ZINC - Horsehead Holding Corp

[abitofvalue]

Also even if the plant can eventually work and the creditors believe this - unless Zinc can come up with an alternative source of financing, the creditors can take over the plant.  The notion that creditors will be supportive is naive. Creditors will do what's best for them. If they think causing an EOD will lead to liquidity issues and a bankruptcy which results in creditors getting equity that is more valuable then the existing debt they will do that.. 

 

At this point ZINC is a lottery / option on the plant working and commodity prices recovering...  but the risk of total loss is very much real.

That's naive, the notion that bankers want to run a zinc recycling plant...

 

You are right that the banks don't want to run a zinc recycling part but I highly highly doubt banks are holding on to this debt.  Especially considering ZINC changed banks on their last debt / revolver issuance.

 

I would guess the debt is held by a variety of funds including some distressed debt funds. If an EOD looks likely, the distressed debt investors will very much buy up the debt and squeeze ZINC. The remaining debt investors will have no interest in runing a zinc recycling facility and will usually sell out (fund mandate or preference).  Either way in the end, I think a distressed debt fund will be owning the fulcrum security which will be debt and will be driving the credit committee.  Whether its onerous terms on the debt or equity it's unlikely that they will be "supportive" in the way management is suggesting they are...

 

Anyway, it only comes to this if ZINC cant get the plant up and running in time to have a better alternative when the debt is due.  If they can actually get some positive momentum maybe they can successfully refinance debt on reasonable terms.. but my point is coming up with a scenario in which you loose money even at these prices isn't hard...   

 

[RadMan24]

Hence, the two dollar stock price. I'll take that risk, I just don't think the odds are what the market think they are, and I'm being compensated well for it. Time will tell if I'm right or not.

[Max Alpha]

Hence, the two dollar stock price. I'll take that risk, I just don't think the odds are what the market think they are, and I'm being compensated well for it. Time will tell if I'm right or not.

 

The risk reward at current levels may very well be attractive but it is a roll of the dice as to what the probabilities are. Many processing plant never operate anywhere near nameplate capacity.

 

This is normally the sort of stock I would like but it reminds me of a disastrous coal processing plant project I was exposed to. This is in no way a direct comparison, but it does a good job of depicting some of the risks involved in this space.

 

We built a small scale $7m semi-mobile processing plant using an OEM which had built dozens of these plants successfully in a slightly different configuration.

 

The machine was able to pass a poorly defined performance test to fulfil the obligation of the OEM, but in practice could not operate reliably above 70% of nameplate capacity. The material responded in a way that was drastically different to how it was modelled in design.

 

With hindsight, we could have spent around $1.5m-$2.0m (i.e.20% - 25% of up-front capital cost) straight away to resolve the problem and have the machine run at 100% of capacity. Instead, a number of smaller bottlenecks were identified and smaller modifications were made to the machine which didn’t resolve the problem.

 

These smaller modifications generally had the impact of resolving one problem and creating another unexpected issue by removing a bottleneck and overloading another part of the system. After around $1.0m of spend across a number of smaller modifications, the plant was capable of running reliably at 80% of nameplate capacity.

 

The mine went into administration and the plant was decommissioned and stored because we couldn’t find a buyer at $3.0m-$3.5m. This was a coal application, so it serves as more of an indicator of what happens when the sky falls in, but the point of the story is that processing plants can be very fickle beasts.

 

There was a bizarre psychology in play where people favoured small incremental fixes, which didn’t yield the necessary results, and the big fix was always ‘just around the corner’.

 

[hobbit]

After hearing to Greg Belland on the cc, i have little doubt that the plant will work at the nameplate capacity and the benefits will be realized. I think the litmus test for that would be if they can be 60% in the first half of 2016

[str8shot]

Also even if the plant can eventually work and the creditors believe this - unless Zinc can come up with an alternative source of financing, the creditors can take over the plant.  The notion that creditors will be supportive is naive. Creditors will do what's best for them. If they think causing an EOD will lead to liquidity issues and a bankruptcy which results in creditors getting equity that is more valuable then the existing debt they will do that.. 

 

At this point ZINC is a lottery / option on the plant working and commodity prices recovering...  but the risk of total loss is very much real.

That's naive, the notion that bankers want to run a zinc recycling plant...

 

You are right that the banks don't want to run a zinc recycling part but I highly highly doubt banks are holding on to this debt.  Especially considering ZINC changed banks on their last debt / revolver issuance.

 

I would guess the debt is held by a variety of funds including some distressed debt funds. If an EOD looks likely, the distressed debt investors will very much buy up the debt and squeeze ZINC. The remaining debt investors will have no interest in runing a zinc recycling facility and will usually sell out (fund mandate or preference).  Either way in the end, I think a distressed debt fund will be owning the fulcrum security which will be debt and will be driving the credit committee.  Whether its onerous terms on the debt or equity it's unlikely that they will be "supportive" in the way management is suggesting they are...

 

Anyway, it only comes to this if ZINC cant get the plant up and running in time to have a better alternative when the debt is due.  If they can actually get some positive momentum maybe they can successfully refinance debt on reasonable terms.. but my point is coming up with a scenario in which you loose money even at these prices isn't hard... 

 

Even with the addition of SVP Belland, which seems encouraging, no one can predict for certain whether they will get the plant to operate close enough to capacity in time to become cash flow positive and be positioned to rework the debt in 2017. If you're a long you have to be willing to lose all of your investment, regardless of the upside potential, otherwise you should sell.

 

If at long last we see positive progress where they hit 60% in Q1 (best case as early as the end of Jan) and can provide some clarity as to when they will implement the full scale bleed treatment solution and at what cost, then we'll likely see a pop in the stock as some shorts cover. At that point they could leverage the ATM vehicle with less dilutive impact.

 

The next few months will be very telling.

[hardincap]

In what scenarios do you see a 100% loss?

[tylerdurden]

In what scenarios do you see a 100% loss?

 

I was just going to ask the same question hardincap. dc42 was also asking it for a while but I don't think we have received any satisfactory answer on this yet. I have been thinking about this for the last couple of days. Let's say plant doesn't work at all, zinc prices stay depressed and ZINC goes bankruptcy. Even under a bankruptcy scenario, there should be multiple buyers the Zochem/Inmetco and other assets the company has excluding Mooresboro and if there are multiple buyers then no reason to assume that these assets will go for depressed prices. Even Mooresboro should be worth something. If you assign $75M to Zochem/Inmetco each and $50M to each 4 EAF plants you end up $350M. Including other current & lt assets and some value for Mooresboro ($100M-$200M perhaps?) your total easily goes above current liabilities $544M. So for sure bankruptcy would be tough to swallow but I cannot see why everybody is talking about $0 value without going into the specifics. I also think sellers are underestimating the options that company has (asset sales, product sale agreements etc.) in order to create additional time/flexibility for the company to make the plant work. Overall I think it is so easy to assign $0 value on this w/o thinking too much given the depressed stock price but would that analysis be correct? not so sure...

 

 

[SnarkyPuppy]

In what scenarios do you see a 100% loss?

 

I was just going to ask the same question hardincap. dc42 was also asking it for a while but I don't think we have received any satisfactory answer on this yet. I have been thinking about this for the last couple of days. Let's say plant doesn't work at all, zinc prices stay depressed and ZINC goes bankruptcy. Even under a bankruptcy scenario, there should be multiple buyers the Zochem/Inmetco and other assets the company has excluding Mooresboro and if there are multiple buyers then no reason to assume that these assets will go for depressed prices. Even Mooresboro should be worth something. If you assign $75M to Zochem/Inmetco each and $50M to each 4 EAF plants you end up $350M. Including other current & lt assets and some value for Mooresboro ($100M-$200M perhaps?) your total easily goes above current liabilities $544M. So for sure bankruptcy would be tough to swallow but I cannot see why everybody is talking about $0 value without going into the specifics. I also think sellers are underestimating the options that company has (asset sales, product sale agreements etc.) in order to create additional time/flexibility for the company to make the plant work. Overall I think it is so easy to assign $0 value on this w/o thinking too much given the depressed stock price but would that analysis be correct? not so sure...

 

Right.  This was the discussion I was trying to have regarding downside.  I've seen almost all of the Bears state that downside is $0 without any further supporting detailed analysis as to why that may the case. 

 

In my previous few posts, I looked at Consolidated Book Value and I looked at Sum of the Parts Valuations (SofP is likely more realistic given the fact that Zochem, Inmetco, and the 4 legacy EAF plants have value that outside acquirers would pay for). 

 

One criticism I received, and I agree in concept, is that Book Value is not a correct proxy given the fact that the sales would occur in a distressed environment.  When I did my SotP analysis, I used the low end of normalized EBITDA for Inmetco and Zochem and applied a very conservative 4X Multiple (I think it's fair to say that even in a distressed situation, a 4X multiple of these two very solid businesses is a reasonably conservative assumption). 

 

Additionally, I took the low end of the cost of the 4 legacy plants ($50mm) each using a proxy of book value.  I believe this is a reasonably conservative estimate of what would be paid by an outside acquirer but I would love to hear detailed dissenting opinions.

 

I think the biggest obstacle in valuing liquidation is the Moorseboro plant (obviously).  I'm in a rush so can't go back to my old post, but I think the current market cap given low $2's per share would be covered if you haircut capitalized costs of the new plant by 50%.  If Horsehead had to sell, why wouldn't someone want to pay for the mostly constructed plant at 50% cost which management has doubled down on (including this new Billard executive's fresh perspective) that they will be able to hit profitable capacity?

[tylerdurden]

Fair question dc42. I think the cost you used was $520M so 50% should get you there. cmlbr also shared direct feedback from the CFO that selling Zochem for $75M - $100M would not be a big problem (His posts were really helpful to understand the thesis here for me. thanks cmlbr) so I guess 4x multiple would be even conservative as you mentioned. The ball is on the bear case's court in terms of putting some value on these assets...

 

 

[tylerdurden]

Also I think the value you can get under a bankruptcy scenario would directly be linked to the quality of the assets you are selling and the number of bidders. ZINC's assets particularly Zochem/Inmetco seem very stable profitable businesses to me so perhaps the value you can get for these wouldn't be that depressed even under a bankruptcy scenario...

[SnarkyPuppy]

Fair question dc42. I think the cost you used was $520M so 50% should get you there. cmlbr also shared direct feedback from the CFO that selling Zochem for $75M - $100M would not be a big problem (His posts were really helpful to understand the thesis here for me. thanks cmlbr) so I guess 4x multiple would be even conservative as you mentioned. The ball is on the bear case's court in terms of putting some value on these assets...

 

Thanks for re-establishing the discussion.  I think this is the most critical piece in determining whether to purchase or not.  The upside case is not worth diving into more than we have already - it's very apparent that if things go in the bull direction owners will do very well.

[cmlber]

Fair question dc42. I think the cost you used was $520M so 50% should get you there. cmlbr also shared direct feedback from the CFO that selling Zochem for $75M - $100M would not be a big problem (His posts were really helpful to understand the thesis here for me. thanks cmlbr) so I guess 4x multiple would be even conservative as you mentioned. The ball is on the bear case's court in terms of putting some value on these assets...

 

Tylerdurden, just want to clarify in case others are reading this out of context later in the thread, I think you're referring to when I said that in response to my question regarding how hard it would be to sell non-core assets in a worst case emergency scenario the CFO told me that selling Zochem wouldn't be difficult.  He never said $75-100M would not be a big problem.  I think based on the cash flow and quality of the business it's worth at least that, but I don't know if they would get that in a distress sale.  I would hope so, but they would be selling into a terrible commodity market (which doesn't matter in the long run given the fact that it's a spread business, but sentiment matters in the short term) and they'd be selling to vultures who know ZINC is up against a wall. 

 

Also, while I've been a ZINC bull and still think the upside is huge and still own the stock, I own it knowing $0 is a possibility.  If they run out of cash in 12 months and the creditors won't finance operations and the stock plummets so equity isn't available and they're still burning through cash, it won't be pretty.  I'm not a bankruptcy expert, so I could be wrong, but I don't know if the equity holders would get anything in that scenario.  I think that's unlikely, but not impossible.

 

But there's a very good chance in my opinion that in 12 months the plant is operating at a much higher capacity and zinc prices have recovered, making it possible to push out the debt and fund operations through cash flow, in which case the stock will be significantly higher.  So it's worth the risk imo. 

 

I don't think anyone posted this yet:  http://www.bloomberg.com/news/articles/2015-11-20/china-zinc-smelters-plan-cutback-as-price-drops-to-six-year-low

 

China smelters cutting production by another 500k tons.  Between that, Glencore cut, Nyrstar potential 400k cut, Century mine closing that's almost 15% of the worlds supply.  Of course you have to rely on Glencore & the Chinese sticking to those cuts and Nyrstar deciding to cut, but if they do, that will be very bullish for zinc prices in 2016. 

[tylerdurden]

Fair question dc42. I think the cost you used was $520M so 50% should get you there. cmlbr also shared direct feedback from the CFO that selling Zochem for $75M - $100M would not be a big problem (His posts were really helpful to understand the thesis here for me. thanks cmlbr) so I guess 4x multiple would be even conservative as you mentioned. The ball is on the bear case's court in terms of putting some value on these assets...

 

Thanks for re-establishing the discussion.  I think this is the most critical piece in determining whether to purchase or not.  The upside case is not worth diving into more than we have already - it's very apparent that if things go in the bull direction owners will do very well.

 

I totally agree. ZINC seems so similar to Pabrai's very profitable canadian mine investment which he bought for $4 and sold ~$50 in 13 months and my recollection is that he did the same exact analysis: what's the value left in a liquidation case. That investment had lots of debt coming due in 6-12 months as well. Anyways that's the more intelligent way to look into this at this point given all the unknowns. I can't decide on the right sizing for this though. Should ZINC be a very risky investment so 5% allocation is appropriate at most or this is heads i win tail i don't loose much so more allocation can be considered. I'd appreciate any thoughts on this from the board...

[tylerdurden]

Thanks for the clarification cmlber. It seems if they sell the spread business by taking their time while trying to fix the plant rathet than doing a fire sale under pressure would give them more value. Who know perhaps that's what they have been working on behind the scenes as well. At the end like in every investment, this is up to anyone's risk/reward analysis. In terms of the zinc curtailments, i think glencore's and others' credibility is on the line so i expect them to deliver their primises. I guess we'll learn in January. That timeframe corresponds to some of the mine exits from the market as well so i wouldnt be surprised to see an imbalanced market at least in the short run. Clearly glencore believes they can have an impact on the price by cutting. That timing could play well into ZINC's renegotiations for the debt by mud 16.

[Guest roark33]

While most people have been focused on the plant issues, zinc prices have really fallen off a cliff.  ZINC's hedges were around 1.10 this year and next year they will probably be selling zinc for 70 cents. 

 

http://www.bloomberg.com/news/articles/2015-11-23/the-one-day-rally-that-shows-goldman-may-be-right-on-metal-cuts

 

Also, steel production is slowly which gives them less dust and less negotiating leverage with their "long-term contracts".

 

 

[tylerdurden]

While most people have been focused on the plant issues, zinc prices have really fallen off a cliff.  ZINC's hedges were around 1.10 this year and next year they will probably be selling zinc for 70 cents. 

 

http://www.bloomberg.com/news/articles/2015-11-23/the-one-day-rally-that-shows-goldman-may-be-right-on-metal-cuts

 

Also, steel production is slowly which gives them less dust and less negotiating leverage with their "long-term contracts".

 

I think no one can know at what price they are going to sell Zinc next year. Commodity prices are really volatile and if some producers can demonstrate that they will deliver curtailment promises beginning with January, you can see a more balanced ZINC market and price next year. Of course, if china falls over the cliff it could be even nastier in commodities but that's not my base case scenario at this point.

 

Why would slowing steel production give them less negotiating leverage with long term contracts?

[RadMan24]

While most people have been focused on the plant issues, zinc prices have really fallen off a cliff.  ZINC's hedges were around 1.10 this year and next year they will probably be selling zinc for 70 cents. 

 

http://www.bloomberg.com/news/articles/2015-11-23/the-one-day-rally-that-shows-goldman-may-be-right-on-metal-cuts

 

Also, steel production is slowly which gives them less dust and less negotiating leverage with their "long-term contracts".

 

I think no one can know at what price they are going to sell Zinc next year. Commodity prices are really volatile and if some producers can demonstrate that they will deliver curtailment promises beginning with January, you can see a more balanced ZINC market and price next year. Of course, if china falls over the cliff it could be even nastier in commodities but that's not my base case scenario at this point.

 

Why would slowing steel production give them less negotiating leverage with long term contracts?

 

Dust volumes were down in the quarter. Any one have thoughts on management's goal of expanding Zochem in Europe?

[Guest roark33]

I really have no clue how the meet this covenant next year. 

 

Our ability to make scheduled payments of the principal or pay interest on or to refinance our 3.80% Convertible Notes (the “Convertible Notes”), our Senior Secured Notes, our Senior Unsecured Notes, our credit facilities or other indebtedness we may incur, depends on our future performance, which is subject to operational, economic, financial, competitive and other factors (some of which are beyond our control), including further delays to ramp-up production at our new zinc facility because of our inability to correct current significant operational issues or future unforeseen operational issues. Our business may not continue to generate cash flow from operations sufficient to service our debt and make necessary capital expenditures. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, or interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants in the instruments governing our indebtedness (including the minimum trailing six-month Adjusted EBITDA covenant of $21 million commencing from July 30, 2016), we could be in default under the terms of the agreements governing such indebtedness. In the event of any such default, the holders of our indebtedness could elect to declare all the funds borrowed thereunder, together with accrued and unpaid interest, to be immediately due and payable. If our indebtedness is accelerated and we are unable to refinance that indebtedness, we may be unable to continue as a going concern and we may be forced into bankruptcy or liquidation.

[kranthi_vic]

Assigning probabilities to the 2017 debt situation (These are my own and i don't have any particular competence in this area, sorry to disappoint you.)

If any of you have better models kindly share/modify below:

 

Avoid Bankruptcy Scenarios:

 

Scenario 1. Mngt successfully sells INMETCO/Zochem to service debt --> 35% probability (assigned high probability as these are working and cash flow positive.)

Scenario 2. Horsehead is acquired/merged with a public/private buyer --> 5% probability (I don`t know which buyer is out there for recycling businesses.)

Scenario 3. Mngt can raise additional capital through equity with significant plant improvements, no asset sale --> 5% (low probability, as this depends on plant showing improvement)

Scenario 4. Mngt fixes plant as per design and is able to refinance debt completely, no asset sale --> 1% (low probability based on the results so far.)

Scenario 5. Debt issuer blinks and extends loan --> 5% (Given the poor commodities market, the debt issuer also might find it difficult to find a buyer.)

 

Bankruptcy:

 

Scenario 6: Plant cannot reach design specs even with additional capital, project scrapped --> 1%

Scenario 7: Commodity prices sink further; low Zinc production & plant issues continue into 2016; cannot raise capital /refinance --> remaining probability (48%)

 

 

 

[SnarkyPuppy]

Assigning probabilities to the 2017 debt situation (These are my own and i don't have any particular competence in this area, sorry to disappoint you.)

If any of you have better models kindly share/modify below:

 

Avoid Bankruptcy Scenarios:

 

Scenario 1. Mngt successfully sells INMETCO/Zochem to service debt --> 35% probability (assigned high probability as these are working and cash flow positive.)

Scenario 2. Horsehead is acquired/merged with a public/private buyer --> 5% probability (I don`t know which buyer is out there for recycling businesses.)

Scenario 3. Mngt can raise additional capital through equity with significant plant improvements, no asset sale --> 5% (low probability, as this depends on plant showing improvement)

Scenario 4. Mngt fixes plant as per design and is able to refinance debt completely, no asset sale --> 1% (low probability based on the results so far.)

Scenario 5. Debt issuer blinks and extends loan --> 5% (Given the poor commodities market, the debt issuer also might find it difficult to find a buyer.)

 

Bankruptcy:

 

Scenario 6: Plant cannot reach design specs even with additional capital, project scrapped --> 1%

Scenario 7: Commodity prices sink further; low Zinc production & plant issues continue into 2016; cannot raise capital /refinance --> remaining probability (48%)

 

It seems to me like you pulled these numbers out of thin air.  I think the chances of them getting to 60-70% utilization in Q1 and being able to refinance the debt at higher interest rates with the lenders is more than 1%......

 

I don't understand why everyone seems to think it's highly unlikely for the lenders to refinance under more attractive terms if 60-70% utilization is made.  They don't want the assets if there's evidence of utilization creeping up.

[tylerdurden]

Assigning probabilities to the 2017 debt situation (These are my own and i don't have any particular competence in this area, sorry to disappoint you.)

If any of you have better models kindly share/modify below:

 

Avoid Bankruptcy Scenarios:

 

Scenario 1. Mngt successfully sells INMETCO/Zochem to service debt --> 35% probability (assigned high probability as these are working and cash flow positive.)

Scenario 2. Horsehead is acquired/merged with a public/private buyer --> 5% probability (I don`t know which buyer is out there for recycling businesses.)

Scenario 3. Mngt can raise additional capital through equity with significant plant improvements, no asset sale --> 5% (low probability, as this depends on plant showing improvement)

Scenario 4. Mngt fixes plant as per design and is able to refinance debt completely, no asset sale --> 1% (low probability based on the results so far.)

Scenario 5. Debt issuer blinks and extends loan --> 5% (Given the poor commodities market, the debt issuer also might find it difficult to find a buyer.)

 

Bankruptcy:

 

Scenario 6: Plant cannot reach design specs even with additional capital, project scrapped --> 1%

Scenario 7: Commodity prices sink further; low Zinc production & plant issues continue into 2016; cannot raise capital /refinance --> remaining probability (48%)

 

It seems to me like you pulled these numbers out of thin air.  I think the chances of them getting to 60-70% utilization in Q1 and being able to refinance the debt at higher interest rates with the lenders is more than 1%......

 

I don't understand why everyone seems to think it's highly unlikely for the lenders to refinance under more attractive terms if 60-70% utilization is made.  They don't want the assets if there's evidence of utilization creeping up.

 

Pretty good list in terms of the scenarios. I agree that no one would want to own +$500M plant especially if that plant appears to be not working. Better choice for them could be giving more time to the company so they can somehow work it out rather than trying to work themselves or sell for nothing. Of course if they want to go after Zochem/Inmetco and other assets if they are available that is more realistic to me.

 

Personally I believe Zinc is not Iron ore so it makes sense to expect a more balanced market in the future so i wouldn't assign 48percent to scenario 6.

[Foubearss]

Assigning probabilities to the 2017 debt situation (These are my own and i don't have any particular competence in this area, sorry to disappoint you.)

If any of you have better models kindly share/modify below:

 

Avoid Bankruptcy Scenarios:

 

Scenario 1. Mngt successfully sells INMETCO/Zochem to service debt --> 35% probability (assigned high probability as these are working and cash flow positive.)

Scenario 2. Horsehead is acquired/merged with a public/private buyer --> 5% probability (I don`t know which buyer is out there for recycling businesses.)

Scenario 3. Mngt can raise additional capital through equity with significant plant improvements, no asset sale --> 5% (low probability, as this depends on plant showing improvement)

Scenario 4. Mngt fixes plant as per design and is able to refinance debt completely, no asset sale --> 1% (low probability based on the results so far.)

Scenario 5. Debt issuer blinks and extends loan --> 5% (Given the poor commodities market, the debt issuer also might find it difficult to find a buyer.)

 

Bankruptcy:

 

Scenario 6: Plant cannot reach design specs even with additional capital, project scrapped --> 1%

Scenario 7: Commodity prices sink further; low Zinc production & plant issues continue into 2016; cannot raise capital /refinance --> remaining probability (48%)

 

It seems to me like you pulled these numbers out of thin air.  I think the chances of them getting to 60-70% utilization in Q1 and being able to refinance the debt at higher interest rates with the lenders is more than 1%......

 

I don't understand why everyone seems to think it's highly unlikely for the lenders to refinance under more attractive terms if 60-70% utilization is made.  They don't want the assets if there's evidence of utilization creeping up.

 

I think the scenarios miss timelines.

 

For instance, this is a probably scenario:

Zinc prices stay depressed in Q4 2015 and Q1/Q2, it starts to go back up in Q3 2016 (this is in line with 2009 depression, where zinc prices dove below 0.80/lb. and stayed there for about a year before rallying above 0.80/lb)

Plant gets up to 70% capacity by Q1 2016 due to fixed anodes/cathodes, management runs plant without additional capex to save cash. Main reason for this scenario is so they can show that they can run the plant consistently at 70-75%.

Investors start to feel more comfortably about the Mooresboro plant eventually reaching 90-95% and start bidding up the stock at end of Q1 2016 (after several months of 70-75% updates). In Q1/Q2 2016, there are signs that zinc will recover shortly, causing temporary spikes in Zinc prices and ZINC prices. ZINC management uses these spikes as opportunities to hedge for Q3/Q4 2016 and Q1/Q2 2017 and they also use some (depending on the cash bleed in Q1 and Q2 2016) of the ATM equity. At the time of the Q2 2016 cons call, zinc prices are close to $1/lb, during that Q2 2016 call, management announces that they have the cash to bring the capex in place to go to 95-100% of capacity in Q3 of 2016, they also announce a record Q2 2016 net income due to the lower cost inventory now flowing through as costs and also announce to be cash flow positive for the remainder of 2016 and 2017. Stock goes to $10 and up to $15, some people on this board will be complaining that "if they would not have diluted the stock with the ATM equity and hedged at 0.80 in Q1/Q2, the stock  would be $20, at least". Sales of luxury cars will spike as well, there will be a shortage of "ZINC" "Z1NC" vanity plates in all states. In Q3 2016, management will announce that the implementation of the new capex is in place, although new issues have arisen because of the higher plant utilization, and blame it on the weather, stock drops to below $10. In 2017, these issues are slowly resolved and the stock tops at $20. THE END :)

[SnarkyPuppy]

Assigning probabilities to the 2017 debt situation (These are my own and i don't have any particular competence in this area, sorry to disappoint you.)

If any of you have better models kindly share/modify below:

 

Avoid Bankruptcy Scenarios:

 

Scenario 1. Mngt successfully sells INMETCO/Zochem to service debt --> 35% probability (assigned high probability as these are working and cash flow positive.)

Scenario 2. Horsehead is acquired/merged with a public/private buyer --> 5% probability (I don`t know which buyer is out there for recycling businesses.)

Scenario 3. Mngt can raise additional capital through equity with significant plant improvements, no asset sale --> 5% (low probability, as this depends on plant showing improvement)

Scenario 4. Mngt fixes plant as per design and is able to refinance debt completely, no asset sale --> 1% (low probability based on the results so far.)

Scenario 5. Debt issuer blinks and extends loan --> 5% (Given the poor commodities market, the debt issuer also might find it difficult to find a buyer.)

 

Bankruptcy:

 

Scenario 6: Plant cannot reach design specs even with additional capital, project scrapped --> 1%

Scenario 7: Commodity prices sink further; low Zinc production & plant issues continue into 2016; cannot raise capital /refinance --> remaining probability (48%)

 

It seems to me like you pulled these numbers out of thin air.  I think the chances of them getting to 60-70% utilization in Q1 and being able to refinance the debt at higher interest rates with the lenders is more than 1%......

 

I don't understand why everyone seems to think it's highly unlikely for the lenders to refinance under more attractive terms if 60-70% utilization is made.  They don't want the assets if there's evidence of utilization creeping up.

 

I think the scenarios miss timelines.

 

For instance, this is a probably scenario:

Zinc prices stay depressed in Q4 2015 and Q1/Q2, it starts to go back up in Q3 2016 (this is in line with 2009 depression, where zinc prices dove below 0.80/lb. and stayed there for about a year before rallying above 0.80/lb)

Plant gets up to 70% capacity by Q1 2016 due to fixed anodes/cathodes, management runs plant without additional capex to save cash. Main reason for this scenario is so they can show that they can run the plant consistently at 70-75%.

Investors start to feel more comfortably about the Mooresboro plant eventually reaching 90-95% and start bidding up the stock at end of Q1 2016 (after several months of 70-75% updates). In Q1/Q2 2016, there are signs that zinc will recover shortly, causing temporary spikes in Zinc prices and ZINC prices. ZINC management uses these spikes as opportunities to hedge for Q3/Q4 2016 and Q1/Q2 2017 and they also use some (depending on the cash bleed in Q1 and Q2 2016) of the ATM equity. At the time of the Q2 2016 cons call, zinc prices are close to $1/lb, during that Q2 2016 call, management announces that they have the cash to bring the capex in place to go to 95-100% of capacity in Q3 of 2016, they also announce a record Q2 2016 net income due to the lower cost inventory now flowing through as costs and also announce to be cash flow positive for the remainder of 2016 and 2017. Stock goes to $10 and up to $15, some people on this board will be complaining that "if they would not have diluted the stock with the ATM equity and hedged at 0.80 in Q1/Q2, the stock  would be $20, at least". Sales of luxury cars will spike as well, there will be a shortage of "ZINC" "Z1NC" vanity plates in all states. In Q3 2016, management will announce that the implementation of the new capex is in place, although new issues have arisen because of the higher plant utilization, and blame it on the weather, stock drops to below $10. In 2017, these issues are slowly resolved and the stock tops at $20. THE END :)

 

While I don't expect it to play out this nicely, I do not think that this scenario has substantially less probability of occurring than the bearish scenario in the previous post.

 

The difference is, in the bear case, I've proven in my prior posts that there is value in the assets which reduces your loss to NOT 100% of capital (likely somewhere between 25-50% loss).  And in the bull case, at current prices, there is a very strong argument to be made of minimum 500% gains post-dilution. 

[Foubearss]

Assigning probabilities to the 2017 debt situation (These are my own and i don't have any particular competence in this area, sorry to disappoint you.)

If any of you have better models kindly share/modify below:

 

Avoid Bankruptcy Scenarios:

 

Scenario 1. Mngt successfully sells INMETCO/Zochem to service debt --> 35% probability (assigned high probability as these are working and cash flow positive.)

Scenario 2. Horsehead is acquired/merged with a public/private buyer --> 5% probability (I don`t know which buyer is out there for recycling businesses.)

Scenario 3. Mngt can raise additional capital through equity with significant plant improvements, no asset sale --> 5% (low probability, as this depends on plant showing improvement)

Scenario 4. Mngt fixes plant as per design and is able to refinance debt completely, no asset sale --> 1% (low probability based on the results so far.)

Scenario 5. Debt issuer blinks and extends loan --> 5% (Given the poor commodities market, the debt issuer also might find it difficult to find a buyer.)

 

Bankruptcy:

 

Scenario 6: Plant cannot reach design specs even with additional capital, project scrapped --> 1%

Scenario 7: Commodity prices sink further; low Zinc production & plant issues continue into 2016; cannot raise capital /refinance --> remaining probability (48%)

 

It seems to me like you pulled these numbers out of thin air.  I think the chances of them getting to 60-70% utilization in Q1 and being able to refinance the debt at higher interest rates with the lenders is more than 1%......

 

I don't understand why everyone seems to think it's highly unlikely for the lenders to refinance under more attractive terms if 60-70% utilization is made.  They don't want the assets if there's evidence of utilization creeping up.

 

I think the scenarios miss timelines.

 

For instance, this is a probably scenario:

Zinc prices stay depressed in Q4 2015 and Q1/Q2, it starts to go back up in Q3 2016 (this is in line with 2009 depression, where zinc prices dove below 0.80/lb. and stayed there for about a year before rallying above 0.80/lb)

Plant gets up to 70% capacity by Q1 2016 due to fixed anodes/cathodes, management runs plant without additional capex to save cash. Main reason for this scenario is so they can show that they can run the plant consistently at 70-75%.

Investors start to feel more comfortably about the Mooresboro plant eventually reaching 90-95% and start bidding up the stock at end of Q1 2016 (after several months of 70-75% updates). In Q1/Q2 2016, there are signs that zinc will recover shortly, causing temporary spikes in Zinc prices and ZINC prices. ZINC management uses these spikes as opportunities to hedge for Q3/Q4 2016 and Q1/Q2 2017 and they also use some (depending on the cash bleed in Q1 and Q2 2016) of the ATM equity. At the time of the Q2 2016 cons call, zinc prices are close to $1/lb, during that Q2 2016 call, management announces that they have the cash to bring the capex in place to go to 95-100% of capacity in Q3 of 2016, they also announce a record Q2 2016 net income due to the lower cost inventory now flowing through as costs and also announce to be cash flow positive for the remainder of 2016 and 2017. Stock goes to $10 and up to $15, some people on this board will be complaining that "if they would not have diluted the stock with the ATM equity and hedged at 0.80 in Q1/Q2, the stock  would be $20, at least". Sales of luxury cars will spike as well, there will be a shortage of "ZINC" "Z1NC" vanity plates in all states. In Q3 2016, management will announce that the implementation of the new capex is in place, although new issues have arisen because of the higher plant utilization, and blame it on the weather, stock drops to below $10. In 2017, these issues are slowly resolved and the stock tops at $20. THE END :)

 

While I don't expect it to play out this nicely, I do not think that this scenario has substantially less probability of occurring than the bearish scenario in the previous post.

 

The difference is, in the bear case, I've proven in my prior posts that there is value in the assets which reduces your loss to NOT 100% of capital (likely somewhere between 25-50% loss).  And in the bull case, at current prices, there is a very strong argument to be made of minimum 500% gains post-dilution.

 

"The difference is, in the bear case, I've proven in my prior posts that there is value in the assets which reduces your loss to NOT 100% of capital (likely somewhere between 25-50% loss). "

 

Well, there is always a perfect storm scenario:

- Oil dives to $20, steel imports from China increase because of low fuel costs, steel mini-mills go bankrupt, EAF dust income plummets

- Fire in Zochem, Zochem unsellable until the fire damage has been fixed

- Nickel prices plummet, INMETCO customers switch away from toll-type contracts, INMETCO has negative EBITDA and its value is questionable

- Zinc prices stay low or going lower

- Pabrai sells his shares, regretting his decision and says to "stick to cloning from now on", shares plummet below $1, shorts jump in and bring it to below $0.50. Horsehead is desperate and uses its ATM equity, severely diluting the equity and bringing the stock to below $0.20

- Private Equity scoops in and buys the company at $0.30/share

 

I would think this scenario is low probability, but not 0%.

 

M

 

 

[tylerdurden]

Assigning probabilities to the 2017 debt situation (These are my own and i don't have any particular competence in this area, sorry to disappoint you.)

If any of you have better models kindly share/modify below:

 

Avoid Bankruptcy Scenarios:

 

Scenario 1. Mngt successfully sells INMETCO/Zochem to service debt --> 35% probability (assigned high probability as these are working and cash flow positive.)

Scenario 2. Horsehead is acquired/merged with a public/private buyer --> 5% probability (I don`t know which buyer is out there for recycling businesses.)

Scenario 3. Mngt can raise additional capital through equity with significant plant improvements, no asset sale --> 5% (low probability, as this depends on plant showing improvement)

Scenario 4. Mngt fixes plant as per design and is able to refinance debt completely, no asset sale --> 1% (low probability based on the results so far.)

Scenario 5. Debt issuer blinks and extends loan --> 5% (Given the poor commodities market, the debt issuer also might find it difficult to find a buyer.)

 

Bankruptcy:

 

Scenario 6: Plant cannot reach design specs even with additional capital, project scrapped --> 1%

Scenario 7: Commodity prices sink further; low Zinc production & plant issues continue into 2016; cannot raise capital /refinance --> remaining probability (48%)

 

It seems to me like you pulled these numbers out of thin air.  I think the chances of them getting to 60-70% utilization in Q1 and being able to refinance the debt at higher interest rates with the lenders is more than 1%......

 

I don't understand why everyone seems to think it's highly unlikely for the lenders to refinance under more attractive terms if 60-70% utilization is made.  They don't want the assets if there's evidence of utilization creeping up.

 

I think the scenarios miss timelines.

 

For instance, this is a probably scenario:

Zinc prices stay depressed in Q4 2015 and Q1/Q2, it starts to go back up in Q3 2016 (this is in line with 2009 depression, where zinc prices dove below 0.80/lb. and stayed there for about a year before rallying above 0.80/lb)

Plant gets up to 70% capacity by Q1 2016 due to fixed anodes/cathodes, management runs plant without additional capex to save cash. Main reason for this scenario is so they can show that they can run the plant consistently at 70-75%.

Investors start to feel more comfortably about the Mooresboro plant eventually reaching 90-95% and start bidding up the stock at end of Q1 2016 (after several months of 70-75% updates). In Q1/Q2 2016, there are signs that zinc will recover shortly, causing temporary spikes in Zinc prices and ZINC prices. ZINC management uses these spikes as opportunities to hedge for Q3/Q4 2016 and Q1/Q2 2017 and they also use some (depending on the cash bleed in Q1 and Q2 2016) of the ATM equity. At the time of the Q2 2016 cons call, zinc prices are close to $1/lb, during that Q2 2016 call, management announces that they have the cash to bring the capex in place to go to 95-100% of capacity in Q3 of 2016, they also announce a record Q2 2016 net income due to the lower cost inventory now flowing through as costs and also announce to be cash flow positive for the remainder of 2016 and 2017. Stock goes to $10 and up to $15, some people on this board will be complaining that "if they would not have diluted the stock with the ATM equity and hedged at 0.80 in Q1/Q2, the stock  would be $20, at least". Sales of luxury cars will spike as well, there will be a shortage of "ZINC" "Z1NC" vanity plates in all states. In Q3 2016, management will announce that the implementation of the new capex is in place, although new issues have arisen because of the higher plant utilization, and blame it on the weather, stock drops to below $10. In 2017, these issues are slowly resolved and the stock tops at $20. THE END :)

You don't think if all this happens Happy Ending price would be more than 20, perhaps 30 or something :-) We saw 20s even without the plant working... If Zinc is highly priced and the plant is working 100% I'd assign even a higher happy ending price on that scenario.