ZINC - Horsehead Holding Corp

[xtreeq]

Horsehead Holding Corp. (Nasdaq:ZINC) announced today that it and certain of its subsidiaries (collectively, the “Company”) have filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”).

http://www.businesswire.com/news/home/20160202005804/en/Horsehead-Holding-Corp.-Subsidiaries-Commence-Voluntary-Restructuring

 

 

[str8shot]

Horsehead Holding Corp. (Nasdaq:ZINC) announced today that it and certain of its subsidiaries (collectively, the “Company”) have filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”).

http://www.businesswire.com/news/home/20160202005804/en/Horsehead-Holding-Corp.-Subsidiaries-Commence-Voluntary-Restructuring

 

And at last the fat lady sings. A profound lesson learned for me on this one. And I will continue to observe the unfolding..

[Txvestor]

Agree. Hard lessons learned, including about cloning.

I have to say however that 80% of the blame for this rests with management, and how they

utterly screwed up the transition to mooresboro without adequate protection.

The commodity crash is at most 20% of the cause. Even if Zinc prices stayed at the average of the

last 5yrs, I think the outcome would have been no different, perhaps the timing might have been but thats about it. Anyone realistically beleive another 6months and these clowns would have had a functional plant?

The truth is poor bridge financing and cash management, and incomprehensibly incompetent plant design, construction and ramp up were the predominant 'cause of death'. I'd be interested to see who in their right mind would now hand them another 90M in BK. Surely any funding has to be contingent upon a change of this management. And it would then be interesting to see where this POS management resurfaces in the corporate world. Cause that would be a consideration for prime short candidate. Lol.

One of the things that struck me about Pabrai in all lf this is, how magnanimous he remained toward management to the very end. Not sure if that's personality or something else.

[rishig]

Agree. Hard lessons learned, including about cloning.

I have to say however that 80% of the blame for this rests with management, and how they

utterly screwed up the transition to mooresboro without adequate protection.

The commodity crash is at most 20% of the cause. Even if Zinc prices stayed at the average of the

last 5yrs, I think the outcome would have been no different, perhaps the timing might have been but thats about it. Anyone realistically beleive another 6months and these clowns would have had a functional plant?

The truth is poor bridge financing and cash management, and incomprehensibly incompetent plant design, construction and ramp up were the predominant 'cause of death'. I'd be interested to see who in their right mind would now hand them another 90M in BK. Surely any funding has to be contingent upon a change of this management. And it would then be interesting to see where this POS management resurfaces in the corporate world. Cause that would be a consideration for prime short candidate. Lol.

One of the things that struck me about Pabrai in all lf this is, how magnanimous he remained toward management to the very end. Not sure if that's personality or something else.

 

They have already lined up "debtor in possession" financing as per the court docket. The DIB financing is super senior - above secured debt.

 

My best guess is that unsecured will get little equity (just so they don't hold out) and secured and dip get large portion of equity post bk. And if there is any doubt about the plant going operational, the debtholders will ask for an orderly sale of the assets to the court.

[Steven B]

Do I need PACER to see the docket?

[rishig]

Agree. Hard lessons learned, including about cloning.

I have to say however that 80% of the blame for this rests with management, and how they

utterly screwed up the transition to mooresboro without adequate protection.

The commodity crash is at most 20% of the cause. Even if Zinc prices stayed at the average of the

last 5yrs, I think the outcome would have been no different, perhaps the timing might have been but thats about it. Anyone realistically beleive another 6months and these clowns would have had a functional plant?

The truth is poor bridge financing and cash management, and incomprehensibly incompetent plant design, construction and ramp up were the predominant 'cause of death'. I'd be interested to see who in their right mind would now hand them another 90M in BK. Surely any funding has to be contingent upon a change of this management. And it would then be interesting to see where this POS management resurfaces in the corporate world. Cause that would be a consideration for prime short candidate. Lol.

One of the things that struck me about Pabrai in all lf this is, how magnanimous he remained toward management to the very end. Not sure if that's personality or something else.

 

They have already lined up "debtor in possession" financing as per the court docket. The DIB financing is super senior - above secured debt.

 

My best guess is that unsecured will get little equity (just so they don't hold out) and secured and dip get large portion of equity post bk. And if there is any doubt about the plant going operational, the debtholders will ask for an orderly sale of the assets to the court.

 

Actually, I take back my comment on unsecured. Sounds like the unsecured is held by the same entity as the secured. The reorg plan is due in 40 days (after which management loses control of the plan) and 130 days to get out of bankruptcy after that.

http://www.wsj.com/articles/horsehead-holding-seeks-bankruptcy-protection-1454417002

[walt373]

I think txvestor is right regarding the blame mostly belonging to management. See this link for an idea of how completely fubar the situation was at the plant: http://www.post-gazette.com/business/pittsburgh-company-news/2016/02/01/Len-Boselovic-s-Heard-off-the-Street-Horsehead-Holding-barely-holding-on-by-a-thread/stories/201601310257

[rishig]

Do I need PACER to see the docket?

 

http://dm.epiq11.com/HOC/Docket

[rishig]

CEO's affidavit:

http://dm.epiq11.com/HOC/Document/GetDocument/2721237

 

Note the CEO highlights in the affidavit:

"The Debtors presently anticipate that approximately 12 to 18 months may be required to implement engineering and operational repairs or modifications necessary to bring the Mooresboro Facility up to full capacity."

 

I doubt that the debt holders are going to pour more liquidity down into this plant. Seems like an orderly sale of assets is the most likely outcome in my opinion. In that case, I doubt the unsecured will recover anything.

[kab60]

Sorry to the folks who lost a bunch of money. I think one takeaway from this is how important it is not to get married to ones ideas. I sold in the fall 2015 around 9-10$ when management kept sucking and I started to get really concerned about liquidity. I wasn't expecting BK less than six months later but I was "awakened" by what someone else in this thread six months earlier when he (can't remember who but thanks!) pointed out that the equity raise last January was pretty easy to see coming. I didn't see that coming, but last fall I could see the Company was in the same liquidity spot but without the same amount of options. My point is that I sold my position with two click on a mouse and that probably hadn't happened if I had sat down with management, invited them out for lunch or made a big writeup where I had vigorously defended the investment. No comparison otherwise but I think some of the arguments in the VRX are a bit troubling as well, because people seems to get very attached to their ideas and are unwilling to adress new information. Obviously it takes confidence and a bit of contrarianism to make outsized returns but it's not enough to disagree with everyone else - one also has to be right.

[kwilde]

Would like to share my experience in hopes that others don't make the same mistakes.  This was by far my worst performing stock pick of all time.  I lost 95% on it and my position size was embarrassingly large.  It was a truly sickening experience, but I decided that while it was an expensive lesson, it would make me a better investor.  In my post-mortem, I recorded 15 mistakes I made.  I couldn't believe it was possible to make that many mistakes on one idea (and I probably made more that I didn't identify), but here's the list:

 

• Position sizing was way too big for the risk profile.

• Put too much faith in a SuperInvestor.

• Got sucked in by the story.

• Ignored that it was not my typical investment type.

• Didn’t focus enough on debt level / interest expense.

• Ignored the poor near-term profitability, believing they'd turn it around.

• Was too trusting of management.

• Focused too much on upside, not enough on the downside.

• Underestimated how challenging the operational problems could be (I thought surely they could engineer them out).

• Underestimated how much the cumulative effects could have to the downside.

• Averaged down multiple times.

• Was overconfident.

• Was not skeptical enough.

• Didn’t consider that there were multiple ways to lose.

• Didn't think enough about currency risk (my base currency is CAD).

[Guest notorious546]

wow and they appear to have stole the broncos logo.

 

https://upload.wikimedia.org/wikipedia/en/thumb/4/44/Denver_Broncos_logo.svg/1280px-Denver_Broncos_logo.svg.png

 

 

[Picasso]

In some other universe a big lawsuit from the Denver Broncos brought down ZINC even as China did well and the plant operated as planned.

[str8shot]

Would like to share my experience in hopes that others don't make the same mistakes.  This was by far my worst performing stock pick of all time.  I lost 95% on it and my position size was embarrassingly large.  It was a truly sickening experience, but I decided that while it was an expensive lesson, it would make me a better investor.  In my post-mortem, I recorded 15 mistakes I made.  I couldn't believe it was possible to make that many mistakes on one idea (and I probably made more that I didn't identify), but here's the list:

 

• Position sizing was way too big for the risk profile.

• Put too much faith in a SuperInvestor.

• Got sucked in by the story.

• Ignored that it was not my typical investment type.

• Didn’t focus enough on debt level / interest expense.

• Ignored the poor near-term profitability, believing they'd turn it around.

• Was too trusting of management.

• Focused too much on upside, not enough on the downside.

• Underestimated how challenging the operational problems could be (I thought surely they could engineer them out).

• Underestimated how much the cumulative effects could have to the downside.

• Averaged down multiple times.

• Was overconfident.

• Was not skeptical enough.

• Didn’t consider that there were multiple ways to lose.

• Didn't think enough about currency risk (my base currency is CAD).

 

Thanks for sharing. I can relate to many of the above. Reflecting on my experience, 5 key mistakes were most impactful in me taking a 95% loss:

1> Seriously concerned in mid-2015 by the stock price drop to $8, I was prepared to sell and lose 40% on the original investment, and potentially hop back in if they showed clear evidence of getting over the hump. When Pabrai plunked down another $15M (2m shares, increasing his stake to 8.3m shares) in July-August 2015, I took that as a cue to average down and hang in there. With his 6 years plus of experience as an investor in the company, 14% equity position, commodity business investing experience, and experience as an IT entrepreneur, I assumed that Pabrai HAD to have inside knowledge so as to be virtually certain that the plant would be at 75% plus capacity within 6-12 months or that there was a contingent path to get there if it took longer. This was a deadly assumption on my part. This was my first and last experience blindly cloning a "guru" investor.

2> Despite having first hand program management experience with large scale (multi-hundred million to billion dollar) complex programs in the business transformation/IT space with Fortune 500 companies, I overlooked my gut feeling in mid-2015, based on all of the distress signals, that the ramp-up was likely irreparably off track and that the management team was inept and clueless based on their continually missing targets in 2014-2015. (I bought the stock in October 2014).

3> Conferred with various equity analysts and investors in the company, and spoke with Guy Spier directly about Horsehead in Sept 2015 at his fund meeting in NYC and then again in Dec 2015. All were sticking with the company. This further reinforced my willingness to stay in the stock and not seriously entertain the possibility of BK. And of course, psychologically I was biased not to admit the error as the loss exceeded 60% and my position had grown WAY too large relative to the risk.

4> Continued to average down even as the picture got bleaker in 2H 2015.

5> I didn't hedge the downside risk (via outright sale of the stock or by shorting) even as the picture got bleaker in 2H 2015.

 

A comedy of errors. And quite painful, but I believe this experience will serve me well in the future.

[gg]

Does anyone know who owns the largest positions in the debt? Curious who will be controlling the process on the creditors committee

[rishig]

Does anyone know who owns the largest positions in the debt? Curious who will be controlling the process on the creditors committee

 

Form 204 has the list of top unsecured lenders:

http://dm.epiq11.com/HOC/Document/GetDocument/2721173

 

 

[Txvestor]

I think txvestor is right regarding the blame mostly belonging to management. See this link for an idea of how completely fubar the situation was at the plant: http://www.post-gazette.com/business/pittsburgh-company-news/2016/02/01/Len-Boselovic-s-Heard-off-the-Street-Horsehead-Holding-barely-holding-on-by-a-thread/stories/201601310257

 

What an utterly incompetent set of bumbling clowns management were/are. I had never previously heard of much of this information. Not sure about the others on this board, but the constant excuses and missed projections etc were give aways in retrospect. I think many of us got uncomfortable with these signals, but trusted Pabrai and Spier who were in neck deep and surely had more insight, especially when Pabrai even added. I even remembered his analogy to Indian scriptures about when a security goes lower and you are in a loss and inside of the Chakra and in the intesity of the battle about whether you are right,and that you double check your facts and thesis etc. i guess this is one time his checklist didn't do a darn thing to screen out failures. Unfortunately that turned out to be a disastrous error. Even though this is a post mortem, perhaps knowing all of this in this article in this context would/could have swayed some of us.

 

I particularly liked the comment made at the bottom, that perhaps the company(management) should be named after the other end of the horse.

[ni-co]

Can we sum up the mistakes listed by those losing 95% with the following?

 

1. Not doing your own homework and

2. not changing your opinion despite the value building facts changing

 

I'd add a third mistake (I was also guilty of until one or two years ago): Investing into commodity companies without a clear macro view. But I think most people here would disagree with this one.

[kwilde]

Can we sum up the mistakes listed by those losing 95% with the following?

 

1. Not doing your own homework and

2. not changing your opinion despite the value building facts changing

 

I'd add a third mistake (I was also guilty of until one or two years ago): Investing into commodity companies without a clear macro view. But I think most people here would disagree with this one.

 

ni-co,

Generally, I agree with what you're saying, but think maybe you're over-simplifying things on the first point.

If we think it in terms of how Pabrai or Spier were looking at it...did they not do their own homework?  Surely, we can agree that they did, so what specific mistakes did they (or any of us) make with this investment that we can learn from. 

Your second and third points are well taken, but in my opinion, these are not black and white issues and need to be taken in the context of the entire investment thesis. 

Cheers.

[gg]

Does anyone know who owns the largest positions in the debt? Curious who will be controlling the process on the creditors committee

 

Form 204 has the list of top unsecured lenders:

http://dm.epiq11.com/HOC/Document/GetDocument/2721173

 

I had seen that before. I should clarify - I meant who owns large chunks of the bonds. That document only lists US Bank, which is not the end-holder of those bonds. So I'm curious who actually owns the bonds and will actually control the credit committee. From what I've read, this is the group that is providing the DIP financing, and seems to have a large position.

[hobbit]

Does anyone know who owns the largest positions in the debt? Curious who will be controlling the process on the creditors committee

 

Form 204 has the list of top unsecured lenders:

http://dm.epiq11.com/HOC/Document/GetDocument/2721173

 

I had seen that before. I should clarify - I meant who owns large chunks of the bonds. That document only lists US Bank, which is not the end-holder of those bonds. So I'm curious who actually owns the bonds and will actually control the credit committee. From what I've read, this is the group that is providing the DIP financing, and seems to have a large position.

 

The biggest chunk of secured loan ( around 180-200 million ) is owned by GreyWolf Capital which also has a big equity position around 8% ownership of company

Another 100 million credit facility is listed as unknown

Macquarie has 27.2 mil outstanding principal

another 30 mil is owned by banco bilbao and poseidon holdings

[vjrao]

OK. I've been lucky to stay away from ZINC up until now. I did run it through my checklist about 9 months ago, but decided that I didn't understand the business, and it dropped off my radar after that.

 

Does anyone have an opinion on buying ZINC post-bankruptcy? I would guess that most of the investors on this board are through with the company due to the events of the past several months. However, Horsehead filed bankruptcy with assets of $1B and liabilities of about $500M.

 

Assuming that Horsehead is going to reorganize and emerge from bankruptcy, I would guess that there would be some value left in the stub equity (I'm making an assumption that most, if not all, of the liabilities get converted to equity, diluting the current common equity shareholders). Horsehead's debt will be reduced, restructured, and extended, and presumably the company will have time to get the plant working once and for all. Thoughts?

[str8shot]

Can we sum up the mistakes listed by those losing 95% with the following?

 

1. Not doing your own homework and

2. not changing your opinion despite the value building facts changing

 

I'd add a third mistake (I was also guilty of until one or two years ago): Investing into commodity companies without a clear macro view. But I think most people here would disagree with this one.

 

Reply point by point to the above:

1. I did my own homework big time. AND analyzed/discussed execution, risks, liquidity, etc. with other investors thoroughly, including Spier face to face. The big lesson for me: DO NOT invest in a company in a crappy industry subject to rapid changes in prices unless A) the company has a sustainable competitive advantage (e.g., low cost producer in US that is hard to duplicate) AND B) it is already executing well on that advantage (i.e., it has a plant already running near capacity so that the break even cash flow requirement is well below market prices) AND C) it has sufficient liquidity to weather a major cycle downturn. ZINC met criteria A, but not B and C. In retrospect it was a no-brainer to pass on this investment until it actually met all three.

2. Agree here. I was ready to sell in July 2015 and when Pabrai doubled down and I decided to follow his lead instead of honor my gut feeling that the ramp-up wasn't likely to happen soon enough given their track record and lack of liquidity.

3. Similar to what I said in my point 1 reply. Agree.

 

It's not good enough to have done your homework or thought independently. If you're not evaluating and weighing the right factors the right way (based on appropriate mental models), then you still end up a big loser when you get it wrong.

 

As Buffett has said, if you make a concentrated bet you better know what you're doing.

[kevin4u2]

Can we sum up the mistakes listed by those losing 95% with the following?

 

1. Not doing your own homework and

2. not changing your opinion despite the value building facts changing

 

I'd add a third mistake (I was also guilty of until one or two years ago): Investing into commodity companies without a clear macro view. But I think most people here would disagree with this one.

 

Number 1 is impossible.  How do you do your "homework" on a commodity investment?  To do this you need to first estimate the revenue for the next ten years.  For commodity companies this is easy and involves two factors, production level and price.  You can do your homework on production but price is impossible.  Thus when you multiply production (which is where most people were also wrong) times the price (which is totally unknown), the result, if you are honest, is I have no idea.  Homework is thus impossible for most commodity companies. 

 

This is why Buffett does not invest in commodity companies.  When he talks about "circle of competence", that does not mean he doesn't understand how a commodity is produced (ie how to get oil out of the ground)... it is that he understands the assumptions in his thinking and stops the analysis when he comes to a point where he doesn't know.  Munger calls this being "rational".

 

***The only way around the unknown wildcard of price is to speculate or buy the lowest cost producer.  The lowest cost producer will be the last man standing.

[LC]

What? Of course u can do homework on a commodity producer. Look at their debt schedule and gauge liquidity. Look at their production profile to see how diversified it is. Had I done the homework on their debt and kept tabs on the technical failures at their very concentrated factory I wouldve sold earlier. But I was lazy.

 

Edit: And I know I'm lazy. I never should've invested in Zinc because it's not a lazy man's investment. It was a very concentrated bet. It wasn't my game. I'm a lazy investor and my portfolio needs to reflect that (it since has). My big takeaway is be honest with your mental profile and make investments which reflect that.