ZINC - Horsehead Holding Corp

[cmlber]

Let’s step back for a second and look at actual numbers instead of assuming this is headed straight for bankruptcy based on one month of price movements and no quantitative analysis.

 

Here is a very bearish case that gets you a 2-3x from this price.

 

Let’s assume that for all of 2016, management achieves an average utilization rate of only 50%.  And lets also assume zinc prices average 75 cents for all of 2016.  If that happened, I estimate EBITDA for the company would be -$10m.  They would also have cash outflow for interest of $40m (I rounded up).  They would also have maintenance capex of ~$10m, and an additional $30m in capex for the 23+ projects that management has identified to get to full capacity.  So cash burn in 2016 under these assumptions would be roughly $90m. 

 

Let’s assume management would like to maintain a minimum of $80m in liquidity at all times.  The CFO has said very recently that given the hedges in place, liquidity should be roughly the same at the end of the year as it was at the end of Q2, so they’ll have ~$80m in liquidity.  Therefore, they’ll need to raise ~$90m.  Let’s say they raise that $50m through an equity offering at $2/share and raise the remaining $40m as debt at 25% interest.  This extra interest will be $10m, so the cash burn for 2016 will be $100m

 

Now let’s assume that all of this gets us to the end of 2016 with $70m in liquidity and hopefully close to 100% utilization with higher zinc prices in 2017.  If we assume Mooresboro adds $80m in incremental EBITDA (mgt. range is $90-110m) and add this to what Horsehead produced in EBITDA in 2010 & 2011 at 98 cent zinc prices and add the ~$10m/yr extra EBITDA that Zochem produces due to expansion capex since then, you get ~$150m in EBITDA.  Taxes would be $30m and maintenance capex ~$12m.  That get’s you $108m in unlevered FCF.  At 10x this bear case unlevered FCF, the enterprise would be worth $1,080m.  Subtract net debt, which then will be $417m to reflect the $100m cash burn and $50m equity infusion and you get $663m for the equity.  Divide by 82 million shares outstanding to reflect ~25m shares issued at $2/share for $50m infusion and you get $8.09/share, almost 3x this price.

 

If the equity is issued at $1/share instead of $2/share, and there are instead 106m shares outstanding, the equity would still be worth $6.25, more than 2x this price.

 

If the equity is issued at $0.50/share instead of $1/share, and there are instead 156m shares outstanding, the equity would still be worth $4.25. 

 

And you can still argue a bull case where they don’t have to issue equity but instead ramp faster or zinc prices recover sooner, enabling $50m in debt to cover short term liquidity needs, and zinc prices could be $1.20 in 2017 given capacity coming offline and delays in new openings due to the recent fall in prices, and you could give management credit for hitting the mid point of guidance at $100m in incremental EBITDA, which could get you $220m in EBITDA and $158m in unlevered FCF in 2017, and maybe the market puts 12x on that instead of 10x, and you could have an enterprise worth $1,896m less net debt of $467m, for an equity value of $1,429m divided by 56.6m shares outstanding since we didn’t get diluted in this scenario and the stock is worth $25/share, 8-9x this price.  This is highly unlikely, but somewhere between that bear case and this bull case is highly likely imo.

 

Of course if you think the plant will never ramp to 100%, then the bear case will not be bearish enough. 

[Green King]

Let’s step back for a second and look at actual numbers instead of assuming this is headed straight for bankruptcy based on one month of price movements and no quantitative analysis.

 

Here is a very bearish case that gets you a 2-3x from this price.

 

Let’s assume that for all of 2016, management achieves an average utilization rate of only 50%.  And lets also assume zinc prices average 75 cents for all of 2016.  If that happened, I estimate EBITDA for the company would be -$10m.  They would also have cash outflow for interest of $40m (I rounded up).  They would also have maintenance capex of ~$10m, and an additional $30m in capex for the 23+ projects that management has identified to get to full capacity.  So cash burn in 2016 under these assumptions would be roughly $90m. 

 

Let’s assume management would like to maintain a minimum of $80m in liquidity at all times.  The CFO has said very recently that given the hedges in place, liquidity should be roughly the same at the end of the year as it was at the end of Q2, so they’ll have ~$80m in liquidity.  Therefore, they’ll need to raise ~$90m.  Let’s say they raise that $50m through an equity offering at $2/share and raise the remaining $40m as debt at 25% interest.  This extra interest will be $10m, so the cash burn for 2016 will be $100m

 

Now let’s assume that all of this gets us to the end of 2016 with $70m in liquidity and hopefully close to 100% utilization with higher zinc prices in 2017.  If we assume Mooresboro adds $80m in incremental EBITDA (mgt. range is $90-110m) and add this to what Horsehead produced in EBITDA in 2010 & 2011 at 98 cent zinc prices and add the ~$10m/yr extra EBITDA that Zochem produces due to expansion capex since then, you get ~$150m in EBITDA.  Taxes would be $30m and maintenance capex ~$12m.  That get’s you $108m in unlevered FCF.  At 10x this bear case unlevered FCF, the enterprise would be worth $1,080m.  Subtract net debt, which then will be $417m to reflect the $100m cash burn and $50m equity infusion and you get $663m for the equity.  Divide by 82 million shares outstanding to reflect ~25m shares issued at $2/share for $50m infusion and you get $8.09/share, almost 3x this price.

 

If the equity is issued at $1/share instead of $2/share, and there are instead 106m shares outstanding, the equity would still be worth $6.25, more than 2x this price.

 

If the equity is issued at $0.50/share instead of $1/share, and there are instead 156m shares outstanding, the equity would still be worth $4.25. 

 

And you can still argue a bull case where they don’t have to issue equity but instead ramp faster or zinc prices recover sooner, enabling $50m in debt to cover short term liquidity needs, and zinc prices could be $1.20 in 2017 given capacity coming offline and delays in new openings due to the recent fall in prices, and you could give management credit for hitting the mid point of guidance at $100m in incremental EBITDA, which could get you $220m in EBITDA and $158m in unlevered FCF in 2017, and maybe the market puts 12x on that instead of 10x, and you could have an enterprise worth $1,896m less net debt of $467m, for an equity value of $1,429m divided by 56.6m shares outstanding since we didn’t get diluted in this scenario and the stock is worth $25/share, 8-9x this price.  This is highly unlikely, but somewhere between that bear case and this bull case is highly likely imo.

 

Of course if you think the plant will never ramp to 100%, then the bear case will not be bearish enough.

 

looks for what is important and knowable. What you are doing is knowable but not important. What is important is knowledge of the process and certainty of success in the plant,  if  you don't know it you should pass.

 

If you are trying to make a bet than good luck and also i would recommend taking on the maximum risk possible on this one via calls, if you are going that rote.

But don't justify it with logic. 

 

"Give me a place to stand, and I shall move the world."

You have to be standing somewhere real first.

[abitofvalue]

I can't recall who it was - but I am pretty it was a fairly well known investor who used to point to this exact dynamic as creating potentially interesting opportunities for investors.

 

The dynamic being - look for a public company that had recently started a new plant or major capex, after the initial jump in stock price, the stock will almost always sell off as a few problems are discovered and teething problems result in a slow ramp. Public markets tend not to be patient in such situations. If you can identify such situations, you will find that inevitably companies are able to resolve the issues.

 

Now obviously not all such situations will result in profitable investments. And ZINC has at a minimum NT headwinds in the form of (a) low commodity costs and (b) liquidity issues. Compounding the issue is that ZINC has pretty much made a bet the farm investment on this new plant - so there is real potential for permanent loss of capital.

[abitofvalue]

I expect tomorrow's update to be much the same - solved some issues, identified others and how to resolve them, hired some expert to resolve them, working on it. cant gaurantee anything.  I do expect them to be more forthcoming about the possibility of the capital raise if prices / production dont increase. So not optimistic in terms of how the market will react.

 

 

[cmlber]

Let’s step back for a second and look at actual numbers instead of assuming this is headed straight for bankruptcy based on one month of price movements and no quantitative analysis.

 

Here is a very bearish case that gets you a 2-3x from this price.

 

Let’s assume that for all of 2016, management achieves an average utilization rate of only 50%.  And lets also assume zinc prices average 75 cents for all of 2016.  If that happened, I estimate EBITDA for the company would be -$10m.  They would also have cash outflow for interest of $40m (I rounded up).  They would also have maintenance capex of ~$10m, and an additional $30m in capex for the 23+ projects that management has identified to get to full capacity.  So cash burn in 2016 under these assumptions would be roughly $90m. 

 

Let’s assume management would like to maintain a minimum of $80m in liquidity at all times.  The CFO has said very recently that given the hedges in place, liquidity should be roughly the same at the end of the year as it was at the end of Q2, so they’ll have ~$80m in liquidity.  Therefore, they’ll need to raise ~$90m.  Let’s say they raise that $50m through an equity offering at $2/share and raise the remaining $40m as debt at 25% interest.  This extra interest will be $10m, so the cash burn for 2016 will be $100m

 

Now let’s assume that all of this gets us to the end of 2016 with $70m in liquidity and hopefully close to 100% utilization with higher zinc prices in 2017.  If we assume Mooresboro adds $80m in incremental EBITDA (mgt. range is $90-110m) and add this to what Horsehead produced in EBITDA in 2010 & 2011 at 98 cent zinc prices and add the ~$10m/yr extra EBITDA that Zochem produces due to expansion capex since then, you get ~$150m in EBITDA.  Taxes would be $30m and maintenance capex ~$12m.  That get’s you $108m in unlevered FCF.  At 10x this bear case unlevered FCF, the enterprise would be worth $1,080m.  Subtract net debt, which then will be $417m to reflect the $100m cash burn and $50m equity infusion and you get $663m for the equity.  Divide by 82 million shares outstanding to reflect ~25m shares issued at $2/share for $50m infusion and you get $8.09/share, almost 3x this price.

 

If the equity is issued at $1/share instead of $2/share, and there are instead 106m shares outstanding, the equity would still be worth $6.25, more than 2x this price.

 

If the equity is issued at $0.50/share instead of $1/share, and there are instead 156m shares outstanding, the equity would still be worth $4.25. 

 

And you can still argue a bull case where they don’t have to issue equity but instead ramp faster or zinc prices recover sooner, enabling $50m in debt to cover short term liquidity needs, and zinc prices could be $1.20 in 2017 given capacity coming offline and delays in new openings due to the recent fall in prices, and you could give management credit for hitting the mid point of guidance at $100m in incremental EBITDA, which could get you $220m in EBITDA and $158m in unlevered FCF in 2017, and maybe the market puts 12x on that instead of 10x, and you could have an enterprise worth $1,896m less net debt of $467m, for an equity value of $1,429m divided by 56.6m shares outstanding since we didn’t get diluted in this scenario and the stock is worth $25/share, 8-9x this price.  This is highly unlikely, but somewhere between that bear case and this bull case is highly likely imo.

 

Of course if you think the plant will never ramp to 100%, then the bear case will not be bearish enough.

 

looks for what is important and knowable. What you are doing is knowable but not important. What is important is knowledge of the process and certainty of success in the plant,  if  you don't know it you should pass.

 

If you are trying to make a bet than good luck and also i would recommend taking on the maximum risk possible on this one via calls, if you are going that rote.

But don't justify it with logic. 

 

"Give me a place to stand, and I shall move the world."

You have to be standing somewhere real first.

 

"What you are doing is knowable but not important."  Sorry GK, but this is an incredibly stupid comment.  Short term liquidity is not important?  Has the market changed it's assessment of the long term value of the company by over 50% in two weeks that saw no operational updates on something else?

 

All investments have unknowable risks.  What do you think the odds are that this management team, who does have substantial knowledge of the process, spent $550 million building a plant using a technology that has been used successfully twice before and made a total error in judgement and will never get it operating?  I think low. 

[Green King]

Let’s step back for a second and look at actual numbers instead of assuming this is headed straight for bankruptcy based on one month of price movements and no quantitative analysis.

 

Here is a very bearish case that gets you a 2-3x from this price.

 

Let’s assume that for all of 2016, management achieves an average utilization rate of only 50%.  And lets also assume zinc prices average 75 cents for all of 2016.  If that happened, I estimate EBITDA for the company would be -$10m.  They would also have cash outflow for interest of $40m (I rounded up).  They would also have maintenance capex of ~$10m, and an additional $30m in capex for the 23+ projects that management has identified to get to full capacity.  So cash burn in 2016 under these assumptions would be roughly $90m. 

 

Let’s assume management would like to maintain a minimum of $80m in liquidity at all times.  The CFO has said very recently that given the hedges in place, liquidity should be roughly the same at the end of the year as it was at the end of Q2, so they’ll have ~$80m in liquidity.  Therefore, they’ll need to raise ~$90m.  Let’s say they raise that $50m through an equity offering at $2/share and raise the remaining $40m as debt at 25% interest.  This extra interest will be $10m, so the cash burn for 2016 will be $100m

 

Now let’s assume that all of this gets us to the end of 2016 with $70m in liquidity and hopefully close to 100% utilization with higher zinc prices in 2017.  If we assume Mooresboro adds $80m in incremental EBITDA (mgt. range is $90-110m) and add this to what Horsehead produced in EBITDA in 2010 & 2011 at 98 cent zinc prices and add the ~$10m/yr extra EBITDA that Zochem produces due to expansion capex since then, you get ~$150m in EBITDA.  Taxes would be $30m and maintenance capex ~$12m.  That get’s you $108m in unlevered FCF.  At 10x this bear case unlevered FCF, the enterprise would be worth $1,080m.  Subtract net debt, which then will be $417m to reflect the $100m cash burn and $50m equity infusion and you get $663m for the equity.  Divide by 82 million shares outstanding to reflect ~25m shares issued at $2/share for $50m infusion and you get $8.09/share, almost 3x this price.

 

If the equity is issued at $1/share instead of $2/share, and there are instead 106m shares outstanding, the equity would still be worth $6.25, more than 2x this price.

 

If the equity is issued at $0.50/share instead of $1/share, and there are instead 156m shares outstanding, the equity would still be worth $4.25. 

 

And you can still argue a bull case where they don’t have to issue equity but instead ramp faster or zinc prices recover sooner, enabling $50m in debt to cover short term liquidity needs, and zinc prices could be $1.20 in 2017 given capacity coming offline and delays in new openings due to the recent fall in prices, and you could give management credit for hitting the mid point of guidance at $100m in incremental EBITDA, which could get you $220m in EBITDA and $158m in unlevered FCF in 2017, and maybe the market puts 12x on that instead of 10x, and you could have an enterprise worth $1,896m less net debt of $467m, for an equity value of $1,429m divided by 56.6m shares outstanding since we didn’t get diluted in this scenario and the stock is worth $25/share, 8-9x this price.  This is highly unlikely, but somewhere between that bear case and this bull case is highly likely imo.

 

Of course if you think the plant will never ramp to 100%, then the bear case will not be bearish enough.

 

looks for what is important and knowable. What you are doing is knowable but not important. What is important is knowledge of the process and certainty of success in the plant,  if  you don't know it you should pass.

 

If you are trying to make a bet than good luck and also i would recommend taking on the maximum risk possible on this one via calls, if you are going that rote.

But don't justify it with logic. 

 

"Give me a place to stand, and I shall move the world."

You have to be standing somewhere real first.

 

"What you are doing is knowable but not important."  Sorry GK, but this is an incredibly stupid comment.  Short term liquidity is not important?  Has the market changed it's assessment of the long term value of the company by over 50% in two weeks that saw no operational updates on something else?

 

All investments have unknowable risks.  What do you think the odds are that this management team, who does have substantial knowledge of the process, spent $550 million building a plant using a technology that has been used successfully twice before and made a total error in judgement and will never get it operating?  I think low.

 

let's leave it here than good luck.

[abitofvalue]

One question for board members - it seems like the board has many members who follow the stock pretty closely. How may actually thought it would take the new plant running at 75% capacity for the company to break even. Was this disclosed before Pabrai meeting?  Seems like 75% is an awfully high number if the company can actually make $90M-$100M additional EBITDA compared to the old plant. They still stand by that number and say its independent of the cost of Zinc.

 

Does anyone know how both those numbers can be consistent? I mean if the price of Zinc isn't the issue, we are basically to assume the 25% of additional volume is able to generate $100M of EBITDA. The company is currently at ~25% plant capacity so a tripling is necessary to break-even. and then an additional 25% gets you to $100M? Something seems odd about this.

 

[cmakam]

The capacity utilization needed for break even is extremely sensitive to lme zinc price.The 75 percent utilization is the break even point for today's price i.e 70-75/lb.In the past given that Zn prices were 85-125 cents/lb so the break even point was lower.

 

The right way to think about the 100-120M incremental EBITDA is incremental to what might have been the case with the older plant,in other words @ 70-73  cents per pound and 75 percent utilization the older plant would be operating at a loss of 100-120M but after  spending 500M in capex on the new plant the company is now break even:)

 

-cmakam

[TREVNI]

Hey cmlber, care to post your spreadsheet on how you arrived at some of your figures?  Curious how you got to the 2016 EBITDA figure of -$10m.  Thanks!

[Sebastien]

A lot of "what if" scenarios to explain the recent stock price drop... human nature is revealing itself...

 

The whole sector is down 50%, I mean the zinc producers, the smelters... they are not making any money at this point...

Is it sustainable??? and for how long??? We don't know... nobody knows (I mean CEO, CFO, sell side, macro guys... Pabrai)

It's the risky part of their business and it's a wonderful time for an entry point... if you are a contrarian...

 

We know for sure:

Horsehead will be the second lowest producer/smelter of zinc after the ramp-up... yes, it's a tought ramp up but it's not anormal in the material sector...

The margin of safety is wide at this point (maximum of pessimist)...

People are selling irrationnaly, example: I dont want to own the stock before the operational update, it's too risky....

Hum, If all the planet thinks like that, the stock will be at zero... that's why we have seen this recent drop.... too many sellers for the current buyers....

 

The opportunity is to buy something that was sold irrationnaly, yes, it's not 100% safe but the bet worth it... the margin of safety is there

That's a real value investment... an UGLY one at its best!!!!!

 

Good luck to all

 

[cmlber]

Hey cmlber, care to post your spreadsheet on how you arrived at some of your figures?  Curious how you got to the 2016 EBITDA figure of -$10m.  Thanks!

 

Hey TREVNI, it's just a rough guess and it's assuming 75 cents and 50% utilization for the year.  This is not my expectation; I expect higher utilization and certainly higher (probably much higher) zinc prices, but was just illustrating that in a very bearish scenario there is significant upside even with an equity raise so long as the plant is working in 2017. 

 

At $1 zinc mgt said Mooresboro would be cash flow break-even at 50% utilization implying Mooresboro EBITDA of $30m (to cover interest).  With zinc/nickel prices here, my guess is Zochem/Inmetco basically cover SG&A, maybe a little higher or lower by an immaterial amount, so with zinc prices at 75 cents instead of $1, that would be a 25 cent move and I think every 10 cents at 50% utilization would be a $15m impact based on $30m impact at 100% utilization.  That gets you to a little better than -$10m EBITDA.   

[cmlber]

One question for board members - it seems like the board has many members who follow the stock pretty closely. How may actually thought it would take the new plant running at 75% capacity for the company to break even. Was this disclosed before Pabrai meeting?  Seems like 75% is an awfully high number if the company can actually make $90M-$100M additional EBITDA compared to the old plant. They still stand by that number and say its independent of the cost of Zinc.

 

Does anyone know how both those numbers can be consistent? I mean if the price of Zinc isn't the issue, we are basically to assume the 25% of additional volume is able to generate $100M of EBITDA. The company is currently at ~25% plant capacity so a tripling is necessary to break-even. and then an additional 25% gets you to $100M? Something seems odd about this.

 

He was not talking about long term break-even at 80 cents.  He was talking about right now.  That excludes the lead/silver recovery circuit which was $10-30m of the $90-$110m, since it isn't operating right now.  It also includes nickel prices that are half where they were last year (probably $10m impact at Inmetco).  Also, there are a lot of start up costs and inefficiencies associated with both running the plant at the same time as they are fixing the plant, which will be worked out once they get closer to capacity utilization.  And on top of that, I think he's being conservative with the 75% number. 

[TREVNI]

Hey cmlber, care to post your spreadsheet on how you arrived at some of your figures?  Curious how you got to the 2016 EBITDA figure of -$10m.  Thanks!

 

Hey TREVNI, it's just a rough guess and it's assuming 75 cents and 50% utilization for the year.  This is not my expectation; I expect higher utilization and certainly higher (probably much higher) zinc prices, but was just illustrating that in a very bearish scenario there is significant upside even with an equity raise so long as the plant is working in 2017. 

 

At $1 zinc mgt said Mooresboro would be cash flow break-even at 50% utilization implying Mooresboro EBITDA of $30m (to cover interest).  With zinc/nickel prices here, my guess is Zochem/Inmetco basically cover SG&A, maybe a little higher or lower by an immaterial amount, so with zinc prices at 75 cents instead of $1, that would be a 25 cent move and I think every 10 cents at 50% utilization would be a $15m impact based on $30m impact at 100% utilization.  That gets you to a little better than -$10m EBITDA. 

 

 

Your analysis assumes a linear relationship between Zinc price, capacity utilization, and EBITDA.  This is probably not the case.  The brain likes to think in a linear fashion but quite often there are important non-linear relationships to consider. 

 

While I don't claim to have all the answers myself, ZINC's plant utilization / EBITDA relationship likely is non-linear.  We have operating leverage exacerbated by financial leverage exacerbated by management/employees moving up the (again, non-linear) learning curve. 

[cmlber]

Hey cmlber, care to post your spreadsheet on how you arrived at some of your figures?  Curious how you got to the 2016 EBITDA figure of -$10m.  Thanks!

 

Hey TREVNI, it's just a rough guess and it's assuming 75 cents and 50% utilization for the year.  This is not my expectation; I expect higher utilization and certainly higher (probably much higher) zinc prices, but was just illustrating that in a very bearish scenario there is significant upside even with an equity raise so long as the plant is working in 2017. 

 

At $1 zinc mgt said Mooresboro would be cash flow break-even at 50% utilization implying Mooresboro EBITDA of $30m (to cover interest).  With zinc/nickel prices here, my guess is Zochem/Inmetco basically cover SG&A, maybe a little higher or lower by an immaterial amount, so with zinc prices at 75 cents instead of $1, that would be a 25 cent move and I think every 10 cents at 50% utilization would be a $15m impact based on $30m impact at 100% utilization.  That gets you to a little better than -$10m EBITDA. 

 

 

Your analysis assumes a linear relationship between Zinc price, capacity utilization, and EBITDA.  This is probably not the case.  The brain likes to think in a linear fashion but quite often there are important non-linear relationships to consider. 

 

While I don't claim to have all the answers myself, ZINC's plant utilization / EBITDA relationship likely is non-linear.  We have operating leverage exacerbated by financial leverage exacerbated by management/employees moving up the (again, non-linear) learning curve.

 

No it doesn't. It assumes a linear(ish) (note I used the high end of the 25-30m range at 100% utilization) relationship between zinc price impact and utilization, not utilization and ebitda.  At 50% utilization they sell 50% less finished zinc, hence the zinc sensitivity should be pretty linear.

 

And btw, the CFO told me this is correct.

[TREVNI]

Hey cmlber, care to post your spreadsheet on how you arrived at some of your figures?  Curious how you got to the 2016 EBITDA figure of -$10m.  Thanks!

 

Hey TREVNI, it's just a rough guess and it's assuming 75 cents and 50% utilization for the year.  This is not my expectation; I expect higher utilization and certainly higher (probably much higher) zinc prices, but was just illustrating that in a very bearish scenario there is significant upside even with an equity raise so long as the plant is working in 2017. 

 

At $1 zinc mgt said Mooresboro would be cash flow break-even at 50% utilization implying Mooresboro EBITDA of $30m (to cover interest).  With zinc/nickel prices here, my guess is Zochem/Inmetco basically cover SG&A, maybe a little higher or lower by an immaterial amount, so with zinc prices at 75 cents instead of $1, that would be a 25 cent move and I think every 10 cents at 50% utilization would be a $15m impact based on $30m impact at 100% utilization.  That gets you to a little better than -$10m EBITDA. 

 

 

Your analysis assumes a linear relationship between Zinc price, capacity utilization, and EBITDA.  This is probably not the case.  The brain likes to think in a linear fashion but quite often there are important non-linear relationships to consider. 

 

While I don't claim to have all the answers myself, ZINC's plant utilization / EBITDA relationship likely is non-linear.  We have operating leverage exacerbated by financial leverage exacerbated by management/employees moving up the (again, non-linear) learning curve.

 

No it doesn't. It assumes a linear(ish) (note I used the high end of the 25-30m range at 100% utilization) relationship between zinc price impact and utilization, not utilization and ebitda.  At 50% utilization they sell 50% less finished zinc, hence the zinc sensitivity should be pretty linear.

 

And btw, the CFO told me this is correct.

 

Thanks for clarifying, I probably misread that.  We're still talking about a multi-variate analysis  between price, volume, and fixed costs. 

[500pages]

I think ZINC is a very attractive risk/reward, the thesis riding on ramping the plant and zinc prices recovering before the company has to take too much dilution. So in my opinion, if one wants to have a position in this, it's worth figuring out how this can get hurt, and spend fairly generously on hedging out those risks.

 

So I'm interested in people's thoughts on appropriate hedges for this.

Here are the key risks as I see them:

- the plant does not ramp. Hedgeable with puts, but seems a bit late. Maybe worth picking up puts if stock recovers some.

- zinc goes into massive oversupply, dropping way below 90th percentile of mine c1 cash curve.

There may be individual miners which enter dramatic distress at that point (MMG? Vedanta?), so that may be a hedge.

This can happen if Glencore or someone else has been stockpiling a few million tonnes of zinc and decides to sell it all at lowest possible price (perhaps in forced selling). overall seems unlikely.

Or, it can happen if China enters a recession, cuts industrial spending (i.e. decides not to stimulate economy with large industrial projects), and Chinese consumer buying of white goods declines, plus China decides to incentivize its zinc mines to keep running (presumably uneconomically). Seems Chinese supply likely to adjust down, but perhaps less than demand in a big decline. So worth figuring out how to hedge China's industrial production. Specific names listed in HK? (A shares cant be directly shorted). Some China ETFs that are industry focused (not Tencent + Alibaba). Would welcome suggestions here.

- zinc stays above 90th percentile of cash cost curve, but cash cost curve moves way down. This can happen on dramatically stronger dollar, or a massive red-dog-like cheap zinc discovery. Seems worth hedging by shorting the currencies like EUR, AUD, maybe CAD.

 

Anything else I missed?

Any thoughts on cost-effective ways of hedging China industrial consumption, or world galvanized steel consumption?

(Presumably, auto sector can be hedged without too much trouble)

 

[TREVNI]

I think ZINC is a very attractive risk/reward, the thesis riding on ramping the plant and zinc prices recovering before the company has to take too much dilution. So in my opinion, if one wants to have a position in this, it's worth figuring out how this can get hurt, and spend fairly generously on hedging out those risks.

 

So I'm interested in people's thoughts on appropriate hedges for this.

Here are the key risks as I see them:

- the plant does not ramp. Hedgeable with puts, but seems a bit late. Maybe worth picking up puts if stock recovers some.

- zinc goes into massive oversupply, dropping way below 90th percentile of mine c1 cash curve.

There may be individual miners which enter dramatic distress at that point (MMG? Vedanta?), so that may be a hedge.

This can happen if Glencore or someone else has been stockpiling a few million tonnes of zinc and decides to sell it all at lowest possible price (perhaps in forced selling). overall seems unlikely.

Or, it can happen if China enters a recession, cuts industrial spending (i.e. decides not to stimulate economy with large industrial projects), and Chinese consumer buying of white goods declines, plus China decides to incentivize its zinc mines to keep running (presumably uneconomically). Seems Chinese supply likely to adjust down, but perhaps less than demand in a big decline. So worth figuring out how to hedge China's industrial production. Specific names listed in HK? (A shares cant be directly shorted). Some China ETFs that are industry focused (not Tencent + Alibaba). Would welcome suggestions here.

- zinc stays above 90th percentile of cash cost curve, but cash cost curve moves way down. This can happen on dramatically stronger dollar, or a massive red-dog-like cheap zinc discovery. Seems worth hedging by shorting the currencies like EUR, AUD, maybe CAD.

 

Anything else I missed?

Any thoughts on cost-effective ways of hedging China industrial consumption, or world galvanized steel consumption?

(Presumably, auto sector can be hedged without too much trouble)

 

Based on what you've just said, I think you should put ZINC in your "too hard" pile.  Why can't people just accept the fact that they are buying businesses and should think like a business owner.  That means: A) I understand it and accept the probabilities as I've determined them; or B) Pass.  There are thousands upon thousands of businesses out there, why gnash your teeth trying to hedge out / in certain risks/rewards?

 

It's like saying, 'Geeze I know I'm not supposed to drink this poison here, but I really want to.  How can I hedge my exposure to death by ingesting some antidote or other substance that limits my downside risk but allows me to tell my friends I'm so smart I survived a tough situation?'.  Just stay away from the darned situation in the first place! 

[Guest roark33]

--Trevni, good description, I agree with your reasoning.  On the other hand, you best hedge is probably a 2017 straddle of Glencore with a forward Zinc price collar are 20% above current spot pricing.  Ok, I am just making stuff up now....

[nikhil25]

October Update: http://www.horsehead.net/project_detail.php?ConstructionProjectID=32

 

Mooresboro, NC

Horsehead Update on Mooresboro, NC Facility

PITTSBURGH--October 1, 2015--Horsehead Holding Corp. (NASDAQ: ZINC) today issued an update on operations at its Mooresboro, North Carolina zinc production facility.  The Company reported that the facility produced approximately 3,000 tons of zinc cathode in September, most of which was converted to cast product, and shipped approximately 3,100 tons from the Mooresboro facility.  Shipment of metal from Mooresboro was supplemented with the sale of approximately 10,700 tons of zinc calcine in September.

 

“We were pleased with the successful start-up of the bleed treatment pilot plant which began to ramp-up by mid-September.  We believe this pilot plant will provide up to 100 tons per day of incremental zinc production capacity by easing the bottleneck in bleed treatment once fully commissioned.  We are currently achieving flows comparable to two-thirds of the level required for that increase in production.  We are very pleased that the initial results of the pilot plant indicate that we have the potential of simplifying the flow-sheet when we build the full-scale version.  We also discovered that we need to add some additional pumping and clarifier capacity to realize the full capacity of the pilot unit which we expect to implement shortly.  As a result of the debottlenecking provided by the pilot plant we were at times able to achieve daily production rates approaching our best levels of the year”, said Jim Hensler, President & CEO.

 

In order to address the low current efficiency issues reported last month caused primarily by the up and down nature of the operation , we took an outage during the second week of September to install a new control system for a portion of the current bleed treatment circuit.  This new system has significantly improved the reliability of the bleed treatment plant resulting in a more stable operation and debottlenecked the residue filter presses to a significant extent.  In addition, we instituted a new control philosophy in the leach-solvent extraction area which has added a further degree of stability.  While further work needs to be done, primarily around process control in Leach, the current efficiency started to improve during the latter half of the month.”

 

Production suffered a setback at the end of the month due to the failure of one of the cell house cooling tower fans which forced us to reduce production rates.  We expect a new fan to be installed early next week.   

 

The number of electrodes in service in the cell house was 82 per cell during September maintaining the maximum plating capacity at approximately 250 tons per day.  Now that the bleed treatment pilot plant has started up, we will start adding cathodes and anodes to the cell house once we consistently produce at the 250 tons per day level.

 

In addition to the upgrades to the control systems completed in September which we believe should improve plant reliability going forward we also upgraded another of the problematic pumps during the month.  During the fourth quarter we expect to connect the previously installed bypass around the first SX settler to allow solids removal from that settler, modify the design of the mixer tanks on the settlers to remove a potential bottleneck, upgrade components in the hydrochloric acid recovery circuit to improve corrosion resistance, upgrade the Waelz oxide delivery system to the leaching process to minimize further plugging issues and improve process control of the circuit, further upgrade the control system in bleed treatment and complete the first phase of an upgrade to the acid distribution system.    However, we cannot guarantee that these improvements will be finally completed during the fourth quarter, or fully address the operational challenges we have faced, or that additional challenges might not arise.

 

There will be no separate update on October production the first week in November.  Information related to October performance at Mooresboro will be provided as part of our November 9, 2015 third quarter 2015 earnings release.

 

 

So, seems like more of the standard "fixed some issues --> found new issues --> already fixed some of them, working on others" followed by "cannot guarantee that this will happen by end of Q4 or it'll fully fix issues at all"

[BG2008]

Hoping that hurricane Joaquin isn't going to do too much damage to the bleed treatment system

[abitofvalue]

Not an engineer but will play one on this board -

 

With the number of upgrades and issues being implemented in Q4, I think utilization is likely lower as there will be more "planned" outages in Q4.  Cash-burn speed will increase too.  And what are the chances that everything works as planned? After that you get into the winter so likely will have some new weather related issues in Q1...  the road to utilization at capacity is still a long imo

 

Hopefully I am wrong and some of these fixes actually stick and they begin to make real progress on increasing volume but at this point I am fully expecting them to be raising capital next year.

[RadMan24]

Re to cynic: Only new problem was fan broke. Apparently you missed the other details. And yes, hurricane could be trouble lol.

[cmlber]

Hoping that hurricane Joaquin isn't going to do too much damage to the bleed treatment system

 

Maybe the hurricane destroys Mooresboro and we get a nice $500 million insurance check :)

 

I agree with Radman, this is the first press release where there are no material new issues (a fan being installed next week is not material) but several material new fixes. 

[AzCactus]

Is there some crazy news today that I overlooked?  Down about 25%.  Mohnish must be sweating at this point!

[Novak]

Oppenheimer downgraded this morning to market perform. The lack of any sort of comfort from last night's operational update (not that there was any bad news - it just didn't give any tangible good news) isn't helping either.