ZINC - Horsehead Holding Corp

[tombgrt]

Imagine coming out with this as your first personal idea that wasn't cloned. Holy shit. Luckily he is a very good promoter. He'll probably survive this too.

[NoCalledStrikes]

Oppenheimer say "market perform".  Hmmm, i guess that means they were cut out of future ZINC investment banking or they would have found something nicer to say.

 

In the update, management talks about wanting to stabilize at 250 tons per day (7500 tons per month) before taking on next steps to raise production from there. My understanding is that 12500 tons per month is the nameplate capacity, in which case even getting to  250 tons per day is only 60% of capacity, so the company still has a way to go. I think they'll figure this out in the end as it doesn't sound like rocket science, but its going to take longer than I ever imagined.  The planning fallacy is a bear.

 

 

[Homestead31]

oppenheimer matching their forecast to the past/current state of affairs.  fairly typical.

 

as an investment, i think there is a very real chance of 100% downside, and a very real chance of 1,000% upside.  You can weight those however you want, but if you have the stomach for volatility, the weighted risk reward is almost definitely attractive in my view.

 

what is more interesting at this point than the investment case however is the trading case.  The negative pressure is feeding on itself...  shorts are selling the name b/c they think the company will need to issue equity.  the lower the price goes, the more dilutive an equity raise would be, so the better the short works in the near term.  i think what these sellers are missing however is that the lower the price goes, the more likely it becomes that the company uses some sort of alternative financing then a straight equity raise... that could mean selling one of the non core businesses, or perhaps some sort of creative financing led by Mohnish.  in either case, if there is even a hint of this - such as management issuing a statement that they are exploring options for the non core businesses - the short squeeze would likely be massive.

[RadMan24]

I really can't add anything of value except to say that I bought more and look like a fool with a 50% loss in less than a month. Good thing I report to myself or I'd be on the streets.

[kab60]

I really can't add anything of value except to say that I bought more and look like a fool with a 50% loss in less than a month. Good thing I report to myself or I'd be on the streets.

It is way too early to make up the score. In hindsight I was lucky to sell at 9, but my process was still shit. Getting in at these levels I'm sure you recognized the potential volatility. Hope it will work out, good luck.

[brker_guy]

 

http://www.horsehead.net/financial_news.php?showall=no&FinancialNews=current&ID=155

 

 

[goldfinger]

 

http://www.horsehead.net/financial_news.php?showall=no&FinancialNews=current&ID=155

 

Hopefully the sell-off continues and glass half empty mentality, pabrai and followers are idiots and so on prevails...

[jawn619]

So at this rate they're making 36K tons of zinc per year right? What's the full ramp? 160K/year?

[Guest Grey512]

I just picked up a small block of ZINC.

[Liberty]

I just picked up a small block of ZINC.

 

http://i00.i.aliimg.com/photo/v24/224833124/zinc_block.jpg

[gfcfa]

Profanity?  Pabrai?

 

Profanity is never appropriate.

 

As for Pabrai?  I'm an investor in Pabrai's Dhandho Holdings.  And, I can tell you that Mohnish Pabrai is an exceptionally fine human being, with a first-class long-term investment track record.  It's not about "self-promotion."  It's an audited fact.

 

 

[Guest Grey512]

Liberty - excellent.

 

Took a flyer on this one. Just bought it to forget about it and come back to see where it's marked in 12 months from now.

 

My reasoning is that there can be strategic / private equity bidders at current prices for 100% of the company, even with all of its operational and capital structure issues, even with what is going on in the commodity prices, and even with all of the market noise about China.

 

[aws]

Dumb question about the convertible bonds.  Does the company choose whether the bonds are converted into common stock at maturity or does the bondholder?  I would have assumed it would be the bondholder since that way it gives them the option, but the language in the reports is unclear to me:

 

The Convertible Notes pay interest semi-annually in arrears on July 1 and January 1 of each year at a rate of 3.80% per annum and mature on July 1, 2017. The Convertible Notes are convertible into shares of the Company’s common stock, cash, or a combination of the Company’s common stock and cash, at the Company’s election, at an initial conversion rate of 0.0666667 shares of the Company’s common stock per $1 principal amount of the Convertible Notes (approximately 6,666.67 underlying shares), which is equivalent to an initial conversion price of approximately $15.00 per share of common stock, subject to adjustment in certain circumstances, as defined in the indenture governing the Convertible Notes. The Company has stated that it intends to settle the par value in cash and the conversion spread in either cash, shares or a combination of both.

 

I was reading that one of the bear cases that Oppenheimer put out was that the yield was so high on the convertible that it indicated it would be impossible for the company to borrow new money at reasonable rates.  But if the company is the one that chooses whether to convert then it would make perfect sense that they trade at a huge discount to par because right now $100 of face value in bonds converts to 6.666667 shares worth $16.33 today. 

[alertmeipp]

are those bonds traded in the market?

[aws]

The CUSIP is 440694AA5.  http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C589105&symbol=ZINC3893598

[TwoCitiesCapital]

Dumb question about the convertible bonds.  Does the company choose whether the bonds are converted into common stock at maturity or does the bondholder?  I would have assumed it would be the bondholder since that way it gives them the option, but the language in the reports is unclear to me:

 

The Convertible Notes pay interest semi-annually in arrears on July 1 and January 1 of each year at a rate of 3.80% per annum and mature on July 1, 2017. The Convertible Notes are convertible into shares of the Company’s common stock, cash, or a combination of the Company’s common stock and cash, at the Company’s election, at an initial conversion rate of 0.0666667 shares of the Company’s common stock per $1 principal amount of the Convertible Notes (approximately 6,666.67 underlying shares), which is equivalent to an initial conversion price of approximately $15.00 per share of common stock, subject to adjustment in certain circumstances, as defined in the indenture governing the Convertible Notes. The Company has stated that it intends to settle the par value in cash and the conversion spread in either cash, shares or a combination of both.

 

I was reading that one of the bear cases that Oppenheimer put out was that the yield was so high on the convertible that it indicated it would be impossible for the company to borrow new money at reasonable rates.  But if the company is the one that chooses whether to convert then it would make perfect sense that they trade at a huge discount to par because right now $100 of face value in bonds converts to 6.666667 shares worth $16.33 today.

 

Sounds like to me that it's the bondholder's right to convert, but it is the company's right to determine the mix of cash/shares that they're converted into at the fixed exchange rates.

[500pages]

Dumb question about the convertible bonds.  Does the company choose whether the bonds are converted into common stock at maturity or does the bondholder?  I would have assumed it would be the bondholder since that way it gives them the option, but the language in the reports is unclear to me:

 

The Convertible Notes pay interest semi-annually in arrears on July 1 and January 1 of each year at a rate of 3.80% per annum and mature on July 1, 2017. The Convertible Notes are convertible into shares of the Company’s common stock, cash, or a combination of the Company’s common stock and cash, at the Company’s election, at an initial conversion rate of 0.0666667 shares of the Company’s common stock per $1 principal amount of the Convertible Notes (approximately 6,666.67 underlying shares), which is equivalent to an initial conversion price of approximately $15.00 per share of common stock, subject to adjustment in certain circumstances, as defined in the indenture governing the Convertible Notes. The Company has stated that it intends to settle the par value in cash and the conversion spread in either cash, shares or a combination of both.

 

I was reading that one of the bear cases that Oppenheimer put out was that the yield was so high on the convertible that it indicated it would be impossible for the company to borrow new money at reasonable rates.  But if the company is the one that chooses whether to convert then it would make perfect sense that they trade at a huge discount to par because right now $100 of face value in bonds converts to 6.666667 shares worth $16.33 today.

 

Sounds like to me that it's the bondholder's right to convert, but it is the company's right to determine the mix of cash/shares that they're converted into at the fixed exchange rates.

 

Your reply threw me for a loop. I think you are agreeing with the original interpretation -- "fixed exchange rate", i.e. Horsehead gets to play the 3.8% annual interest and then pony up (heh) 6.67 shares for original $100 they borrowed. Other than the interest (and being locked up till conversion date), converts don't seem much better than stock. Hence the converts are down with stock price.

How Oppenheimer looks at that and says "ooh, they are at 59% yield, so debt is now unaffordable" is beyond me.

Or maybe they just meant ~8.5% effective current yield is unaffordable.

[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)

 

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!

 

Well, if I knew of a different situation with similar downside (eg plant blows up through their negligence and they have to liquidate, at somewhat above current EV) and upside (8x being somewhere between base and bull case), I'd agree with you.

 

As for hedging, I know it's uncool with true value investing canon, but how difficult, exactly, is it to say "strong dollar is bad for this"?

Any why does it make the investment "too hard"?

Understanding a business, or having it fall within circle of competence, to me, involves literally maybe a hundred considerations like this, all aligned into an overall picture.

 

Think Klarman habitually taking out insurance (of different sorts) against end of the world.

 

Bump on the original question.

[aws]

Your reply threw me for a loop. I think you are agreeing with the original interpretation -- "fixed exchange rate", i.e. Horsehead gets to play the 3.8% annual interest and then pony up (heh) 6.67 shares for original $100 they borrowed. Other than the interest (and being locked up till conversion date), converts don't seem much better than stock. Hence the converts are down with stock price.

How Oppenheimer looks at that and says "ooh, they are at 59% yield, so debt is now unaffordable" is beyond me.

Or maybe they just meant ~8.5% effective current yield is unaffordable.

 

I would definitely like this to be the case, but I just can't imagine who would have ever bought these bonds if the option was truly with the company.  It would be equivalent to loaning money at a 3.8% rate while simultaneously selling $15 put options for zero consideration.  I must be missing something, like maybe on the conversion date they can choose whether to divide $1,000 by the current share price when determining how many shares to issue.  Then again a 58% yield-to-maturity if that's note the case seems way too high, especially since that was based on a trade on October 1st before the downgrade.

[500pages]

Your reply threw me for a loop. I think you are agreeing with the original interpretation -- "fixed exchange rate", i.e. Horsehead gets to play the 3.8% annual interest and then pony up (heh) 6.67 shares for original $100 they borrowed. Other than the interest (and being locked up till conversion date), converts don't seem much better than stock. Hence the converts are down with stock price.

How Oppenheimer looks at that and says "ooh, they are at 59% yield, so debt is now unaffordable" is beyond me.

Or maybe they just meant ~8.5% effective current yield is unaffordable.

 

I would definitely like this to be the case, but I just can't imagine who would have ever bought these bonds if the option was truly with the company.  It would be equivalent to loaning money at a 3.8% rate while simultaneously selling $15 put options for zero consideration.  I must be missing something, like maybe on the conversion date they can choose whether to divide $1,000 by the current share price when determining how many shares to issue.  Then again a 58% yield-to-maturity if that's note the case seems way too high, especially since that was based on a trade on October 1st before the downgrade.

 

 

 

Let's just go to the source:

http://www.sec.gov/Archives/edgar/data/1385544/000115752311004305/a6808848ex4_1.htm

 

"Settlement Method" means, with respect to any conversion of Notes, Physical Settlement, Cash Settlement or Combination Settlement, as elected (or deemed to have been elected) by the Company.

 

but wait for it:

"Notwithstanding the foregoing, in no event shall the total number of shares of Common Stock issuable upon conversion exceed 90.1713 per $1,000 principal amount of Notes"

so Horsehead can always settle by issuing no more than 9.02m shares (or $100m, at Horsehead's election)

 

The upside for the offeror is is the stock pops:

"Prior to April 1, 2017, the Notes may be surrendered for conversion during any calendar quarter commencing after the calendar quarter ending on December 31, 2011 (and only during such calendar quarter), if the Last Reported Sale Price of the Common Stock for at least 20 Trading Days (whether or not consecutive) during the period of 30 consecutive Trading Days ending on the last Trading Day of the immediately preceding calendar quarter is greater than or equal to 130% of the Conversion Price on each applicable Trading Day (the "Sales Price Condition")."

 

[NoCalledStrikes]

I bet the CFO is regretting not calling the convertible when he had the chance...

 

 

 

[peterareed]

Respectfully, this definition is not the relevant or operative part of the Indenture.

 

Article IV deals with Conversion, you are referring to a defined term that is relevant once the conversion decision has been made.

 

Section 4.01 spells out that conversion is an option of the Holder. "...each Holder of a Note shall have the right, at such Holder's option..."

[TwoCitiesCapital]

Respectfully, this definition is not the relevant or operative part of the Indenture.

 

Article IV deals with Conversion, you are referring to a defined term that is relevant once the conversion decision has been made.

 

Section 4.01 spells out that conversion is an option of the Holder. "...each Holder of a Note shall have the right, at such Holder's option..."

 

Thanks. This is what I was trying to say, but didn't have the time to look it up on my phone. I think the only thing that is the companies election is the split between the shares (fixed rate of conversion) and cash.

[500pages]

Respectfully, this definition is not the relevant or operative part of the Indenture.

 

Article IV deals with Conversion, you are referring to a defined term that is relevant once the conversion decision has been made.

 

Section 4.01 spells out that conversion is an option of the Holder. "...each Holder of a Note shall have the right, at such Holder's option..."

 

Thanks. This is what I was trying to say, but didn't have the time to look it up on my phone. I think the only thing that is the companies election is the split between the shares (fixed rate of conversion) and cash.

 

wait, I definitely did not mean the interpretation that "Horsehead gets to pay 3.80% as long as it likes" -- of course it comes due and the Holder can call the notes, as per (the fairly detailed) conversion conditions. I was simply stressing that if the stock is low, Horsehead is on the hook only for ~9m shares.

 

Which I think is good for their ability to roll debt or raise additional debt. The converts basically don't get in the way of that.

[peterareed]

Unless the convert holders elect to convert their Notes into shares (and at these prices, why would they?), Horsehead is on the hook for the entire principal amount of the Notes, payable in cash.