rsmehta Posted March 12, 2015 Share Posted March 12, 2015 Agree to your comments on ramping up being almost the only thing that matters right now(esp for next 1 year). I don't fully agree with your math though. The CEO said he expected $100-150 mil of additional incremental EBITDA. And making generalized statements like that should be taken with a grain of salt. Zinc prices do have a huge impact on EBITDA. ---------------------------------------- After full ramp up(say 6-12 months from now) ZINC hopefully produces zinc at $0.42 /lb, and they average 420 tons per day(340 million pounds annually). At $.92 / lb avg selling price for zinc, we'd be at $200 mil of EBITDA At $1.22 / lb avg selling price for zinc, we'd be at $270 mil of EBITDA ---------------------------------- Keep in mind, this doesn't include approx $25-30 mil worth of earnings from their other two ventures as well, and doesn't include other things like silver recovery. ----------------------------------- The biggest issue with this play imo is that I don't think anyone on this board really understands anything about ZINC's ramp-up issues. Whether ZINC will operate March at 320 tons a day as they suggested or whether we will experience additional issues, I don't think anyone can generate probabilistic scenarios with any form of confidence. We have to listen to the CEO updates/calls and deduce probabilistic scenarios from there. Link to comment Share on other sites More sharing options...
jamesmadison Posted March 12, 2015 Share Posted March 12, 2015 Ramp up issues are materially important only to the extent that they have some sort of bearing on the long-term capacity/productivity of the facility. Does it really matter if in the first few months of operation they produce at 10% vs. 20% of stated capacity? From my perspective, it's only material if we should infer some sort of long-term issues with the 155,000 ton output management has guided to. In fact, if I squint and put on my rose-colored glasses, I would say that the ramp up issues further speak to the difficulty of building one of these plants and, by extension, the increased barriers to entry Zinc will enjoy over the long-term. Link to comment Share on other sites More sharing options...
jawn619 Posted March 12, 2015 Share Posted March 12, 2015 Agree to your comments on ramping up being almost the only thing that matters right now(esp for next 1 year). I don't fully agree with your math though. The CEO said he expected $100-150 mil of additional incremental EBITDA. And making generalized statements like that should be taken with a grain of salt. Zinc prices do have a huge impact on EBITDA. ---------------------------------------- After full ramp up(say 6-12 months from now) ZINC hopefully produces zinc at $0.42 /lb, and they average 420 tons per day(340 million pounds annually). At $.92 / lb avg selling price for zinc, we'd be at $200 mil of EBITDA At $1.22 / lb avg selling price for zinc, we'd be at $270 mil of EBITDA ---------------------------------- Keep in mind, this doesn't include approx $25-30 mil worth of earnings from their other two ventures as well, and doesn't include other things like silver recovery. ----------------------------------- The biggest issue with this play imo is that I don't think anyone on this board really understands anything about ZINC's ramp-up issues. Whether ZINC will operate March at 320 tons a day as they suggested or whether we will experience additional issues, I don't think anyone can generate probabilistic scenarios with any form of confidence. We have to listen to the CEO updates/calls and deduce probabilistic scenarios from there. Yes I agree that just because it's difficult to think about the probability doesn't mean we shouldn't try and just assume it to be 100% capacity 6-12 months from now. I would love for someone to do the math on how much they would make if they only ramped up to half of that 340 million pounds annually or even 25% capacity. I think it's great that you're using a range for zinc prices .92 to 1.22 and i agree that that's an accurate range of possibilities for prices and i think we should also do the same for the capacity. I especially think 100% capacity is rosy because of declining steel prices and steel production aka less EAF dust to collect aka less chance that they will be able to sustain that .42 breakeven. Link to comment Share on other sites More sharing options...
rsmehta Posted March 12, 2015 Share Posted March 12, 2015 It's when ramp-up issues kills your liquidity. You run around all over the place to raise capital to avoid insolvency. They already had to dilute shareholders further than expected. If ramp-up issues continues to occur, additional capex expenses arise, and continued outages for production happen; this can very quickly kill this company much faster than you think. ----------------------------- I agree the timeline for ramp-up isn't that critical. However, getting to a sustainable break-even/positive cash flow level, and not having any major further outages is very critical. ------------------------------ I wouldn't worry too much about the state of the steel industry and lack of EAF dust supply at the moment. There is almost no shortages till they hit 320 tons, launching thirty-ox will help with add'l low-cost feed. Keep in mind, the shortage of EAF dust would only affect the final 50-60 tons of the anticipated 420 tons produced per day. Against this, there are other upside surprises to this thesis like additional silver recovery than original thought, much lower power cost than anticipated 1 year ago due to lower oil etc. Link to comment Share on other sites More sharing options...
cmlber Posted March 12, 2015 Share Posted March 12, 2015 It's when ramp-up issues kills your liquidity. You run around all over the place to raise capital to avoid insolvency. They already had to dilute shareholders further than expected. If ramp-up issues continues to occur, additional capex expenses arise, and continued outages for production happen; this can very quickly kill this company much faster than you think. ----------------------------- I agree the timeline for ramp-up isn't that critical. However, getting to a sustainable break-even/positive cash flow level, and not having any major further outages is very critical. ------------------------------ I wouldn't worry too much about the state of the steel industry and lack of EAF dust supply at the moment. There is almost no shortages till they hit 320 tons, launching thirty-ox will help with add'l low-cost feed. Keep in mind, the shortage of EAF dust would only affect the final 50-60 tons of the anticipated 420 tons produced per day. Against this, there are other upside surprises to this thesis like additional silver recovery than original thought, much lower power cost than anticipated 1 year ago due to lower oil etc. They already operated above cash flow break-even before this last shut down... I think it's a pretty safe assumption that they didn't shut the plant down to work on fixing known issues to reopen it at a lower run rate... At 50% capacity, Mooresboro is FCF break-even (including interest), leaving the company as a whole FCF positive when you include Inmetco and Zochem. If you want to figure out what they can make at 75% capacity, the math is easy. The last 25% they have to pay 50% of LME for scrap feedstock, and 15 cents / pound for incremental conversion costs, and get LME + a small premium in return. Take that off of what you think 100% run rate EBITDA would be and there's your answer. At 75% capacity, they generate significant FCF, enough to justify a higher price today even if they never get to 100%. Link to comment Share on other sites More sharing options...
BPCAP Posted March 12, 2015 Share Posted March 12, 2015 The estimated EBITDA enhancement relies on a number of assumptions. With management's forecasting/execution record, does anyone wonder if the EBITDA assumption is bunk? Anyone wonder if the plan design and/or underlying technology is critically flawed? Link to comment Share on other sites More sharing options...
Against the crowd Posted March 13, 2015 Share Posted March 13, 2015 I definitely agree that management's execution capability of such large project is questionable. I have mentioned the same in my blog post earlier. As far as EBITDA assumptions are concerned i will wait and see. I am not too sure whether i fully believe them yet. Link to comment Share on other sites More sharing options...
colinwalt Posted March 13, 2015 Share Posted March 13, 2015 http://www.bloomberg.com/news/articles/2015-03-13/zinc-near-bear-market-as-raw-stockpiles-fuel-record-china-output Link to comment Share on other sites More sharing options...
jawn619 Posted March 13, 2015 Share Posted March 13, 2015 It seems like Pabrai has an average price of under $10, meaning he probably bought it around 600m-700 EV when expecting 150 EBITDA, that means he paid probably around 4/5x EBITDA. For us, we are all likely to have paid too high of a price. Just goes to show you that even if the plant realizes the cash flow, we probably still paid 7-10x ebitda. Link to comment Share on other sites More sharing options...
karthikpm Posted March 13, 2015 Share Posted March 13, 2015 Interesting to note how the mood of the board on this topic has changed in 1 year . Before the plant was operational, it was quite exuberant . Granted the macro picture and commodity prices have changed the valuation , but from being very bullish the tone now is very bearish. Link to comment Share on other sites More sharing options...
permabear Posted March 13, 2015 Share Posted March 13, 2015 The estimated EBITDA enhancement relies on a number of assumptions. With management's forecasting/execution record, does anyone wonder if the EBITDA assumption is bunk? Anyone wonder if the plan design and/or underlying technology is critically flawed? I find it questionable that management continues to repeat the $90 - 110 million incremental EBITDA forecast given that metal prices have fallen off since this range was first established in late 2011. I believe management was basing this off of $1.00/lb for zinc and lead and $30/ounce for silver. Prices have come off since then: zinc -9%, lead -18% and silver -48%, so how can the incremental EBITDA be unchanged? Link to comment Share on other sites More sharing options...
spartansaver Posted March 13, 2015 Share Posted March 13, 2015 Simplest way to figure out the plant worth is to take the capacity discount it out 50 years and smack a cash flow per ton to that expected tonnage over the next 50 years. You can put your own discount on the tonnage, but I see little risk that they will be able to meet capacity. For others maybe they see more risk, but I see a high reward/risk ratio. Link to comment Share on other sites More sharing options...
topofeaturellc Posted March 15, 2015 Share Posted March 15, 2015 This isn't a unique plant. Its simply a modern zinc refinery. Its a return on capital business and for ZINC its going to Market ROC + Spread from feedstock advantage. That's it end of story. Plants like this always run into trouble at start up. As long as they've got the B/S to survive I wouldn't read too much into it. Link to comment Share on other sites More sharing options...
zizou Posted March 16, 2015 Share Posted March 16, 2015 Horsehead Holding Corp. (NASDAQ: ZINC) today announced that its subsidiary, The International Metals Reclamation Company, LLC ("INMETCO"), plans to expand its recycling facility in Ellwood City, Pennsylvania. Horsehead plans to spend up to $10 million on the expansion project at INMETCO. This investment will allow INMETCO to better meet the increased demand for its recycling services by providing approximately 15% more capacity to process additional specialty steel wastes and batteries. Orders for long lead time items are expected to be placed by the end of March 2015. INMETCO expects to begin to see benefits from the initial phases of the expansion by as early as the first quarter of 2016 with project completion slated for the second half of 2016. Link to comment Share on other sites More sharing options...
kab60 Posted March 16, 2015 Share Posted March 16, 2015 Interesting. I suppose management wouldn't go ahead with an expansion unless things at Mooresboro have improved. Link to comment Share on other sites More sharing options...
oddballstocks Posted March 17, 2015 Share Posted March 17, 2015 Not sure if this was national news but the local paper had a blurb announcing Shell purchased the rest of the land they need in Monaca. The article said it was next to Horsehead's land. I can take a picture and post if anyone wants. Link to comment Share on other sites More sharing options...
jawn619 Posted March 17, 2015 Share Posted March 17, 2015 Not sure if this was national news but the local paper had a blurb announcing Shell purchased the rest of the land they need in Monaca. The article said it was next to Horsehead's land. I can take a picture and post if anyone wants. Can someone explain why is this relevant? Link to comment Share on other sites More sharing options...
racemize Posted March 17, 2015 Share Posted March 17, 2015 Not sure if this was national news but the local paper had a blurb announcing Shell purchased the rest of the land they need in Monaca. The article said it was next to Horsehead's land. I can take a picture and post if anyone wants. Can someone explain why is this relevant? tear-down of the old plant. Link to comment Share on other sites More sharing options...
rsmehta Posted March 20, 2015 Share Posted March 20, 2015 Interesting. I suppose management wouldn't go ahead with an expansion unless things at Mooresboro have improved. I'm really hoping this is the case. I can't imagine them going for this expansion unless they have ramped up okay. ------------------------------ If there is further bad news on the next earnings call, this will tank the stock further making dilution and fund-raising even more expensive for current shareholders. Link to comment Share on other sites More sharing options...
kab60 Posted March 20, 2015 Share Posted March 20, 2015 New write-up on SA - nothing new for followers of the stock, but he does warn about debt maturities in 2017 which new investors should take into consideration: http://seekingalpha.com/article/3014316-horsehead-holding-low-cost-commodity-operator-trading-below-replacement-value Link to comment Share on other sites More sharing options...
ccap Posted March 23, 2015 Share Posted March 23, 2015 The estimated EBITDA enhancement relies on a number of assumptions. With management's forecasting/execution record, does anyone wonder if the EBITDA assumption is bunk? Anyone wonder if the plan design and/or underlying technology is critically flawed? I find it questionable that management continues to repeat the $90 - 110 million incremental EBITDA forecast given that metal prices have fallen off since this range was first established in late 2011. I believe management was basing this off of $1.00/lb for zinc and lead and $30/ounce for silver. Prices have come off since then: zinc -9%, lead -18% and silver -48%, so how can the incremental EBITDA be unchanged? The old plant produced zinc at $x/lb while the new plant will produce zinc at $y/lb. If both plants produce the same amount of metal, the incremental income difference from transitioning from the old plant to the new plant will be something like ($x-$y)*lbs. The $90-$110M incremental EBITDA simply reflects the improved production cost of the new plant. For a constant amount of production, this incremental difference is a constant dollar vallue. The income from the new plant is basically "income old plant" + "incremental income from more efficient new plant". The second term accounts for the price changes in the metal. I doubt the underlying technology is seriously flawed. If you read through the filings, the plant problems are from a sedimentation tank clogging up. This stuff happens all of the time with new plant startups. This should be an easy problem to solve. Sedimentation tanks aren't rocket surgery. Link to comment Share on other sites More sharing options...
jawn619 Posted March 24, 2015 Share Posted March 24, 2015 The estimated EBITDA enhancement relies on a number of assumptions. With management's forecasting/execution record, does anyone wonder if the EBITDA assumption is bunk? Anyone wonder if the plan design and/or underlying technology is critically flawed? I find it questionable that management continues to repeat the $90 - 110 million incremental EBITDA forecast given that metal prices have fallen off since this range was first established in late 2011. I believe management was basing this off of $1.00/lb for zinc and lead and $30/ounce for silver. Prices have come off since then: zinc -9%, lead -18% and silver -48%, so how can the incremental EBITDA be unchanged? The old plant produced zinc at $x/lb while the new plant will produce zinc at $y/lb. If both plants produce the same amount of metal, the incremental income difference from transitioning from the old plant to the new plant will be something like ($x-$y)*lbs. The $90-$110M incremental EBITDA simply reflects the improved production cost of the new plant. For a constant amount of production, this incremental difference is a constant dollar vallue. The income from the new plant is basically "income old plant" + "incremental income from more efficient new plant". The second term accounts for the price changes in the metal. I doubt the underlying technology is seriously flawed. If you read through the filings, the plant problems are from a sedimentation tank clogging up. This stuff happens all of the time with new plant startups. This should be an easy problem to solve. Sedimentation tanks aren't rocket surgery. Where are all these rockets that need surgery? Does Obamacare cover the costs of the surgeon's working on all these sick rockets?! Link to comment Share on other sites More sharing options...
rsmehta Posted March 24, 2015 Share Posted March 24, 2015 Zinc warehouse levels dropping from 750,000 tons -> 500,000 tons in the past 6 months 650,000 tons -> 500,000 tons in the past 60 days ------------------------------------------- http://www.bloomberg.com/news/articles/2015-03-05/record-zinc-shortage-seen-widening-as-producers-close-mines Link to comment Share on other sites More sharing options...
cmlber Posted March 24, 2015 Share Posted March 24, 2015 Zinc warehouse levels dropping from 750,000 tons -> 500,000 tons in the past 6 months 650,000 tons -> 500,000 tons in the past 60 days ------------------------------------------- http://www.bloomberg.com/news/articles/2015-03-05/record-zinc-shortage-seen-widening-as-producers-close-mines And the Century mine is supposed to close in September. It's the second largest mine in the world, produces almost 500,000 tons per year. Link to comment Share on other sites More sharing options...
Guest roark33 Posted March 24, 2015 Share Posted March 24, 2015 I think the bulls on ZINC are looking at the wrong stats, instead of focusing on zinc inventory, you should look at steel prices and production. That has fallen off a cliff this year. The question with Horsehead isn't whether it can operate profitably over a cycle, but whether it can be cash flow positive to maintain equity value, i.e. avoid bankruptcy. Lower zinc prices, renegotiated contracts, stoppage at steel mills, these things may all be temporary in nature at any one time, but given the levels of debt and interest payments, Horsehead's equity value is always in question. That's why the winners in this company are the ones that buy it out of bankruptcy, not now... My two cents... Link to comment Share on other sites More sharing options...
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