ZINC - Horsehead Holding Corp

[cmlber]

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...

 

Steel prices/utilization are only relevant to the extent 1) prices are falling due primarily to weak demand which would indicate zinc prices are likely to fall, or 2) a mix shift is occurring away from U.S. EAF producers towards China which would indicate EAF dust receipts are likely to fall.  1) is far more important for Horsehead than 2).

 

1) This isn't happening. Prices are collapsing because of supply side issues, excess capacity from China and huge declines in input costs.  Input costs are also collapsing because of supply side factors in iron ore and oil, and the strong dollar.  Therefore, given the supply/demand dynamics in zinc, it's unlikely that steel prices/utilization declining is a leading indicator of zinc prices falling from here.

 

2) In 2009, with U.S. steel capacity utilization at 51%, Horsehead still processed 409,000 tons of EAF dust, compared to 580,000 in 2014.  @ $70/ton, that's $12m less revenue.  The margins on the recycling operations are only ~17%, so that's only a $2m reduction in EBITDA.  The bigger cost comes from having to replace that feedstock.  The 580,000 tons of EAF dust is enough to cover ~75% of the feedstock needed to get Mooresboro to capacity.  We know the value of dust feedstock comes from not having to purchase scrap, which costs 45-50% of LME.  With LME at $0.93/lb, that dust is worth ~$112m/year assuming scrap costs 50% of LME.  So a 2009 style crash in steel utilization would also reduce EBITDA by 30% of $112m from here, or $34m, for a total of $36m in EBITDA reduction from capacity utilization in the U.S. plummeting to 51%, the same as in 2009 with the worst financial crisis since the great depression. 

 

Given capacity in China, I guess 2) is possible, although unlikely.  But even if 2) played out, as long as zinc prices hold up, Horsehead will not have liquidity issues, assuming of course management gets to its 330 tpd target soon.  At that point, at current zinc prices, with current dust receipts, Horsehead should generate $70m+ in FCF. 

 

 

 

[Guest roark33]

Seems odd to say that Horsehead won't have liquidity issues barely two months removed from a secondary offering.  Judging from the balance sheet, it wasn't for growth capex....

[ccap]

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...

 

Note that steel prices are down.  Steel production is not down.  If production were down, steel prices would be up.  The steel market is oversupplied by a few percent (I can't remember the number offhand).  Global steel demand is growing by something like 1.5-3%/yr.  If you assume that Zn demand is dictated by the steel production, normalizing the steel market would impact Zn demand negatively by a few percent.  This small reduction in demand needs to be compared against the changes in supply.  This differential is what will drive the long run Zn price.

 

 

[cmlber]

Seems odd to say that Horsehead won't have liquidity issues barely two months removed from a secondary offering.  Judging from the balance sheet, it wasn't for growth capex....

 

Why is that odd?  They now have that $70m in cash on the balance sheet to cover any short term issues don't they? 

 

Break-even, ramping in the next month or so (mgt target is 7 days from now) to 330tpd which will make them substantially FCF positive with $70m cash on the balance sheet.  What's going to burn that $70m in cash besides a total failure of mgt to ever get to 330 tpd?

 

Btw, they actually did say the raise could be used for growth capex, and 10 of it they already announced is going to the INMETCO expansion.

[Guest roark33]

Update on plant:

 

http://www.sec.gov/Archives/edgar/data/1385544/000115752315001073/a51071405ex99_1.htm

 

This is one of those great news updates that bears and bulls can each interpret how they want...

 

 

[kab60]

I'm long, not exactly a bull, but how could that be good? Should have taken seven days but took almost five weeks, no? Didn't get to cf break even, probably have to wait atleast 90 days to know whether or not they get there.

[abitofvalue]

Interesting article - the headline gives a more bullish impression of the situation than the article on the whole, imo

 

http://www.bloomberg.com/news/articles/2015-04-08/in-a-world-filled-with-gluts-one-metal-is-suddenly-hard-to-find

 

From Africa to Ireland, mines that have produced the metal for decades are now tapped out. Morgan Stanley estimates that by 2017 more than 1.2 million metric tons of annual mined supply will be taken out of production. That’s more than the U.S. uses in an entire year

...

More than half of global supplies are used to galvanize steel, Morgan Stanley estimates. China accounted for 51 percent of the world’s crude-steel production in February, according to the latest data from the World Steel Association. China steel producers estimate their output will contract this year after consumption peaked and more mills are shut.

...

 

China’s economy is still growing. The country will use about 6.9 million tons in 2015, Morgan Stanley analysts Tom Price and Joel Crane said in March 24 report. That’s the most since at least 2007

...

Stockpiles monitored by the LME tumbled 26 percent in the first quarter, the biggest loss since 2007. In addition to the Century closing, Vedanta Resources Plc plans to shut its Lisheen mine in Ireland, cutting supply by 175,000 tons, Bloomberg Intelligence estimates

 

Probably not much new for most readers of this thread but thought I would post a linke here since bloomberg's website is so damn unreadable that most would probably miss it completely.

 

Think this could deliver nice returns over a long time period if the teething problems at the plant are rectified within the next few months / quarters.  That said, I thought the last update was not a very good at all so it will be interesting to see how the plant progresses.

 

[Guest notorious546]

Excerpt from Warren Buffett's 2004 letter:

Last year MidAmerican wrote off a major investment in a zinc recovery project that was initiated in 1998 and became operational in 2002. Large quantities of zinc are present in the brine produced by our California geothermal operations, and we believed we could profitably extract the metal. For many months, it appeared that commercially-viable recoveries were imminent. But in mining, just as in oil exploration, prospects have a way of “teasing” their developers, and every time one problem was solved, another popped up. In September, we threw in the towel.

 

Our failure here illustrates the importance of a guideline – stay with simple propositions – that we usually apply in investments as well as operations. If only one variable is key to a decision, and the variable has a 90% chance of going your way, the chance for a successful outcome is obviously 90%. But if ten independent variables need to break favorably for a successful result, and each has a 90% probability of success, the likelihood of having a winner is only 35%. In our zinc venture, we solved most of the problems. But one proved intractable, and that was one too many. Since a chain is no stronger than its weakest link, it makes sense to look for – if you’ll excuse an oxymoron – mono-linked chains.

It also reminded me of this excerpt, and similar lesson, from his 2008 letter:

I told you in an earlier part of this report that last year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.

 

Via Boyles Asset Management

 

[rsmehta]

Excerpt from Warren Buffett's 2004 letter:

Last year MidAmerican wrote off a major investment in a zinc recovery project that was initiated in 1998 and became operational in 2002. Large quantities of zinc are present in the brine produced by our California geothermal operations, and we believed we could profitably extract the metal. For many months, it appeared that commercially-viable recoveries were imminent. But in mining, just as in oil exploration, prospects have a way of “teasing” their developers, and every time one problem was solved, another popped up. In September, we threw in the towel.

 

Our failure here illustrates the importance of a guideline – stay with simple propositions – that we usually apply in investments as well as operations. If only one variable is key to a decision, and the variable has a 90% chance of going your way, the chance for a successful outcome is obviously 90%. But if ten independent variables need to break favorably for a successful result, and each has a 90% probability of success, the likelihood of having a winner is only 35%. In our zinc venture, we solved most of the problems. But one proved intractable, and that was one too many. Since a chain is no stronger than its weakest link, it makes sense to look for – if you’ll excuse an oxymoron – mono-linked chains.

It also reminded me of this excerpt, and similar lesson, from his 2008 letter:

I told you in an earlier part of this report that last year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.

 

Via Boyles Asset Management

 

The above excerpt is very true, however, I don't think it applies to ZINC

 

1. ZINC will be the lowest cost producer of zinc. The moat to be the LCP will be there as long as they have contracts for 75-80% of EAF dust in the US(which they do till 2022).

 

2. The technology to produce ZINC from EAF dust is not novel. It is a proven process that has been around for many years. They are just a simple modern zinc refinery.

 

 

    I agree that myself, most people on this board, and perhaps even the CEO cannot realistically give when they will be actually his 75% of full capacity, when they will be fully ramped up, and how many other roadblocks they might face in the process.

 

    This is part of the reason the stock has been getting so hammered.

 

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

 

    Take the news updates with a grain of salt, and accept the CEO does make aggressive promises.

 

    2-3 years down the line, I really think that this stock can more than triple from it's current price.

 

[Ralf]

Does anyone have any sense as to what the economic value of the company’s  land could be worth – trying to estimate replacement value. 2014 10-K has $50m, up from $21m in 2013 – assuming difference is Mooresboro but no disclosure on this; $50m just 5% of total assets so not especially material, but 2007 Form S-1 has a value of the land of just $7m, which includes the current company owned sites of Calumet, IL, Palmerton, PA and Rockwood, TN, as well as Monaca and some other facilities which are no longer part of the company – looks very low.

 

Applying greenfield capacity cost for Mooresboro and brownfield capacity cost per ton for all other facilities I get a replacement PP&E value of just under $1bn, total asset value of $1.2bn, and less all liabilities of $543m gives residual value of $684m or $12/share. I think this is a conservative number given that all assets bar Mooresboro are valued at brownfield cost and not greenfield, there is no uplift for economic value of historical land, and no value given to intangible assets relating to EAF dust long-term contracts (a possible litigation/regulatory fine relating to 2010 fire at Monaca site is the only potential off balance sheet liability). Assuming ramp-up of Moorseboro is achievable this year, replacement value should put a floor on price.

 

[BG2008]

In the last couple of weeks, I've dove into this name head first and here are my notes.  I'm sharing them in the hope that people can identify errors and hopefully my notes can add value to others' research. 

 

Opinion of the ramp up issues - I got an opinion from an industrial/chemical engineer regarding the issues of the ramp up.  His thought was that dissolving solids on the front end is a very common issue for plants of this type.  This is an issue that the company can likely solve over time.  I spoke with Ali from IR and he mentioned that some of the issues were one time in nature and recurring.  For example, the outage in 2014 was due to the a contractor putting in carbon steel bolts instead of stainless/specialty steel that was specified by the engineers.  The corrosive acids quickly eroded the bolts and caused the outage.  Yes, the company shares oversight issues.  In these complex projects, it's hard to know when a contractor had cut a corner.  The chemical engineer thinks that the zinc production process doesn't appear to be too complex.  The pump issues are also very typical and should be able to mitigate those fairly easily.  He thinks that the anode/cathode issue is a mechanical reliability problem and shouldn't be hard to fix.  My take away is that all the problems experience so far are operation/learning curve related.  We're not asking solar panels to get to 40% efficiently...

 

With that said, I am a firm believer of Murphy's Law.  Anything that could go wrong will go wrong.  I would not be surprised if they encounter some more set back ramping to 100%.  The key is knowing that solving the problems is a matter of time and money rather than a complete overhaul of the underlining technology. 

 

Cost Curve

 

I confirmed with the CFO that $90-110mm incremental EBITDA is on top of what they will generate if Monaca is currently operating.  The way to think about what Moorseboro, NC can ultimately generate is based on the following equations

 

At 230 tons per day or roughly 53% of 155k tons per year capacity, we already generate $30-32mm of EBITDA on an isolated basis.  To go to 75% would mean an additional EBITDA according to the following equation 75% EBITDA = $30mm + 310mm pounds * 22% * (LME -$0.30 - $0.15 + $0.09) = $73.6mm 

to go from 75% to 100%, the math is = $73.6mm + 310mm pounds*25%* (LME *(1-45%)-$0.15+$0.09)= $111.6mm

 

The $0.30 per pound is the cost of the Waelz Oxide per pound from their own intake.  The 45% of the LME is the price they pay to take on incremental Waelz Oxide from other sources.  The $0.15 per pound is the incremental cost of conversion.  The $0.09 is the premium they get above LME. 

 

Lead and Silver Recovery is a whole different item and you can you put in either a $15 or $20mm figure.  This brings Moorseboro's standalone EBITDA to either $125mm or $130mm at 155k tons per year.  If they are able to increase capacity to 175k tons/year rather than 155k tons/year, then the EBITDA will be increased by 40mm lbs * (LME*(1-45%)-$0.15+$0.09) = $19.6mm.  This would bring EBITDA up to $144 to 149 mm. 

 

If they can grow the EAF dust collection and supply their own Waelz Oxide, then the incremental EBITDA would be 117.5mm pounds * $0.15 = $17.6mm bringing EBITDA to $162mm to $167mm. 

 

Adding $35mm in Zochem and INMETCO and taking away $22mm in SG&A brings companywide EBITDA to $174mm to $179mm. 

 

The above math assumes zinc price at $1.  I am a China bear, so I'm holding my zinc price at $1. 

 

 

What EV/EBITDA or P/FCF multiple would you pay for Horsehead?  I probably won't use a $179mm EBITDA on a probabilistic basis.  One would have to discount the probability that ZINC never achieves those figures.  I personally think that the lead and silver recoveries will be challenging and building out additional EAF dust collection maybe difficult as well. 

 

 

     

[Guest notorious546]

 

What EV/EBITDA or P/FCF multiple would you pay for Horsehead?  I probably won't use a $179mm EBITDA on a probabilistic basis.  One would have to discount the probability that ZINC never achieves those figures.  I personally think that the lead and silver recoveries will be challenging and building out additional EAF dust collection maybe difficult as well. 

   

 

i dont remember the investment manager's letter who i read, but the were speaking to the fact that their portfolio trades at an p/fcf multiple of 10-12x, vs the index's at 20-22x. that could be a starting point...

 

 

[jawn619]

I would pay 3-4x EV/EBITDA. Anything much higher I feel like doesn't have a large enough MOS. Currently it's trading at 1.1B EV with "expected" ebitda of 150mish. That's about a 6x multiple, double what I'd be willing to pay.

[BG2008]

A 10-12x FCF would imply at price closer to 50-80% upside to today's price.  A 15X P/FCF would imply 128% upside.  Obviously, one has to discount the fact that we do not know "for sure" the probability of ZINC getting to $180mm in EBITDA. 

 

 

 

What EV/EBITDA or P/FCF multiple would you pay for Horsehead?  I probably won't use a $179mm EBITDA on a probabilistic basis.  One would have to discount the probability that ZINC never achieves those figures.  I personally think that the lead and silver recoveries will be challenging and building out additional EAF dust collection maybe difficult as well. 

   

 

i dont remember the investment manager's letter who i read, but the were speaking to the fact that their portfolio trades at an p/fcf multiple of 10-12x, vs the index's at 20-22x. that could be a starting point...

[cmlber]

I would pay 3-4x EV/EBITDA. Anything much higher I feel like doesn't have a large enough MOS. Currently it's trading at 1.1B EV with "expected" ebitda of 150mish. That's about a 6x multiple, double what I'd be willing to pay.

 

Do you take EBITDA to the bank, or FCF?

 

3-4x EBITDA assumes ~5-6.5x FCF for Horsehead...

[Guest notorious546]

"Century in Australia (the world’s third-biggest zinc mine, with capacity of

480,000 tonnes) and Lisheen in Ireland (172,000 tonnes) will close in the third quarter

due to mine depletion, cutting world supplies by almost 5%. After falling to US$0.92

per pound in March, LME zinc has advanced to US$1.04 in late April. "

 

Read the full Scotiabank Commodity Price Index online at: http://www.scotiabank.com/ca/en/0,,3112,00.html.

 

[DTEJD1997]

Hey all:

 

If you are interested in zinc....take a look at NevSun (NSU).

 

They are currently mining copper, but are gearing up to do zinc in a bit over a year.

 

Solid financials (over capitalized), earning money, solid dividend...

[jawn619]

I would pay 3-4x EV/EBITDA. Anything much higher I feel like doesn't have a large enough MOS. Currently it's trading at 1.1B EV with "expected" ebitda of 150mish. That's about a 6x multiple, double what I'd be willing to pay.

 

Do you take EBITDA to the bank, or FCF?

 

3-4x EBITDA assumes ~5-6.5x FCF for Horsehead...

 

Do you take FCF to the bank that has not come in yet? Or is that highly dependent on a plant running at full capacity which you are unsure of? I think 3-4x EBITDA or "estimated" 5/6.5 FCF is a enough margin of safety for a situation like this. At least for me.

[cmlber]

I would pay 3-4x EV/EBITDA. Anything much higher I feel like doesn't have a large enough MOS. Currently it's trading at 1.1B EV with "expected" ebitda of 150mish. That's about a 6x multiple, double what I'd be willing to pay.

 

Do you take EBITDA to the bank, or FCF?

 

3-4x EBITDA assumes ~5-6.5x FCF for Horsehead...

 

Do you take FCF to the bank that has not come in yet? Or is that highly dependent on a plant running at full capacity which you are unsure of? I think 3-4x EBITDA or "estimated" 5/6.5 FCF is a enough margin of safety for a situation like this. At least for me.

 

If you don't think the plant is going to get to capacity, why would you even pay 3-4x EBITDA? Currently the EBITDA doesn't convert to FCF...  The point I was making is it makes no sense to value Horsehead (or anything in my opinion) based on EBITDA. 

 

I misunderstood and assumed you were referring to the proper multiple if the plant is fully ramped, since that was the question you responded to.  If you think there is a high probability that the plant won't ever fully ramp and therefore think it's only worth 5x potential FCF, I'll respectfully disagree.

 

 

 

[BG2008]

My question is what EV/EBITDA multiple would you pay when the company realize 1) $150mm of EBITDA ($99mm of FCF) and 2) $180mm of EBITDA ($120mm of FCF). 

 

Leave the probabilities to me.  Thank you.

[jawn619]

BG2008 and cmlber

Sorry i misunderstood you both. Let me know if I missed something... @BG2008 The company right now has a 1.1B EV.  If it were to realize 100/120 of FCF, at the current stock price it would trade around a 10-12x FCF multiple. That seems about fair price to pay for this company. you asked me what I would pay, and quoted a lower number than that 10/12x multiple because I'm not trying to buy fairly priced assets. 

 

@cmlber

That 4/5x EV/EBITDA was a general multiple that I would feel comfortable getting into this stock given my lack of understanding of the commodity business the uncertainty with the plant. I don't think of it as black and white if the plant is going to ramp up and another possibility is that they will ramp up but take a while to do so. But at current prices I don't think there is enough Margin of safety and don't see where you get a 80% upside if it trades at 10x FCF. Also for it to trading at 15X FCF, I think that is unrealistic. Just to give some context AAPL trades around 12x FCF and it's the best company in the world.

[BG2008]

jawn619,

 

The EV includes the $300mm net debt.  FCF should be measured against the market cap which is $840mm.  If the company achieve the $180mm of EBITDA and the associated $120mm of FCF, then the implied cash yield is 14%.  That is pretty high.  Yes, yes, we're not at $180mm of EBITDA and $120mm of FCF.  Again, I'll handicap the probability.  Is a 14% FCF yield too high for a business like this?

 

Given a choice to buy Apple or ZINC, I'll own ZINC at the same P/FCF multiple.  1) I don't know whether Apple can produce the next iPhone or whatever it maybe.  This is simply incompetence on my part.  2) I don't know what zinc price will be in the future.  But if zinc price stays constant, ZINC is basically a mine that doesn't get depleted.  3) The only time that a competitor will enter this business is when zinc price is extremely high.  Under that scenario, ZINC is likely worth 2-4x as much as today's price. 

 

 

 

       

[jawn619]

jawn619,

 

The EV includes the $300mm net debt.  FCF should be measured against the market cap which is $840mm.  If the company achieve the $180mm of EBITDA and the associated $120mm of FCF, then the implied cash yield is 14%.  That is pretty high.  Yes, yes, we're not at $180mm of EBITDA and $120mm of FCF.  Again, I'll handicap the probability.  Is a 14% FCF yield too high for a business like this?

 

Given a choice to buy Apple or ZINC, I'll own ZINC at the same P/FCF multiple.  1) I don't know whether Apple can produce the next iPhone or whatever it maybe.  This is simply incompetence on my part.  2) I don't know what zinc price will be in the future.  But if zinc price stays constant, ZINC is basically a mine that doesn't get depleted.  3) The only time that a competitor will enter this business is when zinc price is extremely high.  Under that scenario, ZINC is likely worth 2-4x as much as today's price. 

 

     

Why would you not include debt in the FCF yield calculations? As an owner of the company, any money used to pay down debt is money you as an owner are not going to see. And I would assume that Horsehead, like a Lannister, always pays it's debts. It would take 3 years to pay off the debt, leading to a yield that's closer to 10%(at the high end of things). You said you would handicap the probability so let's just make up some numbers and say it would yield 7-8% with all the uncertainties baked in. So at current prices, you have a maximum upside of 10%(a little more if zinc prices move up) with a likely chance of it yielding less if the plant runs into problems and a remote chance but real chance that you run into some real problems if the company not being able to service the debt.

[cmlber]

jawn619,

 

The EV includes the $300mm net debt.  FCF should be measured against the market cap which is $840mm.  If the company achieve the $180mm of EBITDA and the associated $120mm of FCF, then the implied cash yield is 14%.  That is pretty high.  Yes, yes, we're not at $180mm of EBITDA and $120mm of FCF.  Again, I'll handicap the probability.  Is a 14% FCF yield too high for a business like this?

 

Given a choice to buy Apple or ZINC, I'll own ZINC at the same P/FCF multiple.  1) I don't know whether Apple can produce the next iPhone or whatever it maybe.  This is simply incompetence on my part.  2) I don't know what zinc price will be in the future.  But if zinc price stays constant, ZINC is basically a mine that doesn't get depleted.  3) The only time that a competitor will enter this business is when zinc price is extremely high.  Under that scenario, ZINC is likely worth 2-4x as much as today's price. 

 

     

Why would you not include debt in the FCF yield calculations? As an owner of the company, any money used to pay down debt is money you as an owner are not going to see. And I would assume that Horsehead, like a Lannister, always pays it's debts. It would take 3 years to pay off the debt, leading to a yield that's closer to 10%(at the high end of things). You said you would handicap the probability so let's just make up some numbers and say it would yield 7-8% with all the uncertainties baked in. So at current prices, you have a maximum upside of 10%(a little more if zinc prices move up) with a likely chance of it yielding less if the plant runs into problems and a remote chance but real chance that you run into some real problems if the company not being able to service the debt.

 

If you're going to assume total repayment of the debt, than you should be using unlevered FCF.  Comparing FCF that is burdened by $30m in interest to EV is inconsistent...

 

I'd agree with BG, I would pay a far higher multiple for Horsehead than I would for Apple.  Apple has to constantly reinvent itself.  Paying 10x FCF for Apple implies you are betting that at no time in at least the next decade will Apple lose its dominance of the smartphone market.  Ten years is a long time in technology, anything can happen.  While zinc prices will go up and down, they will always revert to an average over time and Horsehead will never have to reinvent itself.

[RadMan24]

jawn619,

 

The EV includes the $300mm net debt.  FCF should be measured against the market cap which is $840mm.  If the company achieve the $180mm of EBITDA and the associated $120mm of FCF, then the implied cash yield is 14%.  That is pretty high.  Yes, yes, we're not at $180mm of EBITDA and $120mm of FCF.  Again, I'll handicap the probability.  Is a 14% FCF yield too high for a business like this?

 

Given a choice to buy Apple or ZINC, I'll own ZINC at the same P/FCF multiple.  1) I don't know whether Apple can produce the next iPhone or whatever it maybe.  This is simply incompetence on my part.  2) I don't know what zinc price will be in the future.  But if zinc price stays constant, ZINC is basically a mine that doesn't get depleted.  3) The only time that a competitor will enter this business is when zinc price is extremely high.  Under that scenario, ZINC is likely worth 2-4x as much as today's price. 

 

     

Why would you not include debt in the FCF yield calculations? As an owner of the company, any money used to pay down debt is money you as an owner are not going to see. And I would assume that Horsehead, like a Lannister, always pays it's debts. It would take 3 years to pay off the debt, leading to a yield that's closer to 10%(at the high end of things). You said you would handicap the probability so let's just make up some numbers and say it would yield 7-8% with all the uncertainties baked in. So at current prices, you have a maximum upside of 10%(a little more if zinc prices move up) with a likely chance of it yielding less if the plant runs into problems and a remote chance but real chance that you run into some real problems if the company not being able to service the debt.

 

If you're going to assume total repayment of the debt, than you should be using unlevered FCF.  Comparing FCF that is burdened by $30m in interest to EV is inconsistent...

 

I'd agree with BG, I would pay a far higher multiple for Horsehead than I would for Apple.  Apple has to constantly reinvent itself.  Paying 10x FCF for Apple implies you are betting that at no time in at least the next decade will Apple lose its dominance of the smartphone market.  Ten years is a long time in technology, anything can happen.  While zinc prices will go up and down, they will always revert to an average over time and Horsehead will never have to reinvent itself.

 

How do you know for certain Zinc will have a long last advantage?  Are these Zinc plants really that capital intensive and how sticky are customer contracts for taking Zinc waste from a steel mill?