coc Posted October 27, 2015 Share Posted October 27, 2015 Risk is the thing that you don't know and have not anticiped... That's why you ask, for any investments, a good margin of safety Yes Horsehead was an ugly story for at least a few months... the ramp-up is slower than anticiped and mister market is very depressed Is it a bad company or a bad management? I dont think... it's just a bad situation / timing and the sellers are selling irrationnaly If you dont see any value at this price, ask yourself if you are a really value investor... Yes, there are some risks at this thesis but the margin of safety is there to compensate you 5 months ago the default was unthinkable... now it's almost sure for everyone... Disclose: I'm long In regards to this statement: "If you dont see any value at this price, ask yourself if you are a really value investor..." I felt compelled to comment on how dangerous this mentality is as an investor or thinker in general. "If you don't agree with me, you're not a real investor." I've seen this form of statement so many times before people went on to see their iron margin of safety dissipate. I think it's not impossible that a conservative investor might be wary about investing in a leveraged, capital intensive, commodity producer with a track record of falling behind on projects and needing to raise capital at the worst possible time. In fact, they might even be a "real value investor" in my book. How do you think Uncle warren or Uncle Charlie would assess this situation? When this amount of debt is involved, there's no such thing as a price that's absolutely too low. Things go to zero. You might rightly argue this one won't, but to assess the risk at nil is wrong. I don't know much about zinc, but I see a company with the vig running at ~$36 million a year (LTM interest expense), incurring operating losses to get a project up and running, selling stock to stay afloat. Be careful to try and understand the other view as well as your own . Link to comment Share on other sites More sharing options...
Sebastien Posted October 27, 2015 Share Posted October 27, 2015 I dont say agree, I say seeing value... it's a huge difference I'm disappointed by your comment, it's a bit tendentious but may be it's normal for this stock Link to comment Share on other sites More sharing options...
cmlber Posted October 27, 2015 Share Posted October 27, 2015 Risk is the thing that you don't know and have not anticiped... That's why you ask, for any investments, a good margin of safety Yes Horsehead was an ugly story for at least a few months... the ramp-up is slower than anticiped and mister market is very depressed Is it a bad company or a bad management? I dont think... it's just a bad situation / timing and the sellers are selling irrationnaly If you dont see any value at this price, ask yourself if you are a really value investor... Yes, there are some risks at this thesis but the margin of safety is there to compensate you 5 months ago the default was unthinkable... now it's almost sure for everyone... Disclose: I'm long In regards to this statement: "If you dont see any value at this price, ask yourself if you are a really value investor..." I felt compelled to comment on how dangerous this mentality is as an investor or thinker in general. "If you don't agree with me, you're not a real investor." I've seen this form of statement so many times before people went on to see their iron margin of safety dissipate. I think it's not impossible that a conservative investor might be wary about investing in a leveraged, capital intensive, commodity producer with a track record of falling behind on projects and needing to raise capital at the worst possible time. In fact, they might even be a "real value investor" in my book. How do you think Uncle warren or Uncle Charlie would assess this situation? When this amount of debt is involved, there's no such thing as a price that's absolutely too low. Things go to zero. You might rightly argue this one won't, but to assess the risk at nil is wrong. I don't know much about zinc, but I see a company with the vig running at ~$36 million a year (LTM interest expense), incurring operating losses to get a project up and running, selling stock to stay afloat. Be careful to try and understand the other view as well as your own . Different value investors can have different levels of risk tolerance. So I generally agree with your comments, but certainly disagree with the statement that there is no such thing as a price that is absolutely too low. There are many possible outcomes, bankruptcy is one of them, but it is highly unlikely in my opinion, and in the event the company doesn't go bankrupt, it is highly likely, in my opinion, that it will be worth multiples, possibly many multiples, of the current price. If you could create a diversified portfolio of similar bets, I think you would be wise to do so. Link to comment Share on other sites More sharing options...
str8shot Posted October 27, 2015 Share Posted October 27, 2015 The key investment risks are: >market: zinc price levels in 2016 and beyond >execution: whether and how quickly the Mooresboro plant reaches break even capacity and beyond >liquidity: a byproduct of the market and execution risks above - the ability to generate or raise sufficient capital (whether via equity using the ATM offering or through debt financing) to bridge the Mooresboro ramp-up >solvency: the ability to meet debt obligations, including the ability to restructure/refinance debt due in 2017 Pabrai promotes scenarios where, in his words, there is low risk but high uncertainty. Financial risk is typically defined as the uncertainty of a return and the potential for financial loss. Relating Pabrai's commingling of the concepts of risk and uncertainty to this definition of financial risk, he seems to be correlating low risk = low potential for financial loss, and high uncertainty = range of potential investment returns where "tails i win, and heads i don't lose much". If an investment is low risk, it has low potential for financial loss, which implies a margin of safety where the intrinsic value of the company (asset) is significantly understated by the market. We saw Pabrai buy 2m shares of HH in August 2015 at prices ranging from $7.50-8.50 per share. Presumably he had determined that the risk of financial loss was very low. Time will tell. Ultimately it all comes down to execution – how quickly can they get to break-even and can they fund it? My sense is that if they can get to at least 75% capacity in the next 6-9 months and zinc prices stay above $.80, they are likely to get over the hump, assuming they use the ATM equity financing or the sale of assets to bridge the liquidity gap. Debt financing doesn’t seem to be an option near-term, until they reach or exceed break-even. At this stage, given management’s track record with Moorseboro over the past year plus, HH stock appears to be a high-risk investment proposition with further dilution likely to come. It may have significant upside potential, but there looks to be great risk as well as great uncertainty. And if that's true then Pabrai grossly miscalculated. One other note, the ongoing execution risk may be partially mitigated by the hiring of Greg Belland as Senior Vice President – Horsehead Corporation, announced yesterday: Mr. Belland will be based at the Mooresboro, NC plant and have responsibility for the Mooresboro facility, Horsehead’s EAF dust recycling operations, purchasing and corporate engineering. Jim Hensler, President & CEO of Horsehead Holding Corp. noted, “Greg has an extensive background of nearly thirty years in the zinc industry. Most recently, he was employed by Teck Resources Limited as the General Manager of the Trail Operations, the largest zinc smelter in North America producing approximately 300,000 tons of zinc per year, as well as a significant number of co-products. I am very excited to have Greg join our team. I believe he will provide immediate value to the execution of operational improvements at Mooresboro, and with his knowledge and experience in the zinc business, we look for Greg also to be a key contributor to the future growth of the company.” Link to comment Share on other sites More sharing options...
coc Posted October 27, 2015 Share Posted October 27, 2015 Risk is the thing that you don't know and have not anticiped... That's why you ask, for any investments, a good margin of safety Yes Horsehead was an ugly story for at least a few months... the ramp-up is slower than anticiped and mister market is very depressed Is it a bad company or a bad management? I dont think... it's just a bad situation / timing and the sellers are selling irrationnaly If you dont see any value at this price, ask yourself if you are a really value investor... Yes, there are some risks at this thesis but the margin of safety is there to compensate you 5 months ago the default was unthinkable... now it's almost sure for everyone... Disclose: I'm long In regards to this statement: "If you dont see any value at this price, ask yourself if you are a really value investor..." I felt compelled to comment on how dangerous this mentality is as an investor or thinker in general. "If you don't agree with me, you're not a real investor." I've seen this form of statement so many times before people went on to see their iron margin of safety dissipate. I think it's not impossible that a conservative investor might be wary about investing in a leveraged, capital intensive, commodity producer with a track record of falling behind on projects and needing to raise capital at the worst possible time. In fact, they might even be a "real value investor" in my book. How do you think Uncle warren or Uncle Charlie would assess this situation? When this amount of debt is involved, there's no such thing as a price that's absolutely too low. Things go to zero. You might rightly argue this one won't, but to assess the risk at nil is wrong. I don't know much about zinc, but I see a company with the vig running at ~$36 million a year (LTM interest expense), incurring operating losses to get a project up and running, selling stock to stay afloat. Be careful to try and understand the other view as well as your own . Different value investors can have different levels of risk tolerance. So I generally agree with your comments, but certainly disagree with the statement that there is no such thing as a price that is absolutely too low. There are many possible outcomes, bankruptcy is one of them, but it is highly unlikely in my opinion, and in the event the company doesn't go bankrupt, it is highly likely, in my opinion, that it will be worth multiples, possibly many multiples, of the current price. If you could create a diversified portfolio of similar bets, I think you would be wise to do so. You are right, I cast too broad a net. A low enough price and enough similar situations would be an attractive package. Link to comment Share on other sites More sharing options...
coc Posted October 27, 2015 Share Posted October 27, 2015 I dont say agree, I say seeing value... it's a huge difference I'm disappointed by your comment, it's a bit tendentious but may be it's normal for this stock They are the same thing. You see value here. Thus, if I don't see value, I disagree with you. You were clear to say, if you don't see value in ZINC, you should check and see if you're a "real value investor" or "really a value investor". I think that's a bad habit of thought - to not acknowledge the other side of the case for what it is. It blinds you. For the record, I have no idea if there is going to be value here or not. But I see enough elements to know there are substantial risks of being wrong. There is a meaningful risk of failure. It isn't 0% or 1%. So I'm recommending, in a friendly way, that you be careful not to cast out those who disagree about the merits of an uncertain investment as nonbelievers of the creed. You're doing your own self a disservice. I have made that mistake before. Wish you luck. Link to comment Share on other sites More sharing options...
widenthemoat Posted October 27, 2015 Share Posted October 27, 2015 The key investment risks are: >market: zinc price levels in 2016 and beyond >execution: whether and how quickly the Mooresboro plant reaches break even capacity and beyond >liquidity: a byproduct of the market and execution risks above - the ability to generate or raise sufficient capital (whether via equity using the ATM offering or through debt financing) to bridge the Mooresboro ramp-up >solvency: the ability to meet debt obligations, including the ability to restructure/refinance debt due in 2017 Pabrai promotes scenarios where, in his words, there is low risk but high uncertainty. Financial risk is typically defined as the uncertainty of a return and the potential for financial loss. Relating Pabrai's commingling of the concepts of risk and uncertainty to this definition of financial risk, he seems to be correlating low risk = low potential for financial loss, and high uncertainty = range of potential investment returns where "tails i win, and heads i don't lose much". If an investment is low risk, it has low potential for financial loss, which implies a margin of safety where the intrinsic value of the company (asset) is significantly understated by the market. We saw Pabrai buy 2m shares of HH in August 2015 at prices ranging from $7.50-8.50 per share. Presumably he had determined that the risk of financial loss was very low. Time will tell. Ultimately it all comes down to execution – how quickly can they get to break-even and can they fund it? My sense is that if they can get to at least 75% capacity in the next 6-9 months and zinc prices stay above $.80, they are likely to get over the hump, assuming they use the ATM equity financing or the sale of assets to bridge the liquidity gap. Debt financing doesn’t seem to be an option near-term, until they reach or exceed break-even. At this stage, given management’s track record with Moorseboro over the past year plus, HH stock appears to be a high-risk investment proposition with further dilution likely to come. It may have significant upside potential, but there looks to be great risk as well as great uncertainty. And if that's true then Pabrai grossly miscalculated. One other note, the ongoing execution risk may be partially mitigated by the hiring of Greg Belland as Senior Vice President – Horsehead Corporation, announced yesterday: Mr. Belland will be based at the Mooresboro, NC plant and have responsibility for the Mooresboro facility, Horsehead’s EAF dust recycling operations, purchasing and corporate engineering. Jim Hensler, President & CEO of Horsehead Holding Corp. noted, “Greg has an extensive background of nearly thirty years in the zinc industry. Most recently, he was employed by Teck Resources Limited as the General Manager of the Trail Operations, the largest zinc smelter in North America producing approximately 300,000 tons of zinc per year, as well as a significant number of co-products. I am very excited to have Greg join our team. I believe he will provide immediate value to the execution of operational improvements at Mooresboro, and with his knowledge and experience in the zinc business, we look for Greg also to be a key contributor to the future growth of the company.” This is pure speculation but doesn't Mr. Belland's decision to join Horsehead suggest that he believes the plant will become fully operational? Why would a General Manager from "the largest zinc smelter in North America" leave his job to join a soon-to-be bankrupt company in the same industry? I would imagine Horsehead falls within his circle of competence and he would have some insight on these issues...but then again people have done stranger things. Link to comment Share on other sites More sharing options...
arcube Posted October 27, 2015 Share Posted October 27, 2015 The key investment risks are: >market: zinc price levels in 2016 and beyond >execution: whether and how quickly the Mooresboro plant reaches break even capacity and beyond >liquidity: a byproduct of the market and execution risks above - the ability to generate or raise sufficient capital (whether via equity using the ATM offering or through debt financing) to bridge the Mooresboro ramp-up >solvency: the ability to meet debt obligations, including the ability to restructure/refinance debt due in 2017 Pabrai promotes scenarios where, in his words, there is low risk but high uncertainty. Financial risk is typically defined as the uncertainty of a return and the potential for financial loss. Relating Pabrai's commingling of the concepts of risk and uncertainty to this definition of financial risk, he seems to be correlating low risk = low potential for financial loss, and high uncertainty = range of potential investment returns where "tails i win, and heads i don't lose much". If an investment is low risk, it has low potential for financial loss, which implies a margin of safety where the intrinsic value of the company (asset) is significantly understated by the market. We saw Pabrai buy 2m shares of HH in August 2015 at prices ranging from $7.50-8.50 per share. Presumably he had determined that the risk of financial loss was very low. Time will tell. Ultimately it all comes down to execution – how quickly can they get to break-even and can they fund it? My sense is that if they can get to at least 75% capacity in the next 6-9 months and zinc prices stay above $.80, they are likely to get over the hump, assuming they use the ATM equity financing or the sale of assets to bridge the liquidity gap. Debt financing doesn’t seem to be an option near-term, until they reach or exceed break-even. At this stage, given management’s track record with Moorseboro over the past year plus, HH stock appears to be a high-risk investment proposition with further dilution likely to come. It may have significant upside potential, but there looks to be great risk as well as great uncertainty. And if that's true then Pabrai grossly miscalculated. One other note, the ongoing execution risk may be partially mitigated by the hiring of Greg Belland as Senior Vice President – Horsehead Corporation, announced yesterday: Mr. Belland will be based at the Mooresboro, NC plant and have responsibility for the Mooresboro facility, Horsehead’s EAF dust recycling operations, purchasing and corporate engineering. Jim Hensler, President & CEO of Horsehead Holding Corp. noted, “Greg has an extensive background of nearly thirty years in the zinc industry. Most recently, he was employed by Teck Resources Limited as the General Manager of the Trail Operations, the largest zinc smelter in North America producing approximately 300,000 tons of zinc per year, as well as a significant number of co-products. I am very excited to have Greg join our team. I believe he will provide immediate value to the execution of operational improvements at Mooresboro, and with his knowledge and experience in the zinc business, we look for Greg also to be a key contributor to the future growth of the company.” This is pure speculation but doesn't Mr. Belland's decision to join Horsehead suggest that he believes the plant will become fully operational? Why would a General Manager from "the largest zinc smelter in North America" leave his job to join a soon-to-be bankrupt company in the same industry? I would imagine Horsehead falls within his circle of competence and he would have some insight on these issues...but then again people have done stranger things. Not necessarily. His motivation for changing his job can be driven by many reasons, one possibly that he was not going anywhere (moving up) in his current position at the previous employer. That would be one reason. On the other side, maybe he sees a huge opportunity and has a big upside if he can get things in order. I haven't read his employment contract (if any) though. Link to comment Share on other sites More sharing options...
cmlber Posted October 27, 2015 Share Posted October 27, 2015 The key investment risks are: >market: zinc price levels in 2016 and beyond >execution: whether and how quickly the Mooresboro plant reaches break even capacity and beyond >liquidity: a byproduct of the market and execution risks above - the ability to generate or raise sufficient capital (whether via equity using the ATM offering or through debt financing) to bridge the Mooresboro ramp-up >solvency: the ability to meet debt obligations, including the ability to restructure/refinance debt due in 2017 Pabrai promotes scenarios where, in his words, there is low risk but high uncertainty. Financial risk is typically defined as the uncertainty of a return and the potential for financial loss. Relating Pabrai's commingling of the concepts of risk and uncertainty to this definition of financial risk, he seems to be correlating low risk = low potential for financial loss, and high uncertainty = range of potential investment returns where "tails i win, and heads i don't lose much". If an investment is low risk, it has low potential for financial loss, which implies a margin of safety where the intrinsic value of the company (asset) is significantly understated by the market. We saw Pabrai buy 2m shares of HH in August 2015 at prices ranging from $7.50-8.50 per share. Presumably he had determined that the risk of financial loss was very low. Time will tell. Ultimately it all comes down to execution – how quickly can they get to break-even and can they fund it? My sense is that if they can get to at least 75% capacity in the next 6-9 months and zinc prices stay above $.80, they are likely to get over the hump, assuming they use the ATM equity financing or the sale of assets to bridge the liquidity gap. Debt financing doesn’t seem to be an option near-term, until they reach or exceed break-even. At this stage, given management’s track record with Moorseboro over the past year plus, HH stock appears to be a high-risk investment proposition with further dilution likely to come. It may have significant upside potential, but there looks to be great risk as well as great uncertainty. And if that's true then Pabrai grossly miscalculated. One other note, the ongoing execution risk may be partially mitigated by the hiring of Greg Belland as Senior Vice President – Horsehead Corporation, announced yesterday: Mr. Belland will be based at the Mooresboro, NC plant and have responsibility for the Mooresboro facility, Horsehead’s EAF dust recycling operations, purchasing and corporate engineering. Jim Hensler, President & CEO of Horsehead Holding Corp. noted, “Greg has an extensive background of nearly thirty years in the zinc industry. Most recently, he was employed by Teck Resources Limited as the General Manager of the Trail Operations, the largest zinc smelter in North America producing approximately 300,000 tons of zinc per year, as well as a significant number of co-products. I am very excited to have Greg join our team. I believe he will provide immediate value to the execution of operational improvements at Mooresboro, and with his knowledge and experience in the zinc business, we look for Greg also to be a key contributor to the future growth of the company.” This is pure speculation but doesn't Mr. Belland's decision to join Horsehead suggest that he believes the plant will become fully operational? Why would a General Manager from "the largest zinc smelter in North America" leave his job to join a soon-to-be bankrupt company in the same industry? I would imagine Horsehead falls within his circle of competence and he would have some insight on these issues...but then again people have done stranger things. Not necessarily. His motivation for changing his job can be driven by many reasons, one possibly that he was not going anywhere (moving up) in his current position at the previous employer. That would be one reason. On the other side, maybe he sees a huge opportunity and has a big upside if he can get things in order. I haven't read his employment contract (if any) though. Does it make sense that a 30 year veteran of the business managing the largest zinc smelter in North America would leave that position to work for a company he thinks is about to go bankrupt? Clearly he is not a stupid guy, and did some due diligence on his odds of being successful ramping Mooresboro and decided the risk/reward was attractive. He won't be managing Zochem or Inmetco based on that statement, so he won't have that to fall back on if Mooresboro doesn't work. (Side note, does that suggest anything about plans to sell one of those businesses? Maybe.) So, this is a good sign in my opinion. Link to comment Share on other sites More sharing options...
Guest notorious546 Posted October 27, 2015 Share Posted October 27, 2015 Does it make sense that a 30 year veteran of the business managing the largest zinc smelter in North America would leave that position to work for a company he thinks is about to go bankrupt? Clearly he is not a stupid guy, and did some due diligence on his odds of being successful ramping Mooresboro and decided the risk/reward was attractive. He won't be managing Zochem or Inmetco based on that statement, so he won't have that to fall back on if Mooresboro doesn't work. (Side note, does that suggest anything about plans to sell one of those businesses? Maybe.) So, this is a good sign in my opinion. what does this tell you about plans to sell one of the businesses? I'm not sure if i understand your thinking Link to comment Share on other sites More sharing options...
BG2008 Posted October 27, 2015 Share Posted October 27, 2015 Risk is the thing that you don't know and have not anticiped... That's why you ask, for any investments, a good margin of safety Yes Horsehead was an ugly story for at least a few months... the ramp-up is slower than anticiped and mister market is very depressed Is it a bad company or a bad management? I dont think... it's just a bad situation / timing and the sellers are selling irrationnaly If you dont see any value at this price, ask yourself if you are a really value investor... Yes, there are some risks at this thesis but the margin of safety is there to compensate you 5 months ago the default was unthinkable... now it's almost sure for everyone... Disclose: I'm long I disagree that the "margin of safety" is larger now with lower prices. I would say that the "asymmetry" of the bet is now likely larger. If you own Proctor and Gamble and it trades down 50%, the margin of safety would've increased dramatically. With Horsehead trading where it's trading at today, it actually increases the chance that it will file for bankruptcy due to the current level of cash burn and the lack of financing opportunities. I've always viewed ZINC as an asymmetrical bet, which is why I utilized a married put strategies which I have discussed in various previous posts. IMHO, you have to treat ZINC as an event driven investing or an intelligent speculation. You can't back up the truck on this one as the price decline (assuming plant op issues have not been resolved). I would say that it will be much better bet when the price doubles upon the news that they've reach 75% name plate production level. Then the bankruptcy risk gets reduced substantially. I do think that at today's price, you'll likely get a larger risk adjusted return than when the stock was trading at $10-12. As in if you flip this coin 10-20 times, the payout multiplied by the probability will likely be higher than when the stock was trading much higher. But I feel deeply obligated to voice my opinion that loading up at these prices can lead to total loss of capital and should not be viewed as in the same context as a healthy company with a pristine balance sheet. Bigger picture, the intelligent speculation at these prices is fine. But position sizing is very important. I'll go back to "lurking in the background." Link to comment Share on other sites More sharing options...
cmlber Posted October 27, 2015 Share Posted October 27, 2015 Does it make sense that a 30 year veteran of the business managing the largest zinc smelter in North America would leave that position to work for a company he thinks is about to go bankrupt? Clearly he is not a stupid guy, and did some due diligence on his odds of being successful ramping Mooresboro and decided the risk/reward was attractive. He won't be managing Zochem or Inmetco based on that statement, so he won't have that to fall back on if Mooresboro doesn't work. (Side note, does that suggest anything about plans to sell one of those businesses? Maybe.) So, this is a good sign in my opinion. what does this tell you about plans to sell one of the businesses? I'm not sure if i understand your thinking That wasn't meant to be an opinion, was just throwing it out there as a question. The reason being, this guy seems to be taking on the former VP of Operations role, which included oversight of Inmetco and Zochem. But, now that I'm thinking about it and went through the last proxy, there are individual General Managers of those businesses listed now, so I guess giving this new guy control of those operations under his title might have been seen as a demotion for the other guys, so I wouldn't read anything into it regarding a potential sale of other businesses. I wouldn't doubt though that they are actively shopping Zochem for reasons unrelated to hiring this guy. Link to comment Share on other sites More sharing options...
jeeman Posted October 27, 2015 Share Posted October 27, 2015 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. I believe the CFO said that the other two plants that are doing the same processing took around 2 years to spin up. I did ask him why they projected such a short spin up timeframe when the other ones took alot longer. They were optimistic in the <1 year projection because they thought they had the benefit of learning from the previous plants (I forget which companies). Link to comment Share on other sites More sharing options...
bergman104 Posted October 29, 2015 Share Posted October 29, 2015 Risk is the thing that you don't know and have not anticiped... That's why you ask, for any investments, a good margin of safety Yes Horsehead was an ugly story for at least a few months... the ramp-up is slower than anticiped and mister market is very depressed Is it a bad company or a bad management? I dont think... it's just a bad situation / timing and the sellers are selling irrationnaly If you dont see any value at this price, ask yourself if you are a really value investor... Yes, there are some risks at this thesis but the margin of safety is there to compensate you 5 months ago the default was unthinkable... now it's almost sure for everyone... Disclose: I'm long I disagree that the "margin of safety" is larger now with lower prices. I would say that the "asymmetry" of the bet is now likely larger. If you own Proctor and Gamble and it trades down 50%, the margin of safety would've increased dramatically. With Horsehead trading where it's trading at today, it actually increases the chance that it will file for bankruptcy due to the current level of cash burn and the lack of financing opportunities. I've always viewed ZINC as an asymmetrical bet, which is why I utilized a married put strategies which I have discussed in various previous posts. IMHO, you have to treat ZINC as an event driven investing or an intelligent speculation. You can't back up the truck on this one as the price decline (assuming plant op issues have not been resolved). I would say that it will be much better bet when the price doubles upon the news that they've reach 75% name plate production level. Then the bankruptcy risk gets reduced substantially. I do think that at today's price, you'll likely get a larger risk adjusted return than when the stock was trading at $10-12. As in if you flip this coin 10-20 times, the payout multiplied by the probability will likely be higher than when the stock was trading much higher. But I feel deeply obligated to voice my opinion that loading up at these prices can lead to total loss of capital and should not be viewed as in the same context as a healthy company with a pristine balance sheet. Bigger picture, the intelligent speculation at these prices is fine. But position sizing is very important. I'll go back to "lurking in the background." +1 I've thought about ZINC along these lines, but you put it in words that I haven't been able too. Your comment made me take a step back and think about my own thesis. Just wanted to say thanks. I too will go back to "lurking in the background" Link to comment Share on other sites More sharing options...
Against the crowd Posted October 29, 2015 Share Posted October 29, 2015 Risk is the thing that you don't know and have not anticiped... That's why you ask, for any investments, a good margin of safety Yes Horsehead was an ugly story for at least a few months... the ramp-up is slower than anticiped and mister market is very depressed Is it a bad company or a bad management? I dont think... it's just a bad situation / timing and the sellers are selling irrationnaly If you dont see any value at this price, ask yourself if you are a really value investor... Yes, there are some risks at this thesis but the margin of safety is there to compensate you 5 months ago the default was unthinkable... now it's almost sure for everyone... Disclose: I'm long I disagree that the "margin of safety" is larger now with lower prices. I would say that the "asymmetry" of the bet is now likely larger. If you own Proctor and Gamble and it trades down 50%, the margin of safety would've increased dramatically. With Horsehead trading where it's trading at today, it actually increases the chance that it will file for bankruptcy due to the current level of cash burn and the lack of financing opportunities. I've always viewed ZINC as an asymmetrical bet, which is why I utilized a married put strategies which I have discussed in various previous posts. IMHO, you have to treat ZINC as an event driven investing or an intelligent speculation. You can't back up the truck on this one as the price decline (assuming plant op issues have not been resolved). I would say that it will be much better bet when the price doubles upon the news that they've reach 75% name plate production level. Then the bankruptcy risk gets reduced substantially. I do think that at today's price, you'll likely get a larger risk adjusted return than when the stock was trading at $10-12. As in if you flip this coin 10-20 times, the payout multiplied by the probability will likely be higher than when the stock was trading much higher. But I feel deeply obligated to voice my opinion that loading up at these prices can lead to total loss of capital and should not be viewed as in the same context as a healthy company with a pristine balance sheet. Bigger picture, the intelligent speculation at these prices is fine. But position sizing is very important. I'll go back to "lurking in the background." +1 I've thought about ZINC along these lines, but you put it in words that I haven't been able too. Your comment made me take a step back and think about my own thesis. Just wanted to say thanks. I too will go back to "lurking in the background" +2....I am of the same thought. Have traded this stock couple of times in the past.....bought at $4 and sold at $8 then again bought at $10 and sold at $12. Somehow i don't feel very comfortable trading it now at these levels due to ramp up issues and zinc prices Link to comment Share on other sites More sharing options...
str8shot Posted October 30, 2015 Share Posted October 30, 2015 Risk is the thing that you don't know and have not anticiped... That's why you ask, for any investments, a good margin of safety Yes Horsehead was an ugly story for at least a few months... the ramp-up is slower than anticiped and mister market is very depressed Is it a bad company or a bad management? I dont think... it's just a bad situation / timing and the sellers are selling irrationnaly If you dont see any value at this price, ask yourself if you are a really value investor... Yes, there are some risks at this thesis but the margin of safety is there to compensate you 5 months ago the default was unthinkable... now it's almost sure for everyone... Disclose: I'm long I disagree that the "margin of safety" is larger now with lower prices. I would say that the "asymmetry" of the bet is now likely larger. If you own Proctor and Gamble and it trades down 50%, the margin of safety would've increased dramatically. With Horsehead trading where it's trading at today, it actually increases the chance that it will file for bankruptcy due to the current level of cash burn and the lack of financing opportunities. I've always viewed ZINC as an asymmetrical bet, which is why I utilized a married put strategies which I have discussed in various previous posts. IMHO, you have to treat ZINC as an event driven investing or an intelligent speculation. You can't back up the truck on this one as the price decline (assuming plant op issues have not been resolved). I would say that it will be much better bet when the price doubles upon the news that they've reach 75% name plate production level. Then the bankruptcy risk gets reduced substantially. I do think that at today's price, you'll likely get a larger risk adjusted return than when the stock was trading at $10-12. As in if you flip this coin 10-20 times, the payout multiplied by the probability will likely be higher than when the stock was trading much higher. But I feel deeply obligated to voice my opinion that loading up at these prices can lead to total loss of capital and should not be viewed as in the same context as a healthy company with a pristine balance sheet. Bigger picture, the intelligent speculation at these prices is fine. But position sizing is very important. I'll go back to "lurking in the background." +1 I've thought about ZINC along these lines, but you put it in words that I haven't been able too. Your comment made me take a step back and think about my own thesis. Just wanted to say thanks. I too will go back to "lurking in the background" Margin of safety is the difference between the market price of the stock and a given investor's assessment of the intrinsic value of the stock. The calculation (or projection) of intrinsic value for a stock is subject to the valuation method and related assumptions of the investor, shaped by his/her knowledge of the company, industry and market forces, etc. The intrinsic value of the stock changes when the factors underlying that investor's calculation change. A couple years back Carl Icahn accumulated Apple as the stock price declined, because according to his calculation of intrinsic value, the margin of safety expanded as the share price declined. Other investors panned the stock and had the opposite view. I happened to agree with Icahn (and other Apple bulls) back in 2014 and invested accordingly. One can take the position that Horsehead's margin of safety has increased or decreased as its stock price has declined - subject to how one determines its intrinsic value. With the price decline in recent months Mr. Market has clearly indicated that Horsehead was overvalued and may even be a bankruptcy risk. This pessimism in turn looks to be impacting Horsehead's ability to employ additional debt financing to bridge the Mooresboro ramp up, which despite progress continues to have significant uncertainty per management's latest update on Oct 23. An ATM equity financing vehicle has been established, but we don't know for certain if that vehicle will be needed or utilized. Guy Spier has maintained his Horsehead position per the 13F for the quarter ended Sep 30, but who knows whether his assessment of intrinsic value has changed. Or Pabrai for that matter. He was certainly bullish as recently as August 2015 when he added 2m shares to the 6.33m he already owned. In my projection (modeling) of intrinsic value for HH, I'm assuming that 1) zinc market prices average no less than $.80 in 2016, 2) that the ramp-up will achieve at least 75% of name plate capacity by the second half of 2016 such that a stable operational break even is achieved by year end, and 3) that bridge financing, if needed in 2016, will be obtained via the ATM vehicle, additional debt financing, or the sale of all or a portion of the Zochem and/or Inmetco businesses. There are probabilities associated with these assumptions and various other assumptions/projections in my model, and time will tell if my projection/assessment proves reasonably accurate. I remain long at this stage, with a loss on paper, and will continually re-assess this position as circumstances evolve. Good luck to everyone whatever your investment choices. Link to comment Share on other sites More sharing options...
bskptkl Posted October 30, 2015 Share Posted October 30, 2015 The key investment risks are: >market: zinc price levels in 2016 and beyond >execution: whether and how quickly the Mooresboro plant reaches break even capacity and beyond >liquidity: a byproduct of the market and execution risks above - the ability to generate or raise sufficient capital (whether via equity using the ATM offering or through debt financing) to bridge the Mooresboro ramp-up >solvency: the ability to meet debt obligations, including the ability to restructure/refinance debt due in 2017 Pabrai promotes scenarios where, in his words, there is low risk but high uncertainty. Financial risk is typically defined as the uncertainty of a return and the potential for financial loss. Relating Pabrai's commingling of the concepts of risk and uncertainty to this definition of financial risk, he seems to be correlating low risk = low potential for financial loss, and high uncertainty = range of potential investment returns where "tails i win, and heads i don't lose much". If an investment is low risk, it has low potential for financial loss, which implies a margin of safety where the intrinsic value of the company (asset) is significantly understated by the market. We saw Pabrai buy 2m shares of HH in August 2015 at prices ranging from $7.50-8.50 per share. Presumably he had determined that the risk of financial loss was very low. Time will tell. Ultimately it all comes down to execution – how quickly can they get to break-even and can they fund it? My sense is that if they can get to at least 75% capacity in the next 6-9 months and zinc prices stay above $.80, they are likely to get over the hump, assuming they use the ATM equity financing or the sale of assets to bridge the liquidity gap. Debt financing doesn’t seem to be an option near-term, until they reach or exceed break-even. At this stage, given management’s track record with Moorseboro over the past year plus, HH stock appears to be a high-risk investment proposition with further dilution likely to come. It may have significant upside potential, but there looks to be great risk as well as great uncertainty. And if that's true then Pabrai grossly miscalculated. One other note, the ongoing execution risk may be partially mitigated by the hiring of Greg Belland as Senior Vice President – Horsehead Corporation, announced yesterday: Mr. Belland will be based at the Mooresboro, NC plant and have responsibility for the Mooresboro facility, Horsehead’s EAF dust recycling operations, purchasing and corporate engineering. Jim Hensler, President & CEO of Horsehead Holding Corp. noted, “Greg has an extensive background of nearly thirty years in the zinc industry. Most recently, he was employed by Teck Resources Limited as the General Manager of the Trail Operations, the largest zinc smelter in North America producing approximately 300,000 tons of zinc per year, as well as a significant number of co-products. I am very excited to have Greg join our team. I believe he will provide immediate value to the execution of operational improvements at Mooresboro, and with his knowledge and experience in the zinc business, we look for Greg also to be a key contributor to the future growth of the company.” This is pure speculation but doesn't Mr. Belland's decision to join Horsehead suggest that he believes the plant will become fully operational? Why would a General Manager from "the largest zinc smelter in North America" leave his job to join a soon-to-be bankrupt company in the same industry? I would imagine Horsehead falls within his circle of competence and he would have some insight on these issues...but then again people have done stranger things. Not necessarily. His motivation for changing his job can be driven by many reasons, one possibly that he was not going anywhere (moving up) in his current position at the previous employer. That would be one reason. On the other side, maybe he sees a huge opportunity and has a big upside if he can get things in order. I haven't read his employment contract (if any) though. Does it make sense that a 30 year veteran of the business managing the largest zinc smelter in North America would leave that position to work for a company he thinks is about to go bankrupt? Clearly he is not a stupid guy, and did some due diligence on his odds of being successful ramping Mooresboro and decided the risk/reward was attractive. He won't be managing Zochem or Inmetco based on that statement, so he won't have that to fall back on if Mooresboro doesn't work. (Side note, does that suggest anything about plans to sell one of those businesses? Maybe.) So, this is a good sign in my opinion. On the other hand - bankruptcy would not necessarily bad for employees - asset gets restructured, key employees get incentive packages, etc. Link to comment Share on other sites More sharing options...
Steven B Posted October 30, 2015 Share Posted October 30, 2015 Risk is the thing that you don't know and have not anticiped... That's why you ask, for any investments, a good margin of safety Yes Horsehead was an ugly story for at least a few months... the ramp-up is slower than anticiped and mister market is very depressed Is it a bad company or a bad management? I dont think... it's just a bad situation / timing and the sellers are selling irrationnaly If you dont see any value at this price, ask yourself if you are a really value investor... Yes, there are some risks at this thesis but the margin of safety is there to compensate you 5 months ago the default was unthinkable... now it's almost sure for everyone... Disclose: I'm long I disagree that the "margin of safety" is larger now with lower prices. I would say that the "asymmetry" of the bet is now likely larger. If you own Proctor and Gamble and it trades down 50%, the margin of safety would've increased dramatically. With Horsehead trading where it's trading at today, it actually increases the chance that it will file for bankruptcy due to the current level of cash burn and the lack of financing opportunities. I've always viewed ZINC as an asymmetrical bet, which is why I utilized a married put strategies which I have discussed in various previous posts. IMHO, you have to treat ZINC as an event driven investing or an intelligent speculation. You can't back up the truck on this one as the price decline (assuming plant op issues have not been resolved). I would say that it will be much better bet when the price doubles upon the news that they've reach 75% name plate production level. Then the bankruptcy risk gets reduced substantially. I do think that at today's price, you'll likely get a larger risk adjusted return than when the stock was trading at $10-12. As in if you flip this coin 10-20 times, the payout multiplied by the probability will likely be higher than when the stock was trading much higher. But I feel deeply obligated to voice my opinion that loading up at these prices can lead to total loss of capital and should not be viewed as in the same context as a healthy company with a pristine balance sheet. Bigger picture, the intelligent speculation at these prices is fine. But position sizing is very important. I'll go back to "lurking in the background." This is a very key point that I believe needs to be considered. The "tails I lose" in this scenario is all your chips. It is the asymmetry of risk v. reward that has changed. Link to comment Share on other sites More sharing options...
sampr01 Posted November 5, 2015 Share Posted November 5, 2015 Highly encourage to watch this video (at least 24 min-40 min). Outsider view is much closer to insider view in terms of expectations and finishing projects on time. Insider always optimistic view based on information they have at that time. It won't help you now, but may be in future Link to comment Share on other sites More sharing options...
nikhil25 Posted November 9, 2015 Share Posted November 9, 2015 Q3 Results are out: http://www.businesswire.com/news/home/20151109005864/en/Horsehead-Holding-Corp.-Reports-Quarter-2015-Results PITTSBURGH--(BUSINESS WIRE)--Horsehead Holding Corp. (Nasdaq:ZINC) reported a consolidated net loss of $27.4 million, or $(0.48) per diluted share, for the third quarter of 2015 compared to a consolidated net loss of $7.0 million, or $(0.14) per diluted share, for the third quarter of 2014. Results for the quarter, adjusted to exclude unfavorable non-cash adjustments associated with hedges, was a consolidated net loss of $25.5 million, or $(0.45) per diluted share, compared to a consolidated net loss on the same basis of $7.5 million for the third quarter of 2014, or $(0.15) per diluted share. “The significant reduction in commodity prices combined with the uncertainty of production levels at Mooresboro has increased the need to focus on options to maintain liquidity to support the on-going ramp-up of Mooresboro." “The quarter was adversely affected by a sharp decline in commodity prices, lower EAF dust receipts reflecting weaker steel production and some one-time charges primarily related to inventory and LME-related price adjustments. This was offset partially by a 6% increase in shipments on a zinc-contained basis and a 25% increase in shipments of nickel remelt alloy compared with the prior year’s quarter. We continued to supplement our zinc metal shipments with the sale of approximately 27,500 tons of zinc calcine during the third quarter, however, production of Waelz oxide and zinc calcine were lower by 15% and 21%, respectively, as electric arc furnace dust receipts declined by approximately 18%. The total quantity of zinc contained in all product shipments, including Zochem, during the quarter was 46,456 tons, compared to 43,815 tons during the third quarter of 2014,” said Jim Hensler, President and Chief Executive Officer. Link to comment Share on other sites More sharing options...
AzCactus Posted November 9, 2015 Share Posted November 9, 2015 Wow Link to comment Share on other sites More sharing options...
cmlber Posted November 9, 2015 Share Posted November 9, 2015 Operational update was better than prior updates, but still going very slowly. On a positive note, this seems to have gone unnoticed this morning: "Nyrstar will consider further suspensions of its mines if the current depressed commodity price environment continues; such suspensions would potentially reduce global supply by up to a further 400,000 tonnes of zinc concentrate (in addition to the 100,000 tonnes removed by the Myra Falls and Campo Morado suspensions)." http://www.nyrstar.com/investors/en/news/Pages/1965259.aspx Before this announcement and Glencore's announcement (which together would be 900,000 tons coming offline if they follow through with this), ILZSG said "The International Lead and Zinc Study Group (ILZSG) expects global refined zinc demand to exceed supply by 151,000 tonnes in 2015, a figure that is lower than its earlier forecast on falling Chinese imports." Link to comment Share on other sites More sharing options...
Foubearss Posted November 9, 2015 Share Posted November 9, 2015 Operational update was better than prior updates, but still going very slowly. On a positive note, this seems to have gone unnoticed this morning: "Nyrstar will consider further suspensions of its mines if the current depressed commodity price environment continues; such suspensions would potentially reduce global supply by up to a further 400,000 tonnes of zinc concentrate (in addition to the 100,000 tonnes removed by the Myra Falls and Campo Morado suspensions)." http://www.nyrstar.com/investors/en/news/Pages/1965259.aspx Before this announcement and Glencore's announcement (which together would be 900,000 tons coming offline if they follow through with this), ILZSG said "The International Lead and Zinc Study Group (ILZSG) expects global refined zinc demand to exceed supply by 151,000 tonnes in 2015, a figure that is lower than its earlier forecast on falling Chinese imports." The $250MM NC State tax credit kinda jumped out at me. They did admit that they would have to use this tax credit in the next 25 years so it is not as valuable since they won't be able to use it all, but this increases the possibility that somebody sweeps in and buys this company and strips it into its valuable components, IMO. From the call, management seemed optimistic that they will run Mooresboro at 60% by January 2016 (the anodes are the current bottleneck but they expect all new anodes to be delivered within the next 10 weeks) M Link to comment Share on other sites More sharing options...
str8shot Posted November 9, 2015 Share Posted November 9, 2015 All, below are my notes from the 11-9-2015 conference call. Please feel free to augment per your own notes/observations. Working capital outlook • With $50M ATM vehicle in place, can support the business capital needs for the next 12 months, but will continue to look at financing alternatives. • Will report on ATM usage quarterly, not expected to use it in the near term. • They expect debt financing alternatives to be more available by mid-2016 if significant ramp-up progress has been made Mooresboro ramp-up • October net output was only 1000 tons given planned outage and maintenance • Currently producing 125-160 tons per day • Main bottleneck - replacing cell house anodes. Typically they last 4 years, but with impurities entering cell house and ongoing cycling, 50% of them need replacing. Will replace them “on the fly” over the next 10 weeks. • With pilot bleed treatment plant in place, can reach 60% capacity (250 tons/day) after the anodes are replaced by January 2016, with potential to approach 300 tons/day (70%) • Priorities o Acquire/replace anodes in cell house – discussed above o Design full scale bleed treatment and implement in 2016 o Improve quality of solution to cell house – preventive improvements being tested, has required rebuilding organic filters o Improve equipment uptime • No planned outage through remainder of 2015. Next substantive outage will be for full-scale bleed treatment in 2016. Expect to have a better handle on the cost and timing to implement by year end. Capital expenditure for Q4 2015 and 2016 • $11-12M in Q4 2015 • for 2016, $50-60M budgeted not including full scale bleed treatment solution, where timing and amounts are discretionary • Full scale bleed treatment solution estimated to cost $15M, process flow completed but design not yet completed, so cost estimate may change • Replacement of anodes/cathodes to cost $8-10M over next nine plus months Team • Hiring of SVP Greg Belland (with direct oversight of Mooresboro) on Oct 26 was a significant addition, bringing two major benefits that will help accelerate the execution of the ramp-up: o Greater ability to efficiently manage operations and the implementation of improvements concurrently o Brings significant zinc industry knowledge that complements the existing team, helping to solve problems more efficiently • Greg was on the call. Some of his comments: o Core solution at Mooresboro is sound, it will work o Challenges can be resolved to get plant at full capacity, but will take some time (implementing improvements and replacing equipment) o Has done 6-7 start-ups, and it typically takes a couple years to get them at full capacity o With anode replacement and other fixes, and leveraging the pilot plant bleed treatment, can get to at least 60% capacity reliably • Additional commitment to 3rd party consulting resources - costs expected to be about $4m over next 12 months • Hensler commented that he believes the current team of in house and external resources is as talented and experienced as any in the industry (take that for what you will) Zinc market pricing outlook • Mgmt is bullish on the medium to long term view as a zinc market supply deficit looms (they are hearing of additional reductions to global market supply in addition to Glencore’s pullback) 2017 Debt • Expect that debt maturities will be extended, and successful ramp-up of Mooresboro in 2016 will set the stage Bottom line – my take: • They seem to have a firmer handle on what needs to be done to accelerate the ramp-up and achieve operational stability, and seem positioned to make substantial progress over the next few quarters • We’ll see in the coming months if they can hit the 60% mark by January/February 2016, which would be a significant step towards re-building credibility and could boost the stock price, enabling them to tap into ATM with less dilutive impact should they need it • They established ATM out of necessity, but hope to minimize its use and achieve sufficient progress so that reasonable debt financing can be used to bridge the remainder of the Mooresboro ramp-up • If they execute well and get to 60% by Q1 2016, and then 80% or more capacity by mid-year 2016, with no major setbacks, the turnaround story is very likely to play out. Nothing is guaranteed, but I think it is very likely that they will pull it off, albeit with additional equity dilution. Time will tell. Link to comment Share on other sites More sharing options...
arcube Posted November 10, 2015 Share Posted November 10, 2015 All, below are my notes from the 11-9-2015 conference call. Please feel free to augment per your own notes/observations. Working capital outlook • With $50M ATM vehicle in place, can support the business capital needs for the next 12 months, but will continue to look at financing alternatives. • Will report on ATM usage quarterly, not expected to use it in the near term. • They expect debt financing alternatives to be more available by mid-2016 if significant ramp-up progress has been made Mooresboro ramp-up • October net output was only 1000 tons given planned outage and maintenance • Currently producing 125-160 tons per day • Main bottleneck - replacing cell house anodes. Typically they last 4 years, but with impurities entering cell house and ongoing cycling, 50% of them need replacing. Will replace them “on the fly” over the next 10 weeks. • With pilot bleed treatment plant in place, can reach 60% capacity (250 tons/day) after the anodes are replaced by January 2016, with potential to approach 300 tons/day (70%) • Priorities o Acquire/replace anodes in cell house – discussed above o Design full scale bleed treatment and implement in 2016 o Improve quality of solution to cell house – preventive improvements being tested, has required rebuilding organic filters o Improve equipment uptime • No planned outage through remainder of 2015. Next substantive outage will be for full-scale bleed treatment in 2016. Expect to have a better handle on the cost and timing to implement by year end. Capital expenditure for Q4 2015 and 2016 • $11-12M in Q4 2015 • for 2016, $50-60M budgeted not including full scale bleed treatment solution, where timing and amounts are discretionary • Full scale bleed treatment solution estimated to cost $15M, process flow completed but design not yet completed, so cost estimate may change • Replacement of anodes/cathodes to cost $8-10M over next nine plus months Team • Hiring of SVP Greg Belland (with direct oversight of Mooresboro) on Oct 26 was a significant addition, bringing two major benefits that will help accelerate the execution of the ramp-up: o Greater ability to efficiently manage operations and the implementation of improvements concurrently o Brings significant zinc industry knowledge that complements the existing team, helping to solve problems more efficiently • Greg was on the call. Some of his comments: o Core solution at Mooresboro is sound, it will work o Challenges can be resolved to get plant at full capacity, but will take some time (implementing improvements and replacing equipment) o Has done 6-7 start-ups, and it typically takes a couple years to get them at full capacity o With anode replacement and other fixes, and leveraging the pilot plant bleed treatment, can get to at least 60% capacity reliably • Additional commitment to 3rd party consulting resources - costs expected to be about $4m over next 12 months • Hensler commented that he believes the current team of in house and external resources is as talented and experienced as any in the industry (take that for what you will) Zinc market pricing outlook • Mgmt is bullish on the medium to long term view as a zinc market supply deficit looms (they are hearing of additional reductions to global market supply in addition to Glencore’s pullback) 2017 Debt • Expect that debt maturities will be extended, and successful ramp-up of Mooresboro in 2016 will set the stage Bottom line – my take: • They seem to have a firmer handle on what needs to be done to accelerate the ramp-up and achieve operational stability, and seem positioned to make substantial progress over the next few quarters • We’ll see in the coming months if they can hit the 60% mark by January/February 2016, which would be a significant step towards re-building credibility and could boost the stock price, enabling them to tap into ATM with less dilutive impact should they need it • They established ATM out of necessity, but hope to minimize its use and achieve sufficient progress so that reasonable debt financing can be used to bridge the remainder of the Mooresboro ramp-up • If they execute well and get to 60% by Q1 2016, and then 80% or more capacity by mid-year 2016, with no major setbacks, the turnaround story is very likely to play out. Nothing is guaranteed, but I think it is very likely that they will pull it off, albeit with additional equity dilution. Time will tell. Thank you for such meticulous notes. Much appreciated. Link to comment Share on other sites More sharing options...
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