ZINC - Horsehead Holding Corp

[tylerdurden]

Thanks everyone for their comtributions to this discussion, especially folks who have engineering backgrounds provide very valuable insights. I was just reviewing the past calls for seeing management's past views about the ramp up and really it is hard to give them much credibilty at this point after all those overpromises and persistent ongoing problems. Having said that I still believe the problems are solvable and that's why I am long.

 

In terms of similar technologies, Mr B posted a presentation about the Skorpion plant longtime ago on this board. It has the ramp up history of that plant and although it took them 2-2.5 years to get full capacity, from the first quarter they were at 40% capacity so nothing like Mooresboro for sure. I'll repost the link of the presentation again when i have the chance so you can see yourself. It seems ZINC hired one of the engineers who worked at the Skorpion commissioning and ramp up so his experience could be useful for them.

 

For pabrai, I try to understand his timing really with his last purchase. There was nothing different in terms of ramp up around his purchase date, so puzzling for me since he did not continue buying for averaging down either. So why would you buy end of July/August and just stop? Perhaps he wanted to give some positive signal to the market in order to support the price so they can use the equity market later on but failed miserably obviously. That's just a long shot theory of course.

 

Anyways, at this point I want to believe they already figured out this organic impurities issue, otherwise what's the point of replacing all these anodes right? Perhaps they needed more time to find that solution so they are intentionally delaying to replace these anodes (more than original 10 weeks timeframe).

 

Where did you get the info that "ZINC hired one of the engineers who worked at the Skorpion commissioning and ramp up"?

 

I can't believe Pabrai would buy 10%+ in a company without contracting experts to confirm that the plant is going to work. Seems crazy to put $50m+ into a company where everything hinges on the plant working without thoroughly getting the plant vetted by outside experts

 

Skorpion engineer news is from one of their call transcripts. It could be q215 or q115.

 

I think we are putting too much emphasis on Pabrai's rules. He changed his rules in the past. I am sure if he has the sufficient conviction he can bend any rules again...

 

Hatch Associates, which looks like a respectable engineering firm, believes the plant would work at full capacity. That could be your external vetting. If this tchnology worked in Namibia for the Skorpion plant with the available resources like 10 years ago, it should work here in US today as well. I am hoping finally they are figuring this...

[BG2008]

I was one of the people who called around asking for a chemical engineer's opinion for whether they can ramp the plant given the 4-5 issues that they have.  I got the response that these are issues that if the company just put some resources behind them, pumps, filters, etc, they can overcome the issues.  So I figured that ZINC is an option in that ALL the economics in the company really rest in the Moorseboro plant.  Also, we are dealing with a commodity that determines price and revenue.  So, I structured my investment as a married put structure. 

 

I just exercised my puts yesterday.  My puts were worth 3-6x the value of the shares that I own.  I want to point out a few facts for people to consider going forward. 

 

1. The 2017 bonds are trading at 26 cents on the dollar last I check.  At this point, if you believe in the ZINC story, you may as well just buy the bonds.  It offers 4x upside.  The flip side of this information is that unless  http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C589105&symbol=ZINC3893598

2. Unless ZINC ramps up its production quickly and ZINC commodity prices surge, big ifs, the debt will not be rolled.  So, you're likely looking at a chapter 11.  This is not news.  But no one has mentioned the 2017 bonds in a while.  For the guys who are long the shares, I just want to point this out so that you can make better informed decisions.   

3.  From a bond perspective, ZINC needs to demonstrate that at least 3-4 quarters of sufficient cashflow before they can roll the debt.  So, if the plant is not operating close to 85-90% by June 2016, rolling the debt can be a serious issue.  When zinc prices were around $1.00, I would say they just need to get to 75%. 

4. At today's price, the Moorseboro plant can only generate $28mm of EBITDA assuming that they can achieve $0.50 per pound in cost.  This assumption in itself is a huge if. 

 

Kitco zinc prices is around $0.67 per pound http://www.kitcometals.com/charts/Zinc.html

 

There appears to be a lot of variables that needs to go right in order for the investment to work.  Good luck everyone.   

[500pages]

3.  From a bond perspective, ZINC needs to demonstrate that at least 3-4 quarters of sufficient cashflow before they can roll the debt.  So, if the plant is not operating close to 85-90% by June 2016, rolling the debt can be a serious issue.  When zinc prices were around $1.00, I would say they just need to get to 75%. 

Given their comments around Dec 2014, my impression was at $1.00 zinc, they are break-even (i.e. service the debt) at roughly 50%. Nickel prices are down, so maybe a bit higher. But I don't see why they need to hit 75%.

 

Comparing to how zinc mining operations are priced, Horsehead overall (even with Mooresboro as work in progress and needing more time and money to ramp up) is a very (maybe insanely) cheap "mine" at $600m EV, without the risks entailed in upcoming zinc mining operations like Gamsberg or Dugald River (where you put more upfront to have uncertainties of mining and higher costs of SHG).

 

Between selling Zochem and issuing more shares, it looks like the company makes it through, with dilution that still offers great upside when the dust clears.

 

[BG2008]

3.  From a bond perspective, ZINC needs to demonstrate that at least 3-4 quarters of sufficient cashflow before they can roll the debt.  So, if the plant is not operating close to 85-90% by June 2016, rolling the debt can be a serious issue.  When zinc prices were around $1.00, I would say they just need to get to 75%. 

Given their comments around Dec 2014, my impression was at $1.00 zinc, they are break-even (i.e. service the debt) at roughly 50%. Nickel prices are down, so maybe a bit higher. But I don't see why they need to hit 75%.

 

Comparing to how zinc mining operations are priced, Horsehead overall (even with Mooresboro as work in progress and needing more time and money to ramp up) is a very (maybe insanely) cheap "mine" at $600m EV, without the risks entailed in upcoming zinc mining operations like Gamsberg or Dugald River (where you put more upfront to have uncertainties of mining and higher costs of SHG).

 

Between selling Zochem and issuing more shares, it looks like the company makes it through, with dilution that still offers great upside when the dust clears.

 

I think you're underestimating the fixed cost associated with running the plant.  At lower zinc prices, the breakeven at the Moorseboro level is no longer at 50%.  At today's zinc price of 67 cents, the breakeven at the Moorseboro plant is likely over 75%.  I suggest you call the CFO and ask him to walk you through their internal financial model.

 

The debt is coming due in 2017.  The focus is not on what Horsehead trades relative to peers.  The focus is on whether Horsehead can convince lenders to extend the debt. 

 

   

[str8shot]

3.  From a bond perspective, ZINC needs to demonstrate that at least 3-4 quarters of sufficient cashflow before they can roll the debt.  So, if the plant is not operating close to 85-90% by June 2016, rolling the debt can be a serious issue.  When zinc prices were around $1.00, I would say they just need to get to 75%. 

Given their comments around Dec 2014, my impression was at $1.00 zinc, they are break-even (i.e. service the debt) at roughly 50%. Nickel prices are down, so maybe a bit higher. But I don't see why they need to hit 75%.

 

Comparing to how zinc mining operations are priced, Horsehead overall (even with Mooresboro as work in progress and needing more time and money to ramp up) is a very (maybe insanely) cheap "mine" at $600m EV, without the risks entailed in upcoming zinc mining operations like Gamsberg or Dugald River (where you put more upfront to have uncertainties of mining and higher costs of SHG).

 

Between selling Zochem and issuing more shares, it looks like the company makes it through, with dilution that still offers great upside when the dust clears.

 

I think you're underestimating the fixed cost associated with running the plant.  At lower zinc prices, the breakeven at the Moorseboro level is no longer at 50%.  At today's zinc price of 67 cents, the breakeven at the Moorseboro plant is likely over 75%.  I suggest you call the CFO and ask him to walk you through their internal financial model.

 

The debt is coming due in 2017.  The focus is not on what Horsehead trades relative to peers.  The focus is on whether Horsehead can convince lenders to extend the debt. 

 

 

I agree that at current zinc price levels break even is probably in the 70-75% capacity utilization range. But I think you are understating the likelihood that the debt holders want ZINC to succeed, to be able to extend the debt at favorable interest rates, once ZINC demonstrates it's reliably moving beyond break even and into being cash flow positive.

 

ZINC's business model is not in question, it's about getting a plant fully online, and there's no evidence that the problems are insurmountable, yet there is precedent for it taking multiple years to get this kind of operation fully up and running. Assuming good progress is being made, debt holders would rather work with ZINC on refinancing versus taking ownership of these assets, dealing with all the hassles that entails, and selling them at a discount.

 

Do you disagree?

[str8shot]

Another angle for your collective consideration..

 

why didn't Pabrai, who originally invested in q4 2008, and in total has invested $60M in 8.3m shares of ZINC, now worth $13M, sell significant shares in October when the price spiked to $5.50 on the Glencore news? (given that additionally, even then there was an evident risk of additional equity dilution)

 

he must have concluded that there was a relatively small chance (less than 20%) that ZINC would go bankrupt. what are some possible mitigating factors?

>as a 14% equity owner who has held the investment for 7 years and who added 2m shares this past August even after management successively stumbled on quarterly projections and who had the CFO at his Sep 2015 fund meeting - he has more meaningful insights into where they are and what they can do to satisfactorily resolve the issues in 2016, and what the worst case options are to preclude bankruptcy

>via Dhando, which has $80M in cash and securities as of Sep 2015, and another partner if needed, he knows he can provide additional liquidity beyond the $50M ATM program if necessary, and in the process cut Dhando a sweetheart deal by transacting a loan at high rates convertible to equity, thereby further diluting existing holders while positioning 1)Dhando for tremendous equity upside and 2)Pabrai funds equity shares the opportunity to participate in reasonable upside over the long haul, despite the dilution

>he knows of a third party that will exclusively step in and provide additional bridge financing, or that Zochem can be sold for at least $50M plus, if necessary, to further bridge the ramp-up

>he is confident that there is little risk that zinc prices go much lower even if they don't rebound much in 2016, such that ZINC can still achieve break even or cash flow positive status within the next 12 months

>he is confident that the debtors will work with ZINC to extend the debt if they achieve at least break even by the end of 2016

 

Maybe I'm missing something, but it just doesn't add up that both Pabrai and Guy Spier (who was adamant about holding Horsehead for the long haul when I attended his Sep 2015 annual fund meeting) are taking an incredibly high risk of having the equity go to $0, while spurning earlier opportunities to sell some of their holdings to mitigate potential loss. But who knows.

 

Thoughts anyone?

[tylerdurden]

Another angle for your collective consideration..

 

why didn't Pabrai, who originally invested in q4 2008, and in total has invested $60M in 8.3m shares of ZINC, now worth $13M, sell significant shares in October when the price spiked to $5.50 on the Glencore news? (given that additionally, even then there was an evident risk of additional equity dilution)

 

he must have concluded that there was a relatively small chance (less than 20%) that ZINC would go bankrupt. what are some possible mitigating factors?

>as a 14% equity owner who has held the investment for 7 years and who added 2m shares this past August even after management successively stumbled on quarterly projections and who had the CFO at his Sep 2015 fund meeting - he has more meaningful insights into where they are and what they can do to satisfactorily resolve the issues in 2016, and what the worst case options are to preclude bankruptcy

>via Dhando, which has $80M in cash and securities as of Sep 2015, and another partner if needed, he knows he can provide additional liquidity beyond the $50M ATM program if necessary, and in the process cut Dhando a sweetheart deal by transacting a loan at high rates convertible to equity, thereby further diluting existing holders while positioning 1)Dhando for tremendous equity upside and 2)Pabrai funds equity shares the opportunity to participate in reasonable upside over the long haul, despite the dilution

>he knows of a third party that will exclusively step in and provide additional bridge financing, or that Zochem can be sold for at least $50M plus, if necessary, to further bridge the ramp-up

>he is confident that there is little risk that zinc prices go much lower even if they don't rebound much in 2016, such that ZINC can still achieve break even or cash flow positive status within the next 12 months

>he is confident that the debtors will work with ZINC to extend the debt if they achieve at least break even by the end of 2016

 

Maybe I'm missing something, but it just doesn't add up that both Pabrai and Guy Spier (who was adamant about holding Horsehead for the long haul when I attended his Sep 2015 annual fund meeting) are taking an incredibly high risk of having the equity go to $0, while spurning earlier opportunities to sell some of their holdings to mitigate potential loss. But who knows.

 

Thoughts anyone?

 

Thanks for valuable points. I agree most of your thoughts. I cannot think any other investor who knows ZINC better than Pabrai and he is still taking this trip down with the share price and doing nothing. I don't think he does everything right (who does) but there is a reason he had some very impressive returns in the past so we should take him and his action/inactions very seriously.

 

Before ZINC goes to $0 there would be many options for them to buy time as you described. There is only one case that I can think for Pabrai not to arrange some financing to these guys and let his equity go $0 and that is if he loses all his hopes for seeing this plant working at high utilization then he wouldn't throw good money after bad. If had lost faith after all that management failures etc., he would have cut losses many times so far.

 

Anyways, call me dreamer or something but I truly believe Zinc prices will come back strong in Q116. Long thesis does not depend on higher prices but I think the physical market will begin to dictate the market price coming soon. These Glencore guys know trading commodities very well so there is a reason they are cutting shit loads of Zinc from production in 2016. Also for rolling over the debt everybody talks about mid 2016 because of management's plans but the debt comes due in mid 2017 so I think they would have more time to make the plant work or see ZINC prices go higher so they can get some help w/ the ATM or both actually.

[tylerdurden]

Courtesy of MrB please see p57 of the below presentation for Skorpion's ramp up:

 

http://www.angloamerican.com/~/media/Files/A/Anglo-American-Plc/investors/presentations/2006pres/aa-base-anlys.pdf

 

Good news is it took them 2.5 years to get full capacity, bad news they were at ~40% in the first quarter and the trajectory is much more favorable obviously after that. Anyways, I think Horsehead management wasted almost a year without getting any external help to ramp this baby up and only after realizing the level of challenges they face around April 15 timeframe they contracted Hatch, signed with that engineer from Skorpion and late October brought Greg Belland so he could manage their engineering resources better and share his overall zinc/plant ramp up experience with them. We could start seeing the benefit of these additional resources at some point...

[kranthi_vic]

There was an article in Seeking alpha..the author suggested buying the secured debt at 75, CUSIP 440694AC1:

http://seekingalpha.com/article/3717016-horsehead-holding-corp-10_5-percent-first-lien-secured-bonds-at-75-is-a-good-distressed-opportunity?page=2

 

When i check the CUSIP now, its trading at $108.  Is someone buying up the secured debt, am i reading this correct?

[pantheman]

There was an article in Seeking alpha..the author suggested buying the secured debt at 75, CUSIP 440694AC1:

http://seekingalpha.com/article/3717016-horsehead-holding-corp-10_5-percent-first-lien-secured-bonds-at-75-is-a-good-distressed-opportunity?page=2

 

When i check the CUSIP now, its trading at $108.  Is someone buying up the secured debt, am i reading this correct?

 

I'm seeing last trade at $68.25 via bloomberg

[kranthi_vic]

http://1.usa.gov/1WX6XMO

[hardincap]

http://1.usa.gov/1WX6XMO

 

Old news

[hardincap]

PITTSBURGH-- January 4, 2016--Horsehead Holding Corp. (NASDAQ: ZINC) today issued an update on operations at its Mooresboro, North Carolina zinc production facility. The Company reported that the facility produced approximately 2,200 tons of zinc in December 2015. This was supplemented with the sale of approximately 12,200 tons of zinc calcine and waelz oxide.

 

The primary constraint to throughput in December was a significant structural failure on the inner well of the main leaching clarifier.  The failure was a result of a design flaw that has now been functionally addressed.  The repair required a 10 day shutdown of the facility.  During that time we were able to accomplish several improvements which we believe will better position us for increasing production in the New Year.  Progress was made in December through a marked improvement in the condition of the anodes in the electrowinning cell-house.  We received 950 new or reconditioned anodes during the month, 810 of which were installed.  Associated with this progress we observed a current efficiency increase from approximately 70% at the start of the month to approximately 80% by the end of December.

 

There are several additional projects that are in the engineering phase that are required to address equipment deficiencies and to support the continued ramp up to design capacity.  These projects will continue to increase capacity and reliability although we cannot guarantee the timing of these improvements and if they will fully address the operational challenges we have faced, or that additional challenges might not arise.

 

[abitofvalue]

So 3200 in November and 2200 in December..  But don't worry progress made.... Another 10 day shutdown. Is it just me or do there seem to be an awful lot of design flaws with this plant..  At this rate before they get operational will each part will need to be rebuilt due to design flaws.

 

[RadMan24]

So 3200 in November and 2200 in December..  But don't worry progress made.... Another 10 day shutdown. Is it just me or do there seem to be an awful lot of design flaws with this plant..  At this rate before they get operational will each part will need to be rebuilt due to design flaws.

 

Hey, look at the bright side, they are on track to get the anodes fixed ;)

[kranthi_vic]

Hopeless..i think mngt is clueless abt the real yield this plant can actually provide. Looks like we will have another year of constant shutdown drama.

[Nicholas]

So 3200 in November and 2200 in December..  But don't worry progress made.... Another 10 day shutdown. Is it just me or do there seem to be an awful lot of design flaws with this plant..  At this rate before they get operational will each part will need to be rebuilt due to design flaws.

 

Hey, look at the bright side, they are on track to get the anodes fixed ;)

 

 

Haha....that made me laugh

[Txvestor]

This is really looking like a lost cause. Management look like complete idiots. Incompetent at best.

Notice Pabrai hasn't added since around 7.75, which for him is tantamount to selling, since him actually selling would likely accelerate bankruptcy. Unfortunately this is now just an option and in my view a company likley to bankrupt sometime this year. Mr Market is far more often right than he is given credit for!

[goldfinger]

This is really looking like a lost cause. Management look like complete idiots. Incompetent at best.

Notice Pabrai hasn't added since around 7.75, which for him is tantamount to selling, since him actually selling would likely accelerate bankruptcy. Unfortunately this is now just an option and in my view a company likley to bankrupt sometime this year. Mr Market is far more often right than he is given credit for!

 

You may be right on this one!

[DTEJD1997]

Here is something that might not have been brought up before...

 

Perhaps the CURRENT output of the new plant is close to it's full capacity?

 

Maybe the engineering firm that did up the design pulled a fast one on ZINC and the plant is operating as it was designed? 

 

Could the engineers and management be so clueless?

[str8shot]

This is really looking like a lost cause. Management look like complete idiots. Incompetent at best.

Notice Pabrai hasn't added since around 7.75, which for him is tantamount to selling, since him actually selling would likely accelerate bankruptcy. Unfortunately this is now just an option and in my view a company likley to bankrupt sometime this year. Mr Market is far more often right than he is given credit for!

 

i agree that another unexpected equipment failure in December further erodes what little is left of management's credibility. on the other hand, taking the 10 day outage hit before year end to resolve the failure and implement other changes may prove to be a one step back, two steps forward proposition. better to take a big hit in 2015 than in the new year. we'll see.

 

i do think we'll get a much better indication of where they are and where they're headed 90-120 days out from the new SVP having taken over the plant at the end of Oct 2015, which points to the upcoming Feb 24 conference call, where there will be a rigorous discussion and Q&A. management will have no where to hide on this call.

 

if on the Feb 24 call they don't: 1) demonstrate significant improvement in capacity utilization compared to Q42015 levels, 2) convey a coherent, comprehensive plan to reach 75% plus by mid-year 2016, and 3) adequately address how they will manage liquidity and debt refinancing, then there will be far more reason to doubt their prospects for getting over the hump.

[mateo999]

may prove to be a one step back, two steps forward proposition. better to take a big hit in 2015 than in the new year.

 

Forgive me, but what does this actually mean?

[Picasso]

It means that we've been abused by management ineptitude for so long that it's starting to feel good.

[500pages]

It means that we've been abused by management ineptitude for so long that it's starting to feel good.

 

What puzzles me (seriously, not just being sarcastic) is how their current run rate in Nov & Dec 2015 (not counting days of shutdown) is around 106 tpd. At the same time, re Dec 2014: "We were particularly pleased that for extended periods in December the facility operate the near our estimated cash flow breakeven level after cash interest expense [at the prices prevailing then] of 230 tons per day."

This does not appear to be anode-limited since they've been adding them through nov-dec without increasing production.

So, after a ton of debottlenecking and fixes (bleed treatment, controllers, pumps, mixer tanks, bypass to first clarifier, new cooling fan, acid distribution system, hydrochloric acid recovery system, rebuilding carbon filters, refurbishing anodes, to name a few), as well as hiring Hatch and Greg Belland, the plant is running at (a sustained rate) of about half of the (peak-ish) rate of a year ago.

It seems like quite a feat to deliver output this low after so many improvements. Scorpion's ramp wasn't like that...

[tylerdurden]

It means that we've been abused by management ineptitude for so long that it's starting to feel good.

Scorpion's ramp wasn't like that...

 

I guess we learnt that this is nothing like Skorpion long time ago. Anyways, waiting game goes on...

 

Management has been already saying "we cannot guarantee the timing of these improvements and if they will fully address the operational challenges we have faced, or that additional challenges might not arise." so why do you blame them :-)