ZINC - Horsehead Holding Corp

[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.

 

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.

 

Certainly possible, I don't know the area so thanks for that insight. The adjacent 5 acres of land were sold for $1.87 mil (ZINC has 300) and there are tax breaks for the next 22 years attached to the land

 

http://www.ellwoodcityledger.com/news/local_news/shell-horsehead-extend-option-shell-buys-adjacent-potter-property/article_35448330-9912-5fef-9841-70699c1f985c.html

 

Does anyone have insight in how rare or commonplace tax breaks like this are?

[mateo999]

4. Don't trust people named Chad.

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

+1

[cmlber]

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....

 

I haven't followed the Fortress Paper thread, and since it's 240 pages, would you mind summarizing what the thesis was and why it was wrong? 

[Mephistopheles]

 

4. Don't trust people named Chad.

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

 

Lol, there is a wonderful investor who posts on this board by the name of Chad Brand - peridotcapital is his handle.

[rsmehta]

People comparing this to fortress paper are crazy.

 

 

    Aside from both suffering from startup issues on a new megafactory, there is virtually no similarity.

 

-------------------------------

 

    People investing in Zinc, are investing in it because of the:

 

1. Closed loop nature of the business.

2. Virtual monopoly of EAF dust + long term contracts with mini-mills

3. Lowest cost producer of Zinc

4. Zinc, the commodity, hitting a supply crunch.

 

----------------------------------

 

    People investing in fortress were investing almost exclusively on the CEO, who came in with a great track record and is a excellent salesman/orator.

 

      There was nothing unique about their operations, just some geographical advantages to their mills.

 

    They also had ticking time bombs on the maturity of the debs and principal payback of the loan to the Quebec govt.

------------------------------------

 

      I'm not happy that January production of zinc was lower than December production.

 

      That being said, it was nice to see them breaking even at 35% capacity, and nice to see their optimism to hit 327 tons per day by the end of Q1.

 

    At the rate of 327 tons per day, they will be very profitable and will be able to easily service their debt obligations.

 

    This is a very different scenario than ftp's.

[zizou]

wondering if today's price action is related to the production halt at Moorsboro... thought they hinted at working through equipment issues on the conf call.

 

if they get to 330 tpd by end q1 and at least sustain that level through remainder of year, has anyone modeled what 2015 operating income might look like?

[kab60]

wondering if today's price action is related to the production halt at Moorsboro... thought they hinted at working through equipment issues on the conf call.

 

if they get to 330 tpd by end q1 and at least sustain that level through remainder of year, has anyone modeled what 2015 operating income might look like?

 

I was wondering about that as well which would be quiet irrationel, as the production halt was announced along with the Q4 results. I didn't model their operating income, but according to the conference call Q1 should be worse than Q4.

 

It sounds like they found a permanent solution for the problems they encountered in Q3, which will cost between $1-5m to fix permanently, but they also have some temporary fixes. Lots of minor issues, espescially related to pumps, but I was left with the impression that so far it's nothing material; did anyone else get another impression? Cell house seems like the biggest potentiel issue when they want to go from 75 > 100 pct. utilization, but getting to 75 pct. is most important.

 

[topofeaturellc]

The story has always interested me but it is essentially a recycler rather than a producer.

 

A few points/questions

 

The solvent extraction/electro winnowing process isn't unique and more importantly these guys don't own the IP behind it.

 

They are only able to produce at a low cost because they get their feedstock for a low cost-except that appears to be because the EAF guys didn't appreciate the value of it.  If ZINC ends up being a high ROIC business it'll end up being the EAF guys who claw back the returns because they control the feed stock.  I'm not sure I believe the long-term contracts are sort of unimpeachable.

 

The final point is that zinc demand is inextricably linked with steel demand.  If you think steel is going to grow, you should be buying posco or something instead of zinc.

 

I sort like the plant ramp issue as a controversy - tho I'd want to know if its possible for a plant like this to just be messed up permanently.  But I just don't believe the long-term story.

[Homestead31]

 

 

They are only able to produce at a low cost because they get their feedstock for a low cost-except that appears to be because the EAF guys didn't appreciate the value of it.  If ZINC ends up being a high ROIC business it'll end up being the EAF guys who claw back the returns because they control the feed stock.

 

this assumes that the mini mills want the EAF dust. 

 

As i understand it, they don't.

 

They can pay to landfill it and expose themselves to all kinds of future litigation due to environmental damage etc, or they can pay ZINC to take it.

 

 

[spartansaver]

The story has always interested me but it is essentially a recycler rather than a producer.

 

A few points/questions

 

The solvent extraction/electro winnowing process isn't unique and more importantly these guys don't own the IP behind it.

 

They are only able to produce at a low cost because they get their feedstock for a low cost-except that appears to be because the EAF guys didn't appreciate the value of it.  If ZINC ends up being a high ROIC business it'll end up being the EAF guys who claw back the returns because they control the feed stock.  I'm not sure I believe the long-term contracts are sort of unimpeachable.

 

The final point is that zinc demand is inextricably linked with steel demand.  If you think steel is going to grow, you should be buying posco or something instead of zinc.

 

I sort like the plant ramp issue as a controversy - tho I'd want to know if its possible for a plant like this to just be messed up permanently.  But I just don't believe the long-term story.

 

They don't need the process to be unique, the reason they have this advantage is high capital requirements to build the facility and long contract lengths in regard to EAF dust. They were the first mover and have over half the EAF dust within the US. It would not make sense for a steel producer to build this 1/2 billion dollar plant unless they could reach the capacity at which ZINC can run. Even if they could reach the capacity there is more to it than just building the plant, there is the network and expertise involved that comes with years of zinc recycling experience. It might make sense for NUCOR/Major Steel Mill Operator down the road to acquire, but only if they could reach capacity. Based on the 2013 10-k the ten largest customers accounted for 34% of sales, I feel safe in knowing that it would be extremely unlikely that one of those customers could muster the amount of EAF dust to come close to breakeven.

 

It would also be foolish for a competitor to come in and build a plant. Not only would they have to fight for the contracts, but there is not enough EAF dust to go around to reach capacity. I actually think of this as a positive as more EAF dust becomes available, with ZINC having their knowledge they would likely have the most knowledge in being able to reproduce their facilities in another location. With most contracts locked in for multiple years this should give them a runway to pay off debt and replicate their process if need be.

 

 

In regards to feedstock, the dust is worthless unless you have the technology to convert it. We've already covered the high capital requirements and then there is fact that it is cheaper to sell it to ZINC rather than a landfill.

 

I would think of any more hiccups as simply buying opportunities because at some point they will be running at capacity and be highly profitable.

 

 

[Guest roark33]

My two cents--I think people are missing the fact that steel prices are plummeting on a daily basis, about 30% off ytd.  Utilization at steel mills has declined drastically and Zinc will get squeezed on pricing and volumes.  No position, but would rather be short than long....

[spartansaver]

My two cents--I think people are missing the fact that steel prices are plummeting on a daily basis, about 30% off ytd.  Utilization at steel mills has declined drastically and Zinc will get squeezed on pricing and volumes.  No position, but would rather be short than long....

 

In 2009 ZINC processed 411,000 tons of EAF dust, in 2008 they processed 518,000. In 2013 they processed 629,000 tons, I don't believe there will be such a precipitous drop off that they cannot feed Mooresboro at full capacity. Some back of the napkin conservative estimates show that it can operate at capacity of 155,000 tons with around 360,000 tons of EAF dust. 155/.45/.95 = 360

 

Pricing of Zinc is a short term problem that over the long run will likely not have a material effect. I have no idea where this stock will be in 1 year, but over the course of a decade I see little that could materially affect the appreciation of ZINC's business(other than the plant blowing up, knock on wood).

[yadayada]

so what will FCF be then? I cant get more then 100-150m$ with decent zinc prices. Seems not worth the risk? I want 1-2x FCF with this type of risk.

[spartansaver]

so what will FCF be then? I cant get more then 100-150m$ with decent zinc prices. Seems not worth the risk? I want 1-2x FCF with this type of risk.

 

I'm guessing your holding Zinc constant at around $1.00 and in that case you are paying for the option as well. What price do you think you would pay for an option priced 5 years out at $1.00 for Zinc? You are either going to be rewarded for the price rising or the business coming to full fruition. Best case scenario it all happens at once and as previously described you have the lollapalooza effect. Sure the price of Zinc could decline, but warehouse supply has been cut in half in the past few years at sustained prices.  The more likely alternative is at some point the price will spike. Simple supply and demand, you can’t tell when, but when it does it will likely not be forecasted.  Nobody forecasted the extreme drop in oil, but in hindsight it was fairly obvious that a supply was building and prices had remained steady. You can argue that prices will drop, but that doesn't seem sustainable as production is being shut down even at current prices. Something has to give, and you can't time it. This allows you to have a good business at a reasonable/slightly depressed current price with an option on top. How many businesses have a factory that will still be in use likely 50 years from now?

[Guest roark33]

 

Pricing of Zinc is a short term problem that over the long run will likely not have a material effect. I have no idea where this stock will be in 1 year, but over the course of a decade I see little that could materially affect the appreciation of ZINC's business(other than the plant blowing up, knock on wood).

 

Given that this business has already been through chapter 11 in the recent past, I find it "unimaginative" that you can't think of another reason that could materially affect Zinc's business.

 

 

[spartansaver]

 

Pricing of Zinc is a short term problem that over the long run will likely not have a material effect. I have no idea where this stock will be in 1 year, but over the course of a decade I see little that could materially affect the appreciation of ZINC's business(other than the plant blowing up, knock on wood).

 

Given that this business has already been through chapter 11 in the recent past, I find it "unimaginative" that you can't think of another reason that could materially affect Zinc's business.

 

I believe you are stating uncertainty as risk. I will give that a main assumption is that zinc does not become depressed for over an extended amount of time before their debt is due, but I find that as highly unlikely. It seems you have already made up your mind about this investment and there have been plenty of reasonable counterarguments to your inquiries. I'm not sure what company could operate at .40 so yes if those prices were to happen over the course of the next two years at sustained levels I would be worried. 

[topofeaturellc]

Capital intensity is only a barrier to entry if returns are low

 

If you think this is an 8% ROTC business it's like 14x.  I'd suggest that if it's really an 8% ROTC business it ll do dd during an upcycle and attract new entrants and/or the renegotiation of the contracts with the EAF guys and up really being 6-7 overtime.  The bull case of course is you get lifted out by an EAF guy but that seems like a bad bet.  Look at what happened to the steel scrap guys in the US.

 

Also look at what returns are globally for copper and iron smelters.  Its not good.  You are betting the whole thing on the value of those contracts -where I doubt nue et al are obligated to sell to ZINC. I mean imagine if they wanted to shut down a mill?

[Haasje]

I really appreciate the bear perspective on Horsehead. I'm a long but I'm trying my best to be open minded to the counter arguments raised and I think they have merit. I look at it like this:

 

Horsehead competes on two different fronts

 

1. competes with other Zinc producers

2. competes to secure EAF dust

 

1. Lowest cost producer

When utilizing EAF dust input@ new facility in Zinc market Horsehead is the lowest cost producer which is a competitive advantage. This could be taken from them when someone secures EAF dust and an equally efficient factory. Building the state of the art facility is easy. Securing the EAF dust and coördinating this with building a new facility is probably hard. Important is that even if a competitor did so (competition may give it a shot at the peak of cycle) there are then 2 state of the art facilities that can utilize the EAF-dust but there may not be enough dust, causing them both to lose much of their competitive advantage and driving down returns on capital. It's something like the competitive advantage of the hairdresser in a town too big for 1 hairdresser but too small for 2 hairdressers.

 

2. Best deal to get rid of EAF dust

Horsehead gets paid to take the EAF dust but even so is still a cost leader. Landfills and other competition charge even higher prices. So the advantage of running on EAF dust is already shared with the steel mills. Because of the dynamic I described under 1, it's hard for competition to enter and start competing for that EAF dust which would indeed (as pointed out by the bear case) lead to the economic benefit of using the EAF dust going to the steel mills or somewhere else in the chain.

 

ZINC's management key concern should probably be managing the EAF dust supply because that's where it derives its competitive advantage from. It looks like management is expending quite a lot of effort to try and secure additional sources, probably not just to be able to expand its business but also to keep competition out.

[topofeaturellc]

I think that's about right although I think 1 is only true because of 2. 

 

How much revenue comes today from getting paid to take the dust? How much dust is created annually in the US?

 

If the other option is to pay someone to take this away, that actual makes the benefits of vertically integrating even better. The fact that the EAF guys haven't would make me more not less nervous.

 

Of course its actually not that far from pricing that all in.

 

 

[zizou]

Anyone know how to find out if the Moorsboro plant is back up after repairs/outage?

[Guest roark33]

Call them.

[zizou]

The plant is back up and running; they are ramping up production...

 

[kab60]

The plant is back up and running; they are ramping up production...

 

Care to add a bit more flavour? :) Thanks

[spartansaver]

I really appreciate the bear perspective on Horsehead. I'm a long but I'm trying my best to be open minded to the counter arguments raised and I think they have merit. I look at it like this:

 

Horsehead competes on two different fronts

 

1. competes with other Zinc producers

2. competes to secure EAF dust

 

1. Lowest cost producer

When utilizing EAF dust input@ new facility in Zinc market Horsehead is the lowest cost producer which is a competitive advantage. This could be taken from them when someone secures EAF dust and an equally efficient factory. Building the state of the art facility is easy. Securing the EAF dust and coördinating this with building a new facility is probably hard. Important is that even if a competitor did so (competition may give it a shot at the peak of cycle) there are then 2 state of the art facilities that can utilize the EAF-dust but there may not be enough dust, causing them both to lose much of their competitive advantage and driving down returns on capital. It's something like the competitive advantage of the hairdresser in a town too big for 1 hairdresser but too small for 2 hairdressers.

 

2. Best deal to get rid of EAF dust

Horsehead gets paid to take the EAF dust but even so is still a cost leader. Landfills and other competition charge even higher prices. So the advantage of running on EAF dust is already shared with the steel mills. Because of the dynamic I described under 1, it's hard for competition to enter and start competing for that EAF dust which would indeed (as pointed out by the bear case) lead to the economic benefit of using the EAF dust going to the steel mills or somewhere else in the chain.

 

ZINC's management key concern should probably be managing the EAF dust supply because that's where it derives its competitive advantage from. It looks like management is expending quite a lot of effort to try and secure additional sources, probably not just to be able to expand its business but also to keep competition out.

 

Just a quick comment towards 1. I don't believe it is as easy as we think to build a facility. Nucor entered into a JV 4 years back with a similar concept EAF dust recycler and the plant had a major fire causing bankruptcy. It was even a few former ZINC employees who I believe helped start it. To say it is easy to build one of these is not taking into account the risk that ZINC has entered into with it's experience, as well as if a newcomer came in who has never run a facility on this magnitude.

[jawn619]

all that really matters is that they ramp up at mooresboro and produce the ebitda that they are "projected" to do. At the time of the VIC write up, it had a Enterprise value of 1.2B and now it has a enterprise value of 1B. It was projected to have 100m of ebitda in 2014 and 150 of ebitda in 2015. Given that adjusted Ebitda was 20m for 2014 because of the plant problems, we have to look at the probability of horsehead actually being able to realize the 100-150 ebitda in 2015 and beyond. I think the author of the writeup failed to accurate asses probability of of the plant actually ramping up. He talks about limited downside and a lot of upside because Horsehead is hedged for zinc prices under .85. But If we think the probability of mooresboro ramping up smoothly is anything less than 100% It is likely that we all have paid way to high a price.

 

Imagine if after 5 years we paid over a billion for a company that produces 50-100 million of ebidta per year. That can't be a good return and hardly a double or triple that some people think this stock is.