over $30.

 

Alex

 

    Thank you for this great reply,

 

      Btw, loved both your reports on ZINC and PKX and have followed in with you on both of these ideas.

 

        Lets hope they work out :).

[cubsfan]

Alex - your well thought out input here is very much appreciated. Thank you.

[Guest notorious546]

Attached a sell-side report on zinc miners/refiners. didn't really find too much of it helpful. for what its worth some notes from the report below.

 

- estimated that closing of some large mines (including Century, Lisheen, and Skorpion) will remove ~0.8 Mtpa from supply by 2018 which will be offset by project restarts and expansions of primary + byproduction operations.

- zinc production from china has represented ~30% of mined zinc supply and 40% of smelter output recently. supply in china has grown at an 15% CAGR in 2009 to 2012, which played a large role in why zinc prices did not recover over that time period.

-Appendix A has a global supply forecasts for some key mines/countries that could be interesting for you guys. Page 32 of 37

2014-07-17_BMO_-_Zinc_Miners_and_Refiners.pdf

[Against the crowd]

My biggest concern with Zinc is continued execution risk for the new projects....I think we are already 4 qtrs delayed in the full ramp up of this plant and company had large gaffes in starting up Mooresboro plant.  I am in industrial businesses and know startup issues can occur for a project of this size but to me project management at Mooresboro plants seems little weaker. They had some major misses which were caught at a very late stage of plant ramp up. We are personally involved in a similar project like Zinc where we are tearing apart our old plant and building a brand new facility. The added complexity in our project is that we are rebuilding new plant at the same location as our old plant so we have tear the plant in phases and ensure production continuity. However, we have some amazing project management consultants from Japan who have steered our project very well.

 

Overall I am disappointed by their execution but I continue to hold this stock. First got in at $6 and then sold it at $14.....Then got in again at $12 trying to copy Pabrai. The bull case $6 made lot of sense but I am doubting with the melt down in China whether there is enough MOS at $12.

 

[kab60]

This might be a pretty stupid question (actually, two stupid questions), but I'll go ahead anyway; how do I get to participate in the public offering of shares at 12.75 (if possible)? And even though the stock has tanked, it's still a long way from 12.75 at the moment. Shouldn't it move towards 12.75?

[gfp]

I believe that offering has come and gone.  You can not go back in time and participate.

 

This might be a pretty stupid question (actually, two stupid questions), but I'll go ahead anyway; how do I get to participate in the public offering of shares at 12.75 (if possible)? And even though the stock has tanked, it's still a long way from 12.75 at the moment. Shouldn't it move towards 12.75?

[kab60]

I believe that offering has come and gone.  You can not go back in time and participate.

 

This might be a pretty stupid question (actually, two stupid questions), but I'll go ahead anyway; how do I get to participate in the public offering of shares at 12.75 (if possible)? And even though the stock has tanked, it's still a long way from 12.75 at the moment. Shouldn't it move towards 12.75?

 

Well, to be honest I'm not really interested, but I was on vacation when it happened. It just didn't seem like it was meant for retail investors. Just don't understand why it should be only for institutional investor/whatever, if that was the way it worked. Did anyone here participate? I've never taken part in one of these, so excuse the stupid questions. I'll take a look at the prospectus.

[jawn619]

This might be a pretty stupid question (actually, two stupid questions), but I'll go ahead anyway; how do I get to participate in the public offering of shares at 12.75 (if possible)? And even though the stock has tanked, it's still a long way from 12.75 at the moment. Shouldn't it move towards 12.75?

 

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

 

The two most recent 13Gs shows royce+associates with 2million plus shares and blackrock with 3million plus shares. My guess is that the underwriters called up these two funds and got them to buy the majority of the 5million share offering.

[kab60]

This might be a pretty stupid question (actually, two stupid questions), but I'll go ahead anyway; how do I get to participate in the public offering of shares at 12.75 (if possible)? And even though the stock has tanked, it's still a long way from 12.75 at the moment. Shouldn't it move towards 12.75?

 

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

 

The two most recent 13Gs shows royce+associates with 2million plus shares and blackrock with 3million plus shares. My guess is that the underwriters called up these two funds and got them to buy the majority of the 5million share offering.

Yeah, I just noticed that. I just don't get how that's "fair" to existing shareholders. Shouldn't existing shareholders be allowed to buy x shares (x depending on current numbers of shares)? Is this a normal way to do these things?

[jawn619]

This might be a pretty stupid question (actually, two stupid questions), but I'll go ahead anyway; how do I get to participate in the public offering of shares at 12.75 (if possible)? And even though the stock has tanked, it's still a long way from 12.75 at the moment. Shouldn't it move towards 12.75?

 

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

 

The two most recent 13Gs shows royce+associates with 2million plus shares and blackrock with 3million plus shares. My guess is that the underwriters called up these two funds and got them to buy the majority of the 5million share offering.

Yeah, I just noticed that. I just don't get how that's "fair" to existing shareholders. Shouldn't existing shareholders be allowed to buy x shares (x depending on current numbers of shares)? Is this a normal way to do these things?

I'd say this is pretty common. A lot of funds get a discount/sweetheart deals for buying large chunks of stock. If we went to the grocery store you wouldn't be complaining that the store bought chocolate bars at a bulk price of 12.75 a bar while the market price of chocolate bars is 13.50 would you?

[karthikpm]

Is the stock under pressure from Zinc prices or the dilution ?

[kab60]

Not sure, but short interest also increased a bit I believe. Next update will be interesting. :)

[rsmehta]

When do they report Q4 earnings??

[Guest notorious546]

When do they report Q4 earnings??

 

Horsehead Holding Corp. (NASDAQ: ZINC), the parent company of Horsehead Corporation, The International Metals Reclamation Company, LLC and Zochem, Inc. plans to release its 2014 fourth quarter and annual earnings before the market opens on Tuesday, February 24, 2015.

A conference call will be held on Tuesday, February 24, 2015 at 11:00 am ET to discuss the results.  The call will be hosted by James Hensler, President  & CEO, Robert Scherich, Vice President & CFO, and Gary Whitaker, Vice President, General Counsel & Secretary.  Dial-in instructions are as follows:

        Dial-In Number(s):  United States Toll Free:  1 (877) 261-8992

                                              International & US Toll:    1 (847) 619-6548

        Confirmation Number:  38933783       

An Audio-Only Web Conference Cast will also be available from the Investor Relations Corporate Information page of our website http://www.horsehead.net/ or directly at: http://event.on24.com/r.htm?e=936557&s=1&k=7A85C4C50AD7F5CED22B13A5CEF5EB8B

A replay of the call will be available beginning at 1:30 pm ET on Tuesday, February 24, 2015 and ending on Tuesday, March 3, 2015 at 11:59 pm ET.  Dial in instructions for the replay are:

            Dial-In Number(s):  United States:  1 (888) 843-7419

                                            International:  1 (630) 652-3042

            Access Code:        3893 3783#

[rsmehta]

When do they report Q4 earnings??

 

Horsehead Holding Corp. (NASDAQ: ZINC), the parent company of Horsehead Corporation, The International Metals Reclamation Company, LLC and Zochem, Inc. plans to release its 2014 fourth quarter and annual earnings before the market opens on Tuesday, February 24, 2015.

A conference call will be held on Tuesday, February 24, 2015 at 11:00 am ET to discuss the results.  The call will be hosted by James Hensler, President  & CEO, Robert Scherich, Vice President & CFO, and Gary Whitaker, Vice President, General Counsel & Secretary.  Dial-in instructions are as follows:

        Dial-In Number(s):  United States Toll Free:  1 (877) 261-8992

                                              International & US Toll:    1 (847) 619-6548

        Confirmation Number:  38933783       

An Audio-Only Web Conference Cast will also be available from the Investor Relations Corporate Information page of our website http://www.horsehead.net/ or directly at: http://event.on24.com/r.htm?e=936557&s=1&k=7A85C4C50AD7F5CED22B13A5CEF5EB8B

A replay of the call will be available beginning at 1:30 pm ET on Tuesday, February 24, 2015 and ending on Tuesday, March 3, 2015 at 11:59 pm ET.  Dial in instructions for the replay are:

            Dial-In Number(s):  United States:  1 (888) 843-7419

                                            International:  1 (630) 652-3042

            Access Code:        3893 3783#

 

thank you notorious

[Guest roark33]

Q4 earnings.

http://www.sec.gov/Archives/edgar/data/1385544/000115752315000670/a51045718ex99_1.htm

 

I am not the most bullish on this name...Looks like they did the follow-on to address cash flow needs.  They aren't at break-even at the new plant for Q4 and based on the Jan/Feb metrics, they won't be for Q1 either.  Additionally, steel plants are reducing utilization rates.  I just don't understand this investment.  There is obviously tremendous operating leverage in the business, but you are reliant on the operations of one plant.  If it were something simple like miniature golf, where I could easily understand it from the outside, each new press release seems to bring a new reason for  a work stoppage....

[kab60]

Q4 earnings.

http://www.sec.gov/Archives/edgar/data/1385544/000115752315000670/a51045718ex99_1.htm

 

I am not the most bullish on this name...Looks like they did the follow-on to address cash flow needs.  They aren't at break-even at the new plant for Q4 and based on the Jan/Feb metrics, they won't be for Q1 either.  Additionally, steel plants are reducing utilization rates.  I just don't understand this investment.  There is obviously tremendous operating leverage in the business, but you are reliant on the operations of one plant.  If it were something simple like miniature golf, where I could easily understand it from the outside, each new press release seems to bring a new reason for  a work stoppage....

 

Thanks. The old plant lasted for 85 years, I believe, so I don't think it's a big problem that they encounter problems during the rampup - as long as they're fixable. It might even be expected. That said, I'd prefer if everything was just smooth sailing but obviously it's not. Will be interesting to see whether they can get to 75 percent utilisation in march. I'm still long and todays results doesn't change that, but I do consider the investment more risky than others. Might have fallen a bit in love with their competitive advantage, but obviously it's only an advantage if they get things running.

[Haasje]

The way I think about this investment is that the ramp-up problems are sort of an unavoidable part of the ride and at least part of the reason you can get a good price. I think many investors were relieved with the comments about the capital raise on the press release. The way I read it, it implies looking at strategic opportunities was a more important reason than big problems with the new plant.

[kab60]

The way I think about this investment is that the ramp-up problems are sort of an unavoidable part of the ride and at least part of the reason you can get a good price. I think many investors were relieved with the comments about the capital raise on the press release. The way I read it, it implies looking at strategic opportunities was a more important reason than big problems with the new plant.

 

Which is what they repeated today it seems.

 

Some minor things; capital spending was $4.3 million for the quarter, so it seems like the "fixes" haven't been that expensive so far (obviously, it is indirectly due to lost production).

 

They also got $7,5m from Shell. Some writer on SA estimated the total land value of Monaco at $100m, but I have no idea if that's realistic and it's not really part of the thesis. Either way, it does seem like the money they received in Q4 is only part of the full payment.

 

"Other income for the fourth quarter of 2014 included $7.5 million earned under the contract with Shell Chemical LLC to permit early demolition of certain buildings at our Monaca, PA facility."

[cmlber]

Q4 earnings.

http://www.sec.gov/Archives/edgar/data/1385544/000115752315000670/a51045718ex99_1.htm

 

I am not the most bullish on this name...Looks like they did the follow-on to address cash flow needs.  They aren't at break-even at the new plant for Q4 and based on the Jan/Feb metrics, they won't be for Q1 either.  Additionally, steel plants are reducing utilization rates.  I just don't understand this investment.  There is obviously tremendous operating leverage in the business, but you are reliant on the operations of one plant.  If it were something simple like miniature golf, where I could easily understand it from the outside, each new press release seems to bring a new reason for  a work stoppage....

 

The plant was designed to produce 155,000 tpy, and management has always said that could be extended to 175,000 tpy with minimal capex.  I don't think they would say that if getting to 155,000 tpy was going to be impossible.  Bottlenecks are bound to happen in the start up of a new plant like this.  They reiterated an expectation to hit 75% utilization at the end of next month.  They've said 50% utilization is cash flow break even, but most of the FCF comes from just ramping to 75% because beyond that they need to purchase additional feedstock, so the margins on the last 25% of capacity are much lower.  They could generate $80-90m/yr. in normalized FCF (after refinancing) at 75% utilization, on a $710m market cap.  So by the end of March, if management hits its target, the risk buying at todays prices could be gone.  Whether they hit that target is still an unknown, but it seems like a very high probability bet that they get to 330 tpd soon based on the call.

[Haasje]

The way I think about this investment is that the ramp-up problems are sort of an unavoidable part of the ride and at least part of the reason you can get a good price. I think many investors were relieved with the comments about the capital raise on the press release. The way I read it, it implies looking at strategic opportunities was a more important reason than big problems with the new plant.

 

Which is what they repeated today it seems.

 

Some minor things; capital spending was $4.3 million for the quarter, so it seems like the "fixes" haven't been that expensive so far (obviously, it is indirectly due to lost production).

 

They also got $7,5m from Shell. Some writer on SA estimated the total land value of Monaco at $100m, but I have no idea if that's realistic and it's not really part of the thesis. Either way, it does seem like the money they received in Q4 is only part of the full payment.

 

"Other income for the fourth quarter of 2014 included $7.5 million earned under the contract with Shell Chemical LLC to permit early demolition of certain buildings at our Monaca, PA facility."

 

I wrote that article on SA. The land sale is probably not a large driver. I got to the $100 million by multiplying the nr. of acres Horsehead owns by the price Shell paid per acre for a much smaller piece of adjacent land. What I'm unsure of is how the tax break that is attached to the land may influence the price. Shell also kept its options open which may have helped it in the negotiations. It could be very wrong ofcourse.

[oddballstocks]

The way I think about this investment is that the ramp-up problems are sort of an unavoidable part of the ride and at least part of the reason you can get a good price. I think many investors were relieved with the comments about the capital raise on the press release. The way I read it, it implies looking at strategic opportunities was a more important reason than big problems with the new plant.

 

Which is what they repeated today it seems.

 

Some minor things; capital spending was $4.3 million for the quarter, so it seems like the "fixes" haven't been that expensive so far (obviously, it is indirectly due to lost production).

 

They also got $7,5m from Shell. Some writer on SA estimated the total land value of Monaco at $100m, but I have no idea if that's realistic and it's not really part of the thesis. Either way, it does seem like the money they received in Q4 is only part of the full payment.

 

"Other income for the fourth quarter of 2014 included $7.5 million earned under the contract with Shell Chemical LLC to permit early demolition of certain buildings at our Monaca, PA facility."

 

I wrote that article on SA. The land sale is probably not a large driver. I got to the $100 million by multiplying the nr. of acres Horsehead owns by the price Shell paid per acre for a much smaller piece of adjacent land. What I'm unsure of is how the tax break that is attached to the land may influence the price. Shell also kept its options open which may have helped it in the negotiations. It could be very wrong ofcourse.

 

As someone who is from the area I'd say your valuation is very generous.  There is a LOT of empty zoned industrial land in that area.  Monaca is a very depressed area.  Really the only reason Shell was able to buy/build there is because Monaca needs revenue so bad they don't have much in the way of opposition.

 

A quick drive from Monaca down 65 to Pittsburgh passes a few dozen giant empty industrial lots ready to be rebuilt.  Unless the ZINC lot has something special there isn't much demand for these spaces.

 

But you never know, rabbits do get pulled out of hats here and there.

[matts]

I will say up front that I don't know ZINC in any great detail.

 

But just wanted to point out that the general tone of the thread is now starting to remind me of the one on Fortress Paper from 2-3 years back. I suggest anyone in this name investigate that investment if they have not already.

 

Hope I'm wrong and wish you all best of luck.

 

[jawn619]

I will say up front that I don't know ZINC in any great detail.

 

But just wanted to point out that the general tone of the thread is now starting to remind me of the one on Fortress Paper from 2-3 years back. I suggest anyone in this name investigate that investment if they have not already.

 

Hope I'm wrong and wish you all best of luck.

 

 

I just read the posts of Fortress paper alongside a 5 year chart on yahoo finance. It was like watching a horror movie as the lambs get led to slaughter. Every time a forum member posted that they picked up XX number of shares at XX.XX I wanted to be like that guy in the theater that yells "NOOOO don't go in there!!! It's a trap"

 

Here are what i found to be a few key lessons that we can all learn from

1. Beware the bias

    I saw many posters enter for a position and as the price dropped 40%+ on them, instead of re-evaluating if they were wrong in the first place, they averaged down.(I can't prove that everyone who averaged down did so without rechecking and thinking through their work but I'm sure there were people who saw the price as a fraction of their purchase price and thought if i had bought it back then, It's an even better buy now. Often times we make decisions emotionally and find a way to justify it with the numbers). I have found that the amount of hope I have for a declining stock to go back up has no correlation to the probability of the business and subsequently the value of stock improving.

   

2. A bird in the hand is worth two in the bush

    With Fortress and with Horsehead as well, a lot of cash flows were promised in the future. We should be very skeptical and demanding of those cash flows. The further away those cash flows get(because of slowdowns, or plant problems, or employee's leaving) the more disproportionate the affect on intrinsic value. There's something very magical about the earnings going from negative to breakeven or positive and these next few quarters will be huge for Horsehead. 

   

3. You don't know where commodity prices are going

    I think it is better to say I have no idea where cotton prices or zinc or iron ore prices are going than to say China has to rationalize sometime and the supply and demand of this commodity is going to go into shortage. One of the worst things we can do is think we know when we have no idea.

   

4. Don't trust people named Chad.

    Just don't do it. That guy didn't blink in any of his interviews....