ZINC - Horsehead Holding Corp

[stahleyp]

He makes a comment about selling the stock for tax loss reasons if he didn't have to disclose it... He then assumes he wouldn't have gotten back in due to their financial situation.  How would he know that?  Or,  is he trying to make excuses?

 

also,  in his videos he consistently talks about his track record averages nearly  26%.  It's not anywhere close to that. Where does he come up with that number?

 

I enjoy his interviews. It's always bothered me though that he wouldn't release his letters that show his performance,  but he had no problems giving a ton of speeches.

[AzCactus]

Also all the people bashing pabrai , do u hold guy spier in the same light ?

 

I think there are two issues here:

1. Guy spier didn't have a position anywhere near as large as Mohnish.

2. I can't recall him describing investing as periodically checking 13fs and spending the rest of the time on the beach.

 

 

[hobbit]

Also all the people bashing pabrai , do u hold guy spier in the same light ?

 

I think there are two issues here:

1. Guy spier didn't have a position anywhere near as large as Mohnish.

2. I can't recall him describing investing as periodically checking 13fs and spending the rest of the time on the beach.

 

may be u should read his book "the education of a value investor" and see what he has to say about pabrai

[AzCactus]

Also all the people bashing pabrai , do u hold guy spier in the same light ?

 

I think there are two issues here:

1. Guy spier didn't have a position anywhere near as large as Mohnish.

2. I can't recall him describing investing as periodically checking 13fs and spending the rest of the time on the beach.

 

may be u should read his book "the education of a value investor" and see what he has to say about pabrai

 

Thank you I will keep that in mind

[roughlyright]

Does anyone know how much Pabrai put into this position? I am guessing it is 100 million, but hard to say because he has been buying over several years.

[intothebreach]

With the equity looking like it will need a Hail Mary to be worth anything, for those still holding and wondering what to do, the best advice I've seen on unrealized losses is this: based on what you currently know, if you were not currently invested, would you commit money here? If not, you have your answer.

 

Personally, I would sell and in doing so MAY end up missing a miraculous rescue but WOULD save whatever funds I had left (to push the football analogy perhaps one step too far, the Cardinals-Packers game yesterday showed that sometimes even a successful Hail Mary is not enough...)

 

I've been there before and it IS painful. The only thing that can make this worthwhile over time, is picking up a valuable lesson or two that end up eventually making/saving more than what you lost here. In that spirit, I offer what follows in case it may be useful to a few people here (my way of trying to give back, as I never come up with ideas for new threads).

 

Eric asked an interesting question a while ago: how do you successfully measure a value investor? I think it actually goes back to Graham that to be an investor (as opposed to a speculator), one has to be first and foremost concerned about preservation of capital, and only then look at maximizing returns. The usual method consists of staying within one's circle of competence and ensuring an adequate margin of safety (or alternatively, an ever-larger margin of safety when you venture outside that circle of competence). So I would venture: looking at compounded returns over time AND the preservation of capital in individual investing decisions. Thus, one potential learning here is to look at protection of capital before returns.

 

Interestingly enough, the first couple of pages of the current thread covered pretty much all the key risks here: commodity exposure, aggressive and opportunistic management, risk of engineering delays, etc.)

 

There is certainly some lessons related to cloning to be learned. Not that cloning is necessarily bad in itself. At a minimum it can be a very valuable way to generate new ideas. But if cloning is used to "outsource" analysis of a potential/current investment, the investor doing the outsourcing is better be intimately familiar and comfortable with the analysis process of the investor being cloned. In the case of Mr. Pabrai, even though I'm not extremely knowledgeable about his process or performance, I would venture that having positions go down to zero is actually in line with his previous track record/modus operandi. And that investors that blame him should at least also question their decision to rely on him in the first place.

 

(To me, the weirdest observation is, given that Mr. Pabrai's circle of competency seems to be cloning ideas from other well-known investors, there seems to be a disconnect between his ZINC's position sizing and the fact that it is a rare original idea for him)

 

I've stayed away from ZINC not because I ever though it would end up here, but because commodities generally scare me, are outside my circle of competence, and even though the potential upside was apparent, I could not understand the margin of safety, nor handicap the chance of engineering success. However, I've done pretty much the same thing with WaMu during the financial crisis, outsourcing my analysis to Nygren and assuming that his position sizing was indicative that he had done his due diligence (to compound a bad situation, I remember reading a very good article on Bloomberg that laid out very convincingly why WaMu would have to chop its dividend, and yet failed to act).

 

Even though this low 5-figure loss was very painful back then, it turned out to have been a very valuable lesson for me since then. In hindsight, the very best decisions I've made in deciding to invest on my own were, first to measure myself against a benchmark to keep myself honest, and even better: to making sure every loss would at least yield a learning I could apply. Due to this, my process has only gotten better since then (thanks in great part to fellow CoBF posters and Sanjeev, not that I'm done learning).

 

Hoping this may prove useful to some since I'm pretty sure it will not lessen the pain. All the best, and for those that decide to remain invested, I do wish you a ZINC Hail Mary!

[arcube]

With the equity looking like it will need a Hail Mary to be worth anything, for those still holding and wondering what to do, the best advice I've seen on unrealized losses is this: based on what you currently know, if you were not currently invested, would you commit money here? If not, you have your answer.

 

Personally, I would sell and in doing so MAY end up missing a miraculous rescue but WOULD save whatever funds I had left (to push the football analogy perhaps one step too far, the Cardinals-Packers game yesterday showed that sometimes even a successful Hail Mary is not enough...)

 

I've been there before and it IS painful. The only thing that can make this worthwhile over time, is picking up a valuable lesson or two that end up eventually making/saving more than what you lost here. In that spirit, I offer what follows in case it may be useful to a few people here (my way of trying to give back, as I never come up with ideas for new threads).

 

Eric asked an interesting question a while ago: how do you successfully measure a value investor? I think it actually goes back to Graham that to be an investor (as opposed to a speculator), one has to be first and foremost concerned about preservation of capital, and only then look at maximizing returns. The usual method consists of staying within one's circle of competence and ensuring an adequate margin of safety (or alternatively, an ever-larger margin of safety when you venture outside that circle of competence). So I would venture: looking at compounded returns over time AND the preservation of capital in individual investing decisions. Thus, one potential learning here is to look at protection of capital before returns.

 

Interestingly enough, the first couple of pages of the current thread covered pretty much all the key risks here: commodity exposure, aggressive and opportunistic management, risk of engineering delays, etc.)

 

There is certainly some lessons related to cloning to be learned. Not that cloning is necessarily bad in itself. At a minimum it can be a very valuable way to generate new ideas. But if cloning is used to "outsource" analysis of a potential/current investment, the investor doing the outsourcing is better be intimately familiar and comfortable with the analysis process of the investor being cloned. In the case of Mr. Pabrai, even though I'm not extremely knowledgeable about his process or performance, I would venture that having positions go down to zero is actually in line with his previous track record/modus operandi. And that investors that blame him should at least also question their decision to rely on him in the first place.

 

(To me, the weirdest observation is, given that Mr. Pabrai's circle of competency seems to be cloning ideas from other well-known investors, there seems to be a disconnect between his ZINC's position sizing and the fact that it is a rare original idea for him)

 

I've stayed away from ZINC not because I ever though it would end up here, but because commodities generally scare me, are outside my circle of competence, and even though the potential upside was apparent, I could not understand the margin of safety, nor handicap the chance of engineering success. However, I've done pretty much the same thing with WaMu during the financial crisis, outsourcing my analysis to Nygren and assuming that his position sizing was indicative that he had done his due diligence (to compound a bad situation, I remember reading a very good article on Bloomberg that laid out very convincingly why WaMu would have to chop its dividend, and yet failed to act).

 

Even though this low 5-figure loss was very painful back then, it turned out to have been a very valuable lesson for me since then. In hindsight, the very best decisions I've made in deciding to invest on my own were, first to measure myself against a benchmark to keep myself honest, and even better: to making sure every loss would at least yield a learning I could apply. Due to this, my process has only gotten better since then (thanks in great part to fellow CoBF posters and Sanjeev, not that I'm done learning).

 

Hoping this may prove useful to some since I'm pretty sure it will not lessen the pain. All the best, and for those that decide to remain invested, I do wish you a ZINC Hail Mary!

 

+1 Extra +1

 

Thank you for sharing. Great post.

 

[BG2008]

I don't know Pabrai and I don't have a vested interested in how well he does.  I feel a need to speak about an important value investing principle, it's called "Do Your Own Work."  There is nothing that irks me more when I talk with an investor and their response is "Well, so and so famous value investor bought it and they have a reputation for performing thorough analysis.  Despite not fully understanding the business, it's safe because the value investor bought it."  Here are my rants. 

 

1) No one should outsource the analysis to some other famous investor.  There is nothing wrong with cloning people, but you have to do the work yourself and understand the underlining business and its risk.     

 

2) You need to learn to handicap gurus.  Even Buffet makes mistakes from time to time.  Buffet has amazing track record with branded consumer products, he understands insurance, derivatives, etc.  His track record with airlines, oil and gas, retail (Tesco), metals (Posco) are less stellar.  Bruce Berkowitz knows his financials.  You need to know your guru's strength and weaknesses.  Investing is similar to poker in that over time you need to analyze each player's tendencies.  If Buffet bought a branded consumer stable company that trades at 5x cashflow, I will likely buy it blindly.  On the other hand, I never even bothered to look into why Buffet invested in Posco. 

 

3) Unless you're a LP in Pabrai's fund, he owe you nothing!! He's done a wonderful job by narrowing a list of thousands of names down to a dozen.  That's a very valuable free service for you and me.  I think LPs in his fund has a right to be angry.  Pabrai did not pull an Alliance Healthcare like Oaktree.  Pabrai owes you and me nothing.  We cloned him and it didn't work out.  He didn't put a gun to any of our heads and say "buy or I'll blow your head off."  We are all adults and need to be responsible for our actions.   

 

4) Learn to be creative with assessing risk. In the last few years, I got a lot of pushback with regards to "how creative I am when it comes to imagining how companies can fail."  A lot of the feedback centers around that they consider to be 3-5 Sigma events.  What are the chance of China's GDP slows down leading to low metal prices, coupled with a capital market that is not accommodating, and somehow the plant fails to ramp up despite what seems to be easily solvable problems, and somehow the dollars is extremely strong further pressuring commodity prices.  Well, bad events tends to cluster together and you're investing in a commodity business.  In the case of Horsehead, it's readily apparent that the debt load, cashburn and commodity exposure can potentially result in distress.  You need to treat ZINC like an option rather than a sustainable business. 

 

5) When the Chinese RTO blew up.  A lot of people said "The Chinese are disloyal, The Chinese are out to get you, The Chinese bla bla bla."  Investing is inherently risky.  It's your job to figure out the truth.  I guarantee that you will grow as a value investor by leaps and bounds when you change your thought process from "I got screwed" to "I messed up, how do I avoid this in the future".  All of this ranting leaves me to the following:

 

The only person that you can blame is the one looking back at you in the mirror.   

 

 

[walt373]

Excellent points by intothebreach and BG2008. 2015 was a terrible year for cloning as many other high-profile managers like Ackman, Einhorn, et al got crushed. I believe the historical returns for this strategy are still market-beating so it may be wise to not learn too much from one year, as every strategy will have down years. Personally, I am not a subscriber to cloning but I feel like the best time to employ any strategy is after a very bad year and people give up on it. Where I think some went wrong was position sizing and averaging down. Just because Pabrai thought it was a good idea does not mean you should. You know much less than him about the investment and thus your conviction level should be much lower as well. You can steal the investment idea but not the conviction.

[hobbit]

Just an interesting observation from 13Fs on ZINC: Largest amount of sale in Q315 Lazard Asset Management (sold $8.345M principal amount of 7/1/17 notes)

 

Restructuring advisor for ZINC: Lazard

 

I guess they saw this coming based on experience with the company. Doesn't seem like a  coincidence to me.

 

Another concentrated investor with sizable bet on the common:

GREYWOLF CAPITAL MANAGEMENT LP HTTP://WWW.GREYWOLFCAPITAL.COM

 

I do not know if there is a chinese wall between their asset management and restructuring arms but it could have been done to prevent a conflict of interest /insider trading depending on when the management contacting them to look into "options".

[tylerdurden]

Just an interesting observation from 13Fs on ZINC: Largest amount of sale in Q315 Lazard Asset Management (sold $8.345M principal amount of 7/1/17 notes)

 

Restructuring advisor for ZINC: Lazard

 

I guess they saw this coming based on experience with the company. Doesn't seem like a  coincidence to me.

 

Another concentrated investor with sizable bet on the common:

GREYWOLF CAPITAL MANAGEMENT LP HTTP://WWW.GREYWOLFCAPITAL.COM

 

I do not know if there is a chinese wall between their asset management and restructuring arms but it could have been done to prevent a conflict of interest /insider trading depending on when the management contacting them to look into "options".

 

You might be right; you'd expect a chinese wall of course in between those arms...

 

For interested, there is a case study from HL which shows how the negotiation could develop between parties under distressed restructuring cases:

http://www.hl.com/library/bsttcacs.pdf

 

Attached PPT seems useful as well.

 

I am trying to understand whether ZINC Management is negotiating with Convertible Holders only at this point or all bondholders. If it is Convertible holders only they might have a little bit more leverage perhaps. In any case, this doesn't look good of course but I wish we had more info in order to make some decisions. This is pretty unique distressed scenario as well with the dysfunctional he plant investment. Somebody will have to make this plant work or every stakeholder is screwed. Would they give more time to Management so they can demonstrate that it could work? Who f****in knows? Going to Ch 11 seems like a significant threat to creditors but what is Management incentive at this point? No easy answers here...

distress3-3.ppt

[walt373]

I think secured creditors would prefer Chapter 11 as it will probably give them ownership of almost everything, as well as save some interest payments to the unsecured debt. They can still keep management and fix the plant after filing.

[tylerdurden]

I would think secured creditors would prefer Chapter 11 as it will give them ownership over almost everything, as well as save some interest payments to the unsecured debt. They can still keep management and fix the plant after filing.

 

It is actually the other way around if you look into the PPT pages 9-13 particularly. In any scenario, this is not straightforward. HL case study also shows what Management could do under a Ch 11 filing.

[walt373]

Unsecured creditors would certainly like to stay out of bankruptcy. They'd rather just get paid a coupon. But secured creditors view their investment as impaired (as evidenced by the market price of 56). This means every coupon paid is coming out of secured creditors' recovery, so they may prefer bankruptcy to losing more value over time, especially if they think it will just happen down the road anyway.

 

Out of court restructuring is anything but a sure thing and you have issues like holdouts that will either prevent it from happening or drain more value. So after accounting for the chance of failure and value lost, it may just be cheaper to file early. In any case, something like an exchange offer takes time. They won't be able to announce one and conclude it by the end of the grace period.

 

And if ZINC does manage a recovery in time, a lot of that upside would be lost to the unsecured debt and equity if they are allowed to stick around, upside that would've gone to secured creditors had they filed early and received ownership of the company.

 

I think the recent Arch Coal case is instructive. They tried to do an exchange, extending it multiple times. It was unsuccessful and eventually abandoned. They missed a $90m interest payment to unsecured debt on 12/15, then filed for bankruptcy near the end of the grace period last week, despite having $600m in cash.

[tylerdurden]

Unsecured creditors would certainly like to stay out of bankruptcy. They'd rather just get paid a coupon. But secured creditors view their investment as impaired (as evidenced by market price of 56). This means every coupon paid is coming out of secured creditors' recovery, so they may prefer bankruptcy to losing more value over time, especially if they think it will just happen down the road anyway.

 

Out of court restructuring is anything but a sure thing and you have issues like holdouts that will either prevent it from happening or drain more value. So after accounting for the chance of failure and value lost, it may just be cheaper to file early. In any case, something like an exchange offer takes time. They won't be able to announce one and conclude it by the end of the grace period.

 

And if ZINC does manage a recovery in time, a lot of that upside would be lost to the unsecured debt and equity if they are allowed to stick around, upside that would've gone to secured creditors had they filed early and received ownership of the company.

 

I think the recent Arch Coal case is instructive. They tried to do an exchange, extending it multiple times. Eventually it was abandoned. They missed an $90m interest payment on 12/15 and filed for bankruptcy during the last week of their grace period despite having $600m in cash.

 

I think it is impossible to know how events would unfold at this point. I am not a distressed restructuring expert but it seems there are very significant costs associated with going to Ch 11 so that should have some value in secured investors eyes as well. They might just wait (especially if they think there is significant chance the ramp up will show success soon) a couple of more months/quarters rather than swallowing all the costs associated with Ch 11. Whether they would be so anxious to become shareholders of ZINC that I don't know.

 

I think what's happening with ramp up as we speak and the overall market environment including coming indicators from China (zinc prices) would have an impact on how this restructuring would unfold at the end. On those factors especially in the short run no one can know other than management in terms of ramp up and chinese communist party in terms of the GDP figures :-)

 

Arch Coal seems like interesting example but I think different as well. To me a zinc producer who is trying to ramp up a huge plant is different than a coal company who is operating in a doomed industry are different. I definitely do not think zinc and coal markets would have same supply/demand characteristics going forward. Again who knows how the different stakeholders of ZINC think on this matter... 

[RobinMasters]

Just wanted to throw out an observation on ZINC’s debt situation that I don’t think has been brought up yet in the thread. If you look in the credit agreement for the Macquarie revolver in the July 7, 2015 8-K there’s a covenant requiring the company to hit $21mm in adj. EBITDA for the trailing 6 month period ending July 30, 2016. It’s a default event if they don’t. I read this as Macquarie basically putting a timer on Mooresboro. Not sure what this means for the possibility of a distressed restructuring (which of course could feature some kind of covenant relief), but it’s one more factor to consider.

[str8shot]

Also all the people bashing pabrai , do u hold guy spier in the same light ?

 

I think there are two issues here:

1. Guy spier didn't have a position anywhere near as large as Mohnish.

2. I can't recall him describing investing as periodically checking 13fs and spending the rest of the time on the beach.

 

may be u should read his book "the education of a value investor" and see what he has to say about pabrai

 

Spier and Pabrai are friends and mutual admirers, where Spier defers to Pabrai for his brilliance. Spier is far more humble IMO.

[str8shot]

Does anyone know how much Pabrai put into this position? I am guessing it is 100 million, but hard to say because he has been buying over several years.

 

Pabrai owned 6.3m shares in Pabrai Funds at a cost of $62M and another 2m shares in Dhando at a cost of around $15M. 

[str8shot]

Thanks to all who have share their perspectives, advice, and so on...

 

As someone who made too concentrated a bet on ZINC, and took Pabrai's 2m share purchase around $7.50 in July/August as a cue that Horsehead was almost certain to get over the hump, I can only point the finger at me. The irony for me is that I had 5 great years through 2014 averaging over 30% annually picking my own stocks, and decided in late 2014 to "retire" from my own stock picking and to instead clone one or more good value investors who HAD to be better than me because they had a track record and it was their full time gig. The road to hell is paved with good intentions :)

 

I can wish that Pabrai did this or that differently, but the reality is that I made the choice to invest in ZINC originally and then compounded it by buying more when it fell to single digits, having re-evaluated the prospects at that time. I, like Pabrai and others, underestimated the risk. I am disappointed in Pabrai, whose Pabrai Funds, it turns out, have lagged the market the past five years, but I am even more disappointed in myself. Regardless of what Pabrai was doing, the only person deciding where to invest my money was me. Period.

 

I did not truly respect rule #1 of investing - don't lose your principal. This does not mean that you can't make a concentrated bet - Buffett in the early days put 40-50% of his worth on a select bet - the difference is that he fully understood the downside such that he wasn't taking risk, and instead of losing his shirt he made a lot of money. He was still honoring rule #1.

 

Buffett has said that active, concentrated investing is only risky if you don't know what you're doing. Otherwise invest in the index.

 

Horsehead never qualified as a good business at a fair price. And management overlooked opportunities to raise buffer capital in the first half of 2015 because they apparently truly believed that they’d ramp up to a 75% plus utilization by the end of Q1, then Q2, then Q3, then oh sh*t..

 

I have learned a great lesson and unfortunately it is by far the most expensive one of my investing career. Live and learn, and as others have said, do your own work to produce a rational case to invest or not, and on top of that, trust your gut if something just doesn’t feel right. During 2015 my gut was sending me some distress signals, and I didn't honor them.

 

Now I have to decide whether to sell what is now a penny stock that is almost certainly going to $0, or hold it on the off chance a miracle happens since 95% of the damage has already been done.

[BG2008]

For those that still own shares in ZINC and still want to participate but want to protect your principal as well.  I recommend that you sell your shares and buy the $0.50 Jun 2016 calls instead. Those calls have very little premium.  Frankly, the company will likely file or hit a homerun by Jun 2016.  The volume is there.

 

If you don't wish to own a position anymore, then you should sell out entirely.  But if you're unsure, my best advice is to sell shares and buy the calls.  You should probably swap in parts.  Meaning, you should sell shares and buy calls in 5-10% increments.  Don't sell all your shares at once.  If the shares go to $2, you lose out on 5 cents. 

 

No position in this name anymore.  But for anyone looking to "have a position and protect further downside", I highly recommend this strategy.     

[Nicholas]

I'm just going to have to crack this gag (i'm an investor in zinc as well)...Has anyone heard whats going on from the Horse's mouth ? (Boom boom).

[Haasje]

Well, I've been a Horsehead advocate pretty much all the way down so take my opinion fwiw:

 

I don't understand how they don't have the money to make this interest payment. It depends on whether or not they used the ATM facility somewhat. Is it certain they did not tap it? Because management said they would issue a statement when they tapped it for a significant amount:

 

Q: Okay. Lastly just on financing a bit. Tell us how much, if any, you raise for the ATM thus far and any additional color you might be willing to share on terms of additional supplementary financing, what you're kind of considering or looking at this stage?

 

Bob Scherich:

 

Yes, we won't be reporting anything under the ATM until our next quarterly reporting or unless we've a significant transaction under it which we have. And so, we don't plan to report on a day-to-day basis on that. It is a flexible tool. It simply gives us access to capital if we find that we need it. Our liquidity picture continues to be good here through the balance of the year as we expected.

 

They had $118 million in liquidity and zinc hedges in place:

 

We had zinc hedge positions for the third quarter of 2015 at an average price of $1.07 per pound and currently have hedge positions for the fourth quarter of 2015 also at $1.07 per pound on more than half of our expected zinc shipments. We also secured hedge positions for the first quarter of 2016 at $0.83 per pound on one-fourth of our expected exposure to the zinc price.

 

As for other alternatives we're, as I mentioned in my comments, we're looking at the kind of the broad spectrum of across the board of capital alternatives and so we'll keep those kind of identified and in various stages of development just in the event that we need to raise capital. So wouldn't be announcing I mean as we announce something obviously we'll let you know, but can't speculate on anything right now.

 

Furthermore Horsehead has a:

 

$250 mil tax credit

$110 mil of stand alone assets in Inmetco and Zochem

$xxx mil brand new plant

 

We can just put a big fat zero on the brand new plant but I'm not convinced that's the most accurate valuation. If you re-read the transcript and pay specific attention to what Greg Belland is saying(this is just one example):

 

Yes, sure Paul, I can, please recognize I've only been for a couple of weeks and certainly would give some opinion on that. First off let me say that my opinion after being here for a couple of weeks on the core of the operations so that's the leach SX electrowinning or cellhouse, it's a solid core of the operation here. There is no fundamental flaws; there is nothing that I see as being impossible to resolve here. We certainly just need to improve some of the deficiencies that we are experiencing but there is absolutely nothing that we should not be able to resolve here and it's a very solid core of the operation. There certain pieces of equipment that we need to upgrade in order to improve the reliability and we touched on some of them already.

 

As far as your question on startup and ramp up rates, I've been involved in at least six or seven startups over the years and there is a wide range in the time, it can take to get up to full capacity. For a site like this, which I've been involved in, in a couple of different operations this typically can take as much as a couple or more years before you get up to design capacity. This is a Greenfield operation with different feet at the front end. But again I don't see anything that is preventing us from getting to the design rates as expected and it's just going to take a little bit of time to resolve the deficiencies and some capital to invest in whatever those deficiencies are.

 

and then review the latest update:

 

JANUARY 4, 2016

December Mooresboro Update

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.

 

On the debt vs equity debate:

 

I'm understanding from various people that the debt appears to be undervalued compared to the equity? I don't know too much about debt myself although I'm trying to learn more. Is it possible the debt is a victim of the distressed debt rout that is taking place? Horsehead isn't included in any ETF so I don't think its equity is propped up by lots of "dumb money".  If the debt fell victim to the distressed debt rout it may be a good place to go but one additional point I'd like to make is that sometimes people referred to it as having the same upside. That isn't the case imo. It may have a TON of upside but it doesn't have the same upside. Much of the value of horsehead equity lies it the next 20 years of production. Not in its current assets. Right now the value of its long term competitive advantage is out of the picture because it may never be realized but if they survive the current crunch a lot of value comes from there.

 

[tylerdurden]

For those that still own shares in ZINC and still want to participate but want to protect your principal as well.  I recommend that you sell your shares and buy the $0.50 Jun 2016 calls instead. Those calls have very little premium.  Frankly, the company will likely file or hit a homerun by Jun 2016.  The volume is there.

 

If you don't wish to own a position anymore, then you should sell out entirely.  But if you're unsure, my best advice is to sell shares and buy the calls.  You should probably swap in parts.  Meaning, you should sell shares and buy calls in 5-10% increments.  Don't sell all your shares at once.  If the shares go to $2, you lose out on 5 cents. 

 

No position in this name anymore.  But for anyone looking to "have a position and protect further downside", I highly recommend this strategy.   

 

Thanks for the valuable advice! I agree that the upside would be higher with the options and downside is very similar. If this ends up in Ch 11 or something you loose the extra premium on the options and if the stock would still trade at some real zombie value like Arch Coal does now in that scenario, you loose that as well. It shouldn't make a diffeence at this point I guess.

[tylerdurden]

To Haasje,

 

My understanding is that they have the cash to make the coupon payment but intentionally delayed under grace period so they can start negotiating with the bondholders. It seems they started the negotiations while they still have some cash left in order to have more leverage in those discussions. How much cash they have? I have no clue of course.

 

I believe they saw this coming in December so in a final attempt they shut down the plant for 10 days made some repairs while replacing the anodes. Their hope should be demonstrating real improvement in January while negotiating with the bondholders. It comes down to that final showdown in January I guess and no way we would know how that's going now... If this damn oil stops sinking for a while that is going to help with Zinc prices and overall sentiment as well but those are all out of ZINC's control obviously...

[RadMan24]

Re: Post from Walt about Senior Notes:

 

Be careful assuming the senior notes get everything, they don't. The credit revolver is secured by inventory and receivables. Senior notes are second lien to those assets. Hence, if the company increases its revolver, senior loans are "not as secured" in a Chapter 11. This ultimately brings down the value for the unsecured bonds, which is why they are probably around 7.