ZINC - Horsehead Holding Corp

[AzCactus]

Im still new to investing, but one of the things i suspect is when i clone mohnish i should also clone his risk profile.

So if he is 40%  in fcau and 5% in zinc...then clone that fully..dont invest equally in both, which is the mistake i committed, even if you get it much cheaper than him....as a corollary i personally dont think Mohnish will invest in Horsehead  anymore, until the risk profile changes for Horsehead...just my opinion.

 

Pretty sure those numbers are prior to the huge drop in Horsehead.  Last quarter the numbers were closer.  Point being that if you "cloned" 6 months ago you would be down huge on Zinc. 

[str8shot]

Is he really down to that little?  I could have sworn he was around $700-800 million of AUM earlier this year.

 

I'm also not implying how stupid it is for ZINC to go up or down.  I readily admit there are a very wide range of outcomes here.  Either move could be equally brilliant or retarded.  This is a $500 million + enterprise value, and a now very commodity/China sensitive business with a shrinking equity stub.  The outcome for the equity isn't going to be about how right or wrong anyone was.  You also need a lot of luck; hopefully the price on the stock lets you take advantage of the potential luck.

 

I just bought some other steel related plays so I'm hoping the China thing gets resolved.  But you shouldn't underestimate how badly China can screw up the "all else being equal" thesis.

 

That's right. China has the potential to screw lots of things for sure...

 

 

From what I understand, under Pabrai Funds he has 6.33m shares of ZINC which has not changed for some time. Then he added about 2m shares at around $7.50-8 last summer which were reported on a series of SEC Form 4 updates, bring him to 8.33m total shares or about 14% ownership of ZINC equity. The Form 4 disclosures must be made public within days for insiders (like CEO and CFO) and for entities owning over 10% of the equity like Pabrai. So any moves Pabrai makes here forward will be known shortly after. These additional 2m shares did not appear on the latest 13F (Q3 2015) for the Pabrai Funds so they were presumably lumped under Dhandho Holdings or the like. Then he has other foreign positions, like South Indian Bank, which do not appear on the SEC 13F. I recall from a May 2015 interview with Auckland Investment Club that Pabrai indicated that he had a grand total of about $1B in total assets he was managing under various entities.

[str8shot]

A recent analysis from a hedge fund analyst on ZINC's operations and capital structure with a recommendation to consider its 10.5% notes:

 

http://seekingalpha.com/article/3717016-horsehead-holding-corp-10_5-percent-first-lien-secured-bonds-at-75-is-a-good-distressed-opportunity?app=1&auth_param=bpm9:1b5pf30:d251bb9df032d463c5cdc7557f4da8bc

[str8shot]

A recent analysis from a hedge fund analyst on ZINC's operations and capital structure with a recommendation to consider its 10.5% notes:

 

http://seekingalpha.com/article/3717016-horsehead-holding-corp-10_5-percent-first-lien-secured-bonds-at-75-is-a-good-distressed-opportunity?app=1&auth_param=bpm9:1b5pf30:d251bb9df032d463c5cdc7557f4da8bc

 

Also for some additional commentary check out the comments/questions by readers and the answers by the author following the article.

[str8shot]

Latest Mooresboro update from HH - 3,200 tons of zinc produced in November.

Progress being made but overall seems a bit underwhelming.

 

http://horsehead.net/news/view/horsehead-update-on-mooresboro-nc-facility4

[pantheman]

Latest Mooresboro update from HH - 3,200 tons of zinc produced in November.

Progress being made but overall seems a bit underwhelming.

 

http://horsehead.net/news/view/horsehead-update-on-mooresboro-nc-facility4

 

Anyone know when they updated the website? Last I checked (last operational update I believe) it was still the website from the 1990's. I could do without the slicker interface and price tag that no doubt came along with it.

[str8shot]

Latest Mooresboro update from HH - 3,200 tons of zinc produced in November.

Progress being made but overall seems a bit underwhelming.

 

http://horsehead.net/news/view/horsehead-update-on-mooresboro-nc-facility4

 

Anyone know when they updated the website? Last I checked (last operational update I believe) it was still the website from the 1990's. I could do without the slicker interface and price tag that no doubt came along with it.

 

Funny. The previous website looked like it was produced by a high school project over 15 years ago. They've finally stepped into the 21st century. I first noticed the new design two days ago.

[Foubearss]

Latest Mooresboro update from HH - 3,200 tons of zinc produced in November.

Progress being made but overall seems a bit underwhelming.

 

http://horsehead.net/news/view/horsehead-update-on-mooresboro-nc-facility4

 

This sentence throws me for a loop:

"The current efficiency improved from approximately 50% at the start of the month to approximately 70% by the end of November and is expected to continue to improve as the compromised anodes are replaced with new anodes."

 

The nameplate capacity is 155,000 tons, or 12,916 (simplified by dividing by 12) per month. 3200 ton is about 25% of full capacity

 

Now, during the Q3 conf call, they were talking about bringing the pilot plant to about 60% so this 50% to 70% range I am guessing would refer to the pilot plant (front end of the plant).

 

Regarding the cathodes/anodes, they currently have  5250 (full amount of anodes, 3/2*3500) - 3500 (anodes needing replacement) + 420 (anodes replaced in nov) = 2170 working anodes at the end of nov

or 41% (2170/5250) of full anodes capacity.

 

Multiplying 41% with the front end capacity (50% to 70%) brings total capacity between 21% and 29%, so the 25%/3200 tons is in the middle of the range (ignoring that the 41% is the end of nov capacity)

 

So, if this is how you jive the 50%/70% to the 25%/3200 tons, the second part of the sentence does not make sense and they should have said something in the lines of "The current pilot plant efficiency improved from approximately 50% at the start of the month to approximately 70% by the end of November and is expected to continue to improve and <b>will translate to total plant efficiency </b>as the compromised anodes are replaced with new anodes."

 

Or where am I wrong?

 

M

[tylerdurden]

I wish I had an answer. Didn't they say they needed 10 weeks to change all the anodes at Nov 9? Since then 3 weeks elapsed but only 12% of the anodes are replaced and based on other data given in this update it seems like it will take longer than 10 weeks to change all the anodes. Am I right? If so pretty frustrating to see...

[Max Alpha]

Latest Mooresboro update from HH - 3,200 tons of zinc produced in November.

Progress being made but overall seems a bit underwhelming.

 

http://horsehead.net/news/view/horsehead-update-on-mooresboro-nc-facility4

 

This sentence throws me for a loop:

"The current efficiency improved from approximately 50% at the start of the month to approximately 70% by the end of November and is expected to continue to improve as the compromised anodes are replaced with new anodes."

 

The nameplate capacity is 155,000 tons, or 12,916 (simplified by dividing by 12) per month. 3200 ton is about 25% of full capacity

 

Now, during the Q3 conf call, they were talking about bringing the pilot plant to about 60% so this 50% to 70% range I am guessing would refer to the pilot plant (front end of the plant).

 

Regarding the cathodes/anodes, they currently have  5250 (full amount of anodes, 3/2*3500) - 3500 (anodes needing replacement) + 420 (anodes replaced in nov) = 2170 working anodes at the end of nov

or 41% (2170/5250) of full anodes capacity.

 

Multiplying 41% with the front end capacity (50% to 70%) brings total capacity between 21% and 29%, so the 25%/3200 tons is in the middle of the range (ignoring that the 41% is the end of nov capacity)

 

So, if this is how you jive the 50%/70% to the 25%/3200 tons, the second part of the sentence does not make sense and they should have said something in the lines of "The current pilot plant efficiency improved from approximately 50% at the start of the month to approximately 70% by the end of November and is expected to continue to improve and <b>will translate to total plant efficiency </b>as the compromised anodes are replaced with new anodes."

 

Or where am I wrong?

 

M

 

I think they may be referring specifically to the efficiency of the anodes when they cite the figure of 50% - 70%. http://www.corrosion-doctors.org/CP/an-efficiency.htm

 

I doubt there is any way for a layman to reasonably determine the impact this jump from 50% to 70% has on total plant efficiency.

 

I think the biggest issue is that the shortened anode life and reduced efficiency isn't the problem, it is a side effect of the problems preceding it in the front end. They have said they are trialing changes which will improve the stability of the front end of the plant however the jury is still out there.

 

Until they resolve the root problem the useful lifespan of anodes will be greatly reduced which means plant efficiency will continue to be impacted, and maintenance capex will remain high as they continue to replace anodes.

 

 

 

[hardincap]

I wish I had an answer. Didn't they say they needed 10 weeks to change all the anodes at Nov 9? Since then 3 weeks elapsed but only 12% of the anodes are replaced and based on other data given in this update it seems like it will take longer than 10 weeks to change all the anodes. Am I right? If so pretty frustrating to see...

 

Looks like it won't be until March to replace all the anodes (based on 1400/3500 by end of dec).  Twice longer than they estimated on the cc. Frustrating indeed.

[tylerdurden]

I wish I had an answer. Didn't they say they needed 10 weeks to change all the anodes at Nov 9? Since then 3 weeks elapsed but only 12% of the anodes are replaced and based on other data given in this update it seems like it will take longer than 10 weeks to change all the anodes. Am I right? If so pretty frustrating to see...

 

Looks like it won't be until March to replace all the anodes (based on 1400/3500 by end of dec).  Twice longer than they estimated on the cc. Frustrating indeed.

 

I am sure they are fighting against significant challenges overall but still at least on these technical short term promises you'd expect them to deliver closer to publicized targets. I guess anodes deliveries will accelerate in q1 16 but still 10 weeks is out of the window and 60% utilization by January seems very questionable unless they do some magic with front end problems as explained by Max Alpha

[str8shot]

 

I think they may be referring specifically to the efficiency of the anodes when they cite the figure of 50% - 70%. http://www.corrosion-doctors.org/CP/an-efficiency.htm

 

I doubt there is any way for a layman to reasonably determine the impact this jump from 50% to 70% has on total plant efficiency.

 

I think the biggest issue is that the shortened anode life and reduced efficiency isn't the problem, it is a side effect of the problems preceding it in the front end. They have said they are trialing changes which will improve the stability of the front end of the plant however the jury is still out there.

 

Until they resolve the root problem the useful lifespan of anodes will be greatly reduced which means plant efficiency will continue to be impacted, and maintenance capex will remain high as they continue to replace anodes.

 

Agree that the 50% to 70% reference is specific to electric current efficiency in the cell house. While 60% of the anodes remain to be replaced, apparently they are still getting about half the expected efficiency out of this 60% to produce an overall efficiency of: 40% + (.5*60%)= 70%.

Mgmt alluded to a series of bottlenecks/capacity limitations in the overall process on the Nov 9 call. With the pilot bleed treatment only being able to support 60-70% of nameplate capacity, that alone puts a cap on overall utilization. Then looking at the front end (pre-cell house) there were issues with carbon filters that required they be rebuilt, then after being rebuilt, required further maintenance because the root cause issue impairing the filters hadn't yet been resolved. The downstream effects were impurities getting into the cell house, which depleted the anodes more quickly as Max Alpha alluded to.

 

What I took from the Nov 9 call was that they:

1) have the pilot bleed treatment fully operational such that they could operate at 60-70% of nameplate capacity absent other bottlenecks/limitations (this seems to be confirmed in the Dec 1 update)

2) would address issues with the carbon filters and other causal elements in the front end process that resulted in rapid degradation of the anodes in the cell house (the Dec 1 update indicates progress on this front, but no quantitative specifics)

3) would get all 3500 anodes replaced by the end of January (give or take), which probably means well into February. This would resolve the cell house efficiency issue, assuming they addressed root cause issues sufficiently to prevent further rapid diminishment of anodes

 

So in the best case, by the end of Jan or Feb they will be running at 60% of nameplate capacity, hopefully moving towards 70%. More realistically, if they can get to 60% of nameplate (a rate of 7500 tons per month) by the end of March that would be a colossal achievement given their track record, but maybe good enough to produce a pop in the stock to enable mgmt to begin leveraging the ATM vehicle (with less dilutive impact) if necessary.

 

On the other hand, who the hell knows.

[hobbit]

In the last CC jim Hensler mentioned they need to replace half the anodes

"Yes, we've got somewhere in the neighborhood of 70 or 74 anodes and cathode peers in the cellhouse right now, that's per cell. So we've got 70 cell times that number. And we estimate that about half of those anodes are going to need to be replaced"

 

now they are seeing 2/3rd need to be replaced..whats going on ?

[str8shot]

In the last CC jim Hensler mentioned they need to replace half the anodes

"Yes, we've got somewhere in the neighborhood of 70 or 74 anodes and cathode peers in the cellhouse right now, that's per cell. So we've got 70 cell times that number. And we estimate that about half of those anodes are going to need to be replaced"

 

now they are seeing 2/3rd need to be replaced..whats going on ?

 

Seems consistent with mgmt's tendency over the past 18 months to over promise and under deliver, though they have become more cautious in the specificity of projections in recent months. One explanation could be that the continued carbon filter problems enabled impurities to affect additional anodes in the cell house, driving up the replacement number.  Hence they must resolve the root cause issues affecting the cell house to achieve normal anode replacement cycles.

 

Even at this stage, whatever they say, probably best to assume a 50%-100% multiplier. If they say 10 weeks to replace the anodes, assume it's 15-20 weeks. From Nov 9th, 10 weeks translated to a target of Jan 15, so adding 5 weeks is Feb 19, and then another 5 weeks is Mar 25.

[kranthi_vic]

They Just can't get past the 3200 tons/month figure...

[tylerdurden]

With just 12% of the anodes are replaced I wouldn't expect anything different. December update and obviously January will tell more about what's really going on. The Company still believes January is still achievable for replacing all anodes and of course they admit it could be delayed into February... January/February timeframe is shaping to be a decisive time for this Company with the factory performance and Glencore etc. disclosing their Q4 Zinc output (and whether they really cut 100k tons) in terms of the Zinc prices...

[Guest roark33]

This is one of the better article on SA.  I don't 'agree with everything the author says, but he does at least make an effort:

http://seekingalpha.com/article/3717016-horsehead-holding-corp-10_5-percent-first-lien-secured-bonds-at-75-is-a-good-distressed-opportunity

[Guest anilpandit]

@roark33,  Can you elaborate your points why you don't agree. Just wanted to hear other side of story.

[kranthi_vic]

@tylerdurden

 

Its getting difficult to trust mngt that the anode replacement will help them match the 60% capacity rates in the cell house, especially with the electrolyte issues.

I don`t really know how long these solutions will take and the debt deadlines are closing in fast. 

 

Say they reach 60% cap by April, which in itself is a miracle. It still dosen`t change the debt scenario. Are you thinking they can extend the loan periods at that point and avoid restructuring?  Add to this the 40% equity dilution thats coming.. its hard to see the silver lining.

[SnarkyPuppy]

@tylerdurden

 

Its getting difficult to trust mngt that the anode replacement will help them match the 60% capacity rates in the cell house, especially with the electrolyte issues.

I don`t really know how long these solutions will take and the debt deadlines are closing in fast. 

 

Say they reach 60% cap by April, which in itself is a miracle. It still dosen`t change the debt scenario. Are you thinking they can extend the loan periods at that point and avoid restructuring?  Add to this the 40% equity dilution thats coming.. its hard to see the silver lining.

 

If they reach ~60% utilization by mid Q1 and are able articulate a solid plan to bump up to 75% utilization over the course of the year, I see no reason why the bondholders (maturing in Q2 '17) would not be willing to refinance under more favorable terms as the likelihood of eventual repayment will be high under these utilization rates.  I highly doubt the debt holders want to force a bankruptcy and liquidation if there is evidence suggesting eventual repayment. 

[spartansaver]

@tylerdurden

 

Its getting difficult to trust mngt that the anode replacement will help them match the 60% capacity rates in the cell house, especially with the electrolyte issues.

I don`t really know how long these solutions will take and the debt deadlines are closing in fast. 

 

Say they reach 60% cap by April, which in itself is a miracle. It still dosen`t change the debt scenario. Are you thinking they can extend the loan periods at that point and avoid restructuring?  Add to this the 40% equity dilution thats coming.. its hard to see the silver lining.

 

If they reach ~60% utilization by mid Q1 and are able articulate a solid plan to bump up to 75% utilization over the course of the year, I see no reason why the bondholders (maturing in Q2 '17) would not be willing to refinance under more favorable terms as the likelihood of eventual repayment will be high under these utilization rates.  I highly doubt the debt holders want to force a bankruptcy and liquidation if there is evidence suggesting eventual repayment.

 

Why couldn't a distressed debt investor who was interested in the company come in and pay a premium for the debt? They could essentially force them into bankruptcy and get the company at a cheap price. Just trying to think of ways as to how the equity loses.

[jawn619]

@tylerdurden

 

Its getting difficult to trust mngt that the anode replacement will help them match the 60% capacity rates in the cell house, especially with the electrolyte issues.

I don`t really know how long these solutions will take and the debt deadlines are closing in fast. 

 

Say they reach 60% cap by April, which in itself is a miracle. It still dosen`t change the debt scenario. Are you thinking they can extend the loan periods at that point and avoid restructuring?  Add to this the 40% equity dilution thats coming.. its hard to see the silver lining.

 

If they reach ~60% utilization by mid Q1 and are able articulate a solid plan to bump up to 75% utilization over the course of the year, I see no reason why the bondholders (maturing in Q2 '17) would not be willing to refinance under more favorable terms as the likelihood of eventual repayment will be high under these utilization rates.  I highly doubt the debt holders want to force a bankruptcy and liquidation if there is evidence suggesting eventual repayment.

 

Why couldn't a distressed debt investor who was interested in the company come in and pay a premium for the debt? They could essentially force them into bankruptcy and get the company at a cheap price. Just trying to think of ways as to how the equity loses.

 

You don't have to think very hard.

[kranthi_vic]

@spartansaver,

 

Can you pls elaborate how this scenario would work? I still dont have a solid understanding of the debt market.

[tylerdurden]

Well I guess a distressed debt investor who wants to own a +$500M facility which is not very easy to ramped up to full capacity can become equityholder in a bankruptcy if they prefer. Anyways, debt maturity is q217 so any bankruptcy will have to wait until then probably. Don't forget they have assets they can sell to buy more time. They hope they will demonstrate that they can make this plant work and with possible tailwind of a zinc price increase they want to renegotiate debt by mid 16. Of course this is risky; as always, no free lunch. You have to make your own risk/reward analysis...