ZINC - Horsehead Holding Corp

[Guest hellsten]

Mohnish seems to share my doubts about gold producers, but I'm probably reading too much into what he said about gold:

 

Q: Would you invest in Gold?

 

A: No. Gold is too hard to value. It has luster value but the intrinsic value is unclear. He has investments in gold through some of the companies he owns. He wants to invest in productive commodities and then find the lowest cost producer. Then he would be interested.

 

http://www.gurufocus.com/news/70886/pabrai-funds-annual-meeting-notes-2009-huntington-beach-california

 

So I think for a gold miner, he would talk about the cost-curve, but then conclude that even if it is $900 break-even for the lowest cost gold producer, we still cannot be sure that $900 is a reasonable price for gold.  Something like zinc should have much better defined demand and so it is easier to figure out what prices are reasonable and the volatility should be lower (presumably).

 

Arnold Van Den Berg's (Century Management) analysis of gold prices came up with a worst case scenario of 600-700 USD. Buy point 800-1000 USD:

 

Arnold discusses how to value commodities. I think he said inflation adjusted prices are the most accurate predictor.

 

This should probably go in a thread about gold, but since we were discussing gold I'm posting it here.

[nikhil25]

Horsehead achieves ISO 14001 certification

http://www.4-traders.com/HORSEHEAD-HOLDING-CORP-58472/news/HORSEHEAD-HOLDING-CORP--Horsehead-Corporation-Achieves-ISO-14001-Certification-17631962/

[OracleofCarolina]

Mine Closures Set to Give Zinc a Boost http://on.wsj.com/1cH6rvc

[phil_Buffett]

mohnish again bought more Shares. bought only 700  ;D

[Guest hellsten]

From 2006, but still interesting:

 

Take a look below at this graphic created by Teck-Cominco showing current and future mine supply versus expected demand. This graphic illustrates what is termed the “Zinc Supply Gap”.

 

http://www.kitcometals.com/images/commmentary/Furse/feb102006_2.gif

 

Source: http://www.kitcometals.com/commentaries/Furse/feb102006.html

 

Anyone have a chart showing for the inflation-adjusted price of zinc?

[indirect]

Mohnish does not talk to the management as far as I know. Sometimes management wants to talk to the largest shareholder and indirect shareholders, i.e. PIF investors.

[phil_Buffett]

Mohnish does not talk to the management as far as I know. Sometimes management wants to talk to the largest shareholder and indirect shareholders, i.e. PIF investors.

 

But Pabrai pulling a DaVita-like buying spree has made me think, well, I'll give these guys a chance -- maybe he's talked to these guys and trusts them.   

 

Just a reminder that Pabrai doesn't usually (ever?) talk to management....

 

the ceo of horsehead was this year at the annual Meeting from mohnish in California. so in this case he talks to Management  ;D

[phil_Buffett]

From 2006, but still interesting:

 

Take a look below at this graphic created by Teck-Cominco showing current and future mine supply versus expected demand. This graphic illustrates what is termed the Zinc Supply Gap.

 

http://www.kitcometals.com/images/commmentary/Furse/feb102006_2.gif

 

Source: http://www.kitcometals.com/commentaries/Furse/feb102006.html

 

Anyone have a chart showing for the inflation-adjusted price of zinc?

 

hellsten nice graph ;)

 

so there are good reasons to assume a higher zinc Prince in the future 

[kmukul]

Thanks guys very useful data, however if there is a supply gap as of today how come zinc prices are near their lows.

[yadayada]

isnt that explained by this?

http://www.connemaramc.com/zinc/zinc-fundamentals

 

http://www.bloomberg.com/news/2013-03-13/zinc-s-six-year-glut-is-seen-ending-after-china-curbs.html

 

So basicly the gap isnt nearly as large as some of those pictures show. I supose you could study this, and get a pretty high probability on where zinc will go.

http://www.richriver.bc.ca/attachments/ZINC_PRICES_ARE_GOING_TO_EXPLODE.pdf

 

V interesting, i will study this 8-)

 

Any way to figure out what the mining capacity is per cost of mining? Like what kind of capacity comes online when zinc reaches 1.10$ or 1.50$.

 

What kind of multiple do you put on a company like this? In 2010 the market gave it a multiple of more then 10. If im not mistaken, the production capability of zinc will roughly be 155k tons per annum in 2015 right? Or are there additional facilities coming up. If they are low cost, there is no competition in sight, and with it being extremly unlikely supply wont be tight in the next 5 or so years, it seems you can easily put a 10x multiple on this. in that case in the base case there is still a nice upside, and in the bull case this could be a double or triple?

[AccentricInv]

I've owned Horshead since March of 2009 when I invested at $3. I believe the risk/ reward is as favorible today as it was then.

 

At a current price of $14 I believe they are worth in excess of $20 per share and potentially a lot more. They recycle a hazardous waste produced from steel mini mills called electric arc furnace dust. They are one of the lowest cost producers of zinc in the world and their cost advantage will be even more secure when their new low cost facility is operational next year. They will be the 2nd lowest cost producer in the world behind the Skorpian mine in Australia when the new facility is complete. I view that as a wide moat and strong competitive advantage. They have long term contracts with their feedstock providers and customers as well. The steel mini mill industry which provides the dust they recycle also has long term growth tailwinds. In the next few years EDITDA will grow to $150-$200 million resulting in a EV/EBITDA of 4. FCF will be in excess of $100 million at this point compared to the current market cap of $700 million resulting in a FCF yield of 14%. The replacement value of their facilities has been estimated at over $1 billion prior to the construction of their new $490 million facility.

 

The supply demand situation in zinc is also very interesting. In the next few years there are a few high cost mines closing and very little new capacity coming on board. Demand increases will be driven by continued growth in the housing and automobile market. Although I'm assuming the price of zinc will stay the same as it is today in my analysis, Horsehead has a $25-30 million delta to a $.10 change in zinc prices. In addition, only 70% of their feedstock comes from EAF dust today, if this rises to 100% this would increase operating income by at least $14 million. Again this is not accounted for in my price target but could be additional upside.

 

This is one of th few good ideas I can find today and its worth a least $20. Insiders have been buying as well.

 

Alex

 

Congrats Alex!  Just noticed your ZINC writeup was the weekly pick on that "other" site SZ.  Solid job!

[racemize]

any chance someone could PM me that write-up?  I'd love to read it.

 

Thanks!

[racemize]

Attached is my writeup on Horsehead. I think its worth at least $25 today.

 

Enjoy

 

Alex Bossert

 

Thanks Alex, this is very nice.

 

If you have a chance, do you have any comments for these questions from skanjee (sp?) a while back?

 

Hi Alex,

 

I recently did some work on Horsehead, but I seem to have some trouble to reproduce your figures.

 

The EBITDA for the past several years has averaged almost 40$m. They claim they can get an incremental 90-110$m with the South Carolina plant. So that would be a total EBITDA of say 150$m.

When the plant is up and running, I estimate a net debt of about 400$m, so a total E.V. of 1100$m. That would be an EV/EBITDA of 7,3.

 

Cash flow could indeed be about 100m$. However I would take the convertibles (at 15$) into account for the marketcap. That would give us about 66m shares for a marketcap of 900-1000$m.

 

But I'm not sure if this cash flow is really to be considered "free". This is a very capital intensive business. So the depreciation should be taken into account. In the years since 2004, they invested about 250$m in maintenance (and depreciated only about 125$m). However, the impact of these considerable investments is not really apparent from higher profits or higher cash flows. The impact has of course also been obscured by the commodity prices, but still.

 

I suppose I am to conservative, or maybe I make some reasoning mistakes. If so, can you help me clarify them please?

I wouldn't bet against mr. Pabrai, but I can't seem to find the value at these prices, unless you have strong views on the future of the zinc prices (I don't).

[racemize]

Here is the section on the convertible notes:

 

Convertible Senior Notes

On July 27, 2011, the Company issued $100,000 of 3.80% Convertible Senior Notes due 2017 (the “Convertible Notes”) in a private placement. The Company received proceeds of $100,000 and recognized $3,481 in issuance costs in connection with the offering. The Company used the proceeds from the offering for the initial stages of construction of the new state-of-the-art zinc and diversified metal production facility under construction in Rutherford County, North Carolina (“new zinc facility”) and for general corporate purposes, including working capital needs, investment in business initiatives, capital expenditures and acquisitions.

The Convertible Notes pay interest semi-annually in arrears on July 1 and January 1 of each year, beginning on January 1, 2012, at a rate of 3.80% per annum. The Convertible Notes mature on July 1, 2017. The Convertible Notes are convertible into shares of the Company’s common stock, cash, or a combination of the Company’s common stock and cash, at the Company’s election, at an initial conversion rate of 0.0666667 shares of the Company’s common stock per $1 principal amount of the Convertible Notes (approximately 6,666.67 underlying shares), which is equivalent to an initial conversion price of approximately $15.00 per share of common stock, subject to adjustment in certain circumstances, as defined in the indenture governing the Convertible Notes. The Company has stated that it intends to settle the par value in cash and the conversion spread in either cash, shares or a combination of both.

The Convertible Notes are senior unsecured obligations of the Company and rank senior in right of payment to its future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to its existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of its secured indebtedness, to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and other liabilities (including trade payables) of its subsidiaries.

Holders of the Convertible Notes may convert their Convertible Notes at the applicable conversion rate at any time on or after April 1, 2017 until the close of business on the second business day immediately preceding the maturity date. The Convertible Notes may be converted prior to April 1, 2017 only under certain circumstances. If the Company undergoes a fundamental change, as defined in the indenture governing the Convertible Notes, holders may require the Company to repurchase for cash all or a portion of their notes at a price equal to 100% of the principal amount of the Convertible Notes to be repurchased plus any accrued and unpaid interest up to, but excluding the fundamental change repurchase date. The Company does not have the right to redeem the Convertible Notes prior to the stated maturity date of July 1, 2017 and no sinking fund is provided for the Convertible Notes.

In accordance with the guidance under ASC 815-015 Embedded Derivatives and ASC 470-20 Debt with Conversion and other Options, the Company separately accounted for the liability and equity components of the Convertible Notes to reflect the Company’s nonconvertible borrowing rate when interest cost is recognized in subsequent periods. The fair value of the liability component of the Convertible Notes was calculated to be $78,174 and was determined by measuring the fair value of a similar liability that does not have an associated equity component. The nonconvertible rate was determined by the Company to be 8.5%. The carrying amount of the embedded conversion option (the debt discount) of $21,826 was determined by deducting the fair value of the liability component from the initial proceeds of the Convertible Notes and was recorded, net of deferred taxes of $8,805, as additional paid-in capital. The Company is accreting the long-term debt balance to par value over the term of the bonds using the interest method as required by ASC 835-30 Imputation of Interest.

Costs of $3,481 associated with the issuance were allocated to the liability and equity components in proportion to the allocation of the fair value of the Convertible Notes. As such, $2,721 were accounted for as debt issuance costs attributable to the liability component of the Convertible Notes and were capitalized as a component of other assets. These costs are being amortized to interest expense over the term of the Convertible Notes and are included as a component of interest expense. The Company recognized interest expense of $460 and $192 related to the amortization of debt issuance costs during the years ended December 31, 2012 and 2011, respectively. The remaining issuance costs of $760 were accounted for as equity issuance costs and were recorded in additional-paid in capital.

During the years ended December 31, 2012 and 2011, the Company recognized $6,867 and $2,861, respectively, in interest expense related to the Convertible Notes. Interest expense includes the contractual interest coupon of 3.80% and amortization of the discount on the liability component. This interest expense reflects an effective interest rate of 8.50%.

The carrying amount of the Convertible Notes was $82,476 with an unamortized discount of $17,524 at December 31, 2012. The carrying amount of the Convertible Notes was $79,408 with an unamortized discount of $20,592 at December 31, 2011. The carrying amount of the equity component was $10,204 and $12,879 at December 31, 2012 and 2011, respectively. The accumulated accretion related to the equity component was $2,817 and $846 at December 31, 2012 and 2011, respectively. The fair value of the Convertible Notes was estimated to be approximately $95,000 and $93,000 at December 31, 2012 and 2011, respectively, per quotes obtained from active markets.

[phil_Buffett]

Attached is my writeup on Horsehead. I think its worth at least $25 today.

 

Enjoy

 

Alex Bossert

 

 

great write up Alex!!! thanks for it. iam Long horsehead and also very optimistic about the future for horsehead  :)

[wknecht]

Thanks for the insight Alex, very much appreciated!

 

Small item, and don't mean to nitpick, but I'm curious where are folks seeing $1.05/lb zinc? I've seen that number a few times on the thread, and I think people may be using 2,000 lb/US ton instead of 2,204.62 lb/tonne. The LME website shows official cash of $2,115 per tonne, or $0.95/lb (http://www.lme.com/en-gb/metals/non-ferrous/zinc/).

[vinod1]

Skanjete and Racmize,

 

In regards to replacement value, I spoke to management the other day and they did confirm a replacement value of $1.5 billion.

 

The increasing share count over the years is disappointing. When the cash flows begin coming in from the new facility I hope they will put it to good use buying back stock, dividends etc. I think Skanjete's point about the convertible notes is correct. When I valued the company I did account for them in the enterprise value calculation. Now that Horsehead's stock has increased if you want to assume they all get converted that would make sense. Since the shares are now above $15, assuming all of the convertible debt gets converted this would increase the enterprise value slightly.

 

You are also correct that Horsehead needs to continue to put some capital back into their business for maintenance, upgrades etc. This is something I already took into consideration. Keep in mind their capex has been high in the last few years due to the new facility and also expansion in other areas of their business such as Zochem. So maintenance capex is significantly lower than what they have been spending lately.

 

Finally, I used a zinc price of $.86 when valuing Horsehead. Zinc prices are at $1.05 today. This should generate almost $50 million in additional EBITDA if prices stay the same.

 

Alex

 

Hi Alex,

 

Thanks for sharing the writeup.

 

Looking at the convertible debt, the dilution should be about 6.7 million shares ($100 million debt converted at $15 per share). Given current share count of about 50 million (including about 5.5 million shares issued recently), the total share count should be about 57 million.

 

Do you agree with this estimate or am I missing something?

 

Vinod

[yadayada]

great write up. Only one little thing, is zinc really that cheap historically? it was lower then todays prices before the crazy housing boom. If china's economy gets into a recession, there could be some downside here.

 

And you assume FCF multiple of ~12? Im not sure myself what kind of multiple to put on this. Since its unlikely they will generate losses, and they will be competitive 10 years from now.

[AccentricInv]

Skanjete and Racmize,

 

In regards to replacement value, I spoke to management the other day and they did confirm a replacement value of $1.5 billion.

 

The increasing share count over the years is disappointing. When the cash flows begin coming in from the new facility I hope they will put it to good use buying back stock, dividends etc. I think Skanjete's point about the convertible notes is correct. When I valued the company I did account for them in the enterprise value calculation. Now that Horsehead's stock has increased if you want to assume they all get converted that would make sense. Since the shares are now above $15, assuming all of the convertible debt gets converted this would increase the enterprise value slightly.

 

You are also correct that Horsehead needs to continue to put some capital back into their business for maintenance, upgrades etc. This is something I already took into consideration. Keep in mind their capex has been high in the last few years due to the new facility and also expansion in other areas of their business such as Zochem. So maintenance capex is significantly lower than what they have been spending lately.

 

Finally, I used a zinc price of $.86 when valuing Horsehead. Zinc prices are at $1.05 today. This should generate almost $50 million in additional EBITDA if prices stay the same.

 

Alex

 

Hey Alex, just a quick question.  In your conversation with mgmt, did you ask or did they give an indication for a rough maintenance capex figure?  It's hard to go off the pre-Mooresboro figures since so much has changed since then.

[wknecht]

wknecht you are correct! My oversight. But do keep in mind that I was factoring in $.86/ pound in my analysis. So anything above that is additional upside.

Yep, roger that. Very minor thing given the thesis. Thanks again for the analysis.

[moody202]

Updates on operations

 

http://www.streetinsider.com/Corporate+News/Horsehead+Holding+(ZINC)+Updates+on+Zinc+Production+Transfer+to+N.C.,+Other+Operations/9012407.html

 

[moody202]

Here's a link for checking out Zinc prices!

 

http://www.infomine.com/investment/metal-prices/zinc/

 

 

[Guest hellsten]

Grant's Interest Rate Observer on ZINC:

And we remain bullish, too, on Horsehead Holding Corp. (ZINC on the Nasdaq), a leading American pro- ducer of zinc and zinc oxide and a top recycler of electric arc furnace dust and of nickel-bearing wastes (Grant’s, Dec. 16, 2011). No, it would not be bullish for Horsehead if China went the way of all credit debauched economies, but we are willing to subordinate China in this case to a bigger, more immediate consider- ation. This is the looming completion of Horeshead’s new zinc plant in Ruther- ford County, N.C.

“Management anticipates that the facility, once operational later this year, will generate annual incremental ad- justed EBITDA of approximately $90 million to $110 million,” relates col- league David Peligal. “Considering that Horsehead delivered $40.7 million of adjusted EBITDA in 2012, down from $63.3 million in 2011, you realize the im- portance of this project to the company’s fortunes. To use an overworked word, it will be transformational.

“Let’s assume, not unreasonably,” Peligal goes on, “that Horsehead can generate $150 million of EBITDA. Jotting on the back of the envelope, subtract $12 million for maintenance cap-ex, $25 million for interest expense

and $35 million for taxes. The balance is roughly $78 million, and the company has less than 50 million shares outstand- ing. It’s not hard to see them generating $1.56 a share of free cash flow in the not- so-distant future. Remember, the stock trades at $10.65 today. If there’s infla- tion, that’s just a bonus. If China blows up, that would be a negative.

“At year-end,” Peligal closes, “the balance sheet showed $244.1 million cash and equivalents against $263.3 mil- lion of long-term debt. In July, manage- ment completed a private placement of $175 million of five-year notes at a yield of 10.5%. Why such a high rate? Robert Scherich, the Horsehead CFO, told me in November that his company is too small to secure one of those tiny little interest rates. ‘Size matters,’ he said. ‘We’re investing in a project that ap- proximates our current market cap. As a relatively small company, when you step out and get ratings for the first time, about 25% of the rating is based on the size of the company [Moody’s rates it B2]. That’s why, strategically, we have to grow over time.’”

 

http://www.grantspub.com/mygrants/Viewarticle.cfm?aid=4875

[nikhil25]

Horsehead Holding Corp. Price Target Raised to $20.00 at FBR Capital Markets

http://www.wkrb13.com/markets/243996/horsehead-holding-corp-price-target-raised-to-20-00-at-fbr-capital-markets-zinc/

[nikhil25]

Zinc or Swim: Do Base Metals Have a Future?

http://jutiagroup.com/20140107-zinc-or-swim-do-base-metals-have-a-future/

 

TMR: Let’s look at zinc, which is a metal market that you have studied extensively. What are the commercial applications of zinc?

JG: About 50% of the zinc market is used for galvanizing steel as anti-rust protection for car manufacturing and construction. The biggest buyers are China at 45% and Europe at 20%.

 

TMR: What’s the global supply situation?

 

“Even a small increase in the price of zinc will generate a big increase in revenue for producers.”

JG: The market in the Western world has been in a supply deficit for quite some time, and now, for the first time, it is in a global deficit. And the deficit will only get bigger. The zinc market is quite different from the copper market because about 40% of its production comes from junior miners, whereas in the copper space, juniors only account for about 7% of production. As the big zinc ore bodies are tapped out and the large mines close, they will continue to be replaced by smaller zinc operations. Brunswick was the first to close, and Century, Skorpion and a whole host of other mines are following suit.

 

TMR: You have talked about the large zinc mines shutting down, which should drive up prices. Can you expand on that scenario?

JG: The big zinc ore bodies are near an end and there is no replacement on the horizon for two reasons: 1) There are no more big ore bodies available. 2) There is no serious exploration for zinc. The copper business faces the same dynamic of gradual diminishment of raw material. Interestingly, as Brunswick and Century and Skorpion shut down their zinc operations, the sector has been freed up to bring on smaller-capacity mines, which helps the supply situation. And there is undeveloped supply capacity in China. But none of these potential developments can replace the magnitude of what we are losing by way of the big ore bodies going extinct.

 

TMR: Does the downward trend in terms of supply mean that the zinc market is not cyclical?

JG: All commodity markets have long-term cycles. But right now we are dealing with a special zone of the long-term zinc cycle as the big ore bodies close one after the other and are not replaced. This is a first for the zinc market, even though it was not unforeseen.

 

TMR: So what features can make the changing zinc market attractive to investors?

JG: Zinc equities are leveraged to the commodity, and there are not many equities left to buy on the TSX. But it is important to look at the zinc cost curve, which is very flat compared to the copper cost curve. As the zinc mine shutdowns cause supply limitations, and warehouse inventories start to peter out, market prices will have to rise. And due to the cost curve, even a small increase in the price of zinc will generate a big increase in revenue for producers.