ni-co Posted February 4, 2014 Share Posted February 4, 2014 txlaw, Thanks for your reply: "But, IMO, Pabrai is likely withholding his full thesis on ZINC. It's such a large portion of his portfolio now that I’m skeptical it simply represents a play on zinc prices and existing capacity. Instead, I’m willing to bet that he is putting so much into it because he believes in the ZINC growth story." I agree with that statement. If he is putting in 20%??? (i think that is right), that's huge. I would only do that if I thought ZINC could make money / pay debt / operate with a reasonable P/E multiple to boot (say 10 times) at low zinc prices. THEN, you get a free option. OR, as you say, if they can do the foregoing but with a higher implied p/e multiple (say 15 times) but where there is this very long-term growth strategy. a) I don't think the thesis can be as simple as what he is saying or b) I think he is making a mistake (overly bullish / not prudent enough on this one clouded by his past - probably successful - experiences in commodities). Mohnish Pabrai said in one of his presentations that he was looking for less discovered consequences of the shale gas boom. Here are two angles to this: 1. How about zinc air batteries, e.g. for electric cars? http://gigaom.com/2013/09/24/whats-a-metal-air-battery-and-why-is-tesla-interested-in-it/ and http://gigaom.com/2013/11/12/eos-energy-to-soon-crank-out-zinc-air-batteries/ and http://news.stanford.edu/news/2013/june/zinc-air-battery-060413.html The shale gas boom and, as a consequence, cheaper energy are likely to increase the adoption rate of electric cars. http://www.quora.com/Alternative-Energy/Will-shale-gas-stall-the-mass-adoption-of-electric-cars 2. Commodity producers are main beneficiaries of the shale gas boom/cheaper energy – ZINC is not only a commodity producer itself, but so are its main customers… http://www.bloomberg.com/news/2012-12-31/shale-gas-revolution-spurs-wave-of-new-u-s-steel-plants-energy.html Link to comment Share on other sites More sharing options...
yadayada Posted February 4, 2014 Share Posted February 4, 2014 v interesting but here is a 2009 article saying the same http://www.technologyreview.com/news/416020/high-energy-batteries-coming-to-market/ Almost 5 years ago. There are loads of new so called revolutions every day in energy science. But 99% amount to nothing in the end. Any reliable sources this one will be different? Link to comment Share on other sites More sharing options...
nikhil25 Posted February 5, 2014 Share Posted February 5, 2014 Horsehead Holding Corp. Provides Update on Commissioning of New Plant http://www.marketwatch.com/story/horsehead-holding-corp-provides-update-on-commissioning-of-new-plant-2014-02-05?reflink=MW_news_stmp Link to comment Share on other sites More sharing options...
ni-co Posted February 5, 2014 Share Posted February 5, 2014 v interesting but here is a 2009 article saying the same http://www.technologyreview.com/news/416020/high-energy-batteries-coming-to-market/ Almost 5 years ago. There are loads of new so called revolutions every day in energy science. But 99% amount to nothing in the end. Any reliable sources this one will be different? Nope. However, that's not how I look at it. It's only one of several free options here, apart from the already mentioned points in this thread. What makes ZINC such a compelling investment idea is that you get the comparably limited downside of a (now) low-cost zinc producer with several free options on the upside. It's also worth thinking about the fact that, at the moment, ZINC wouldn't show up on any kind of value screen, because you can't see the tripling in their future cash flows. However, they are more or less on track with their new plant and within a few quarters these cash flows are supposed to show up. That's one catalyst. Add to that a favorable zinc price outlook adding about $25-$30M in EBITDA to a $0.10/lb or 200/ton increase in the price of zinc with only marginal increase in production cost. I think that is what Mohnish Pabrai is seeing. Link to comment Share on other sites More sharing options...
brker_guy Posted February 5, 2014 Share Posted February 5, 2014 http://www.bloomberg.com/news/2014-02-05/zinc-rebounds-from-longest-slump-in-25-years-on-supply-outlook.html?cmpid=yhoo Link to comment Share on other sites More sharing options...
PJM Posted February 10, 2014 Share Posted February 10, 2014 Zinc producers raising prices due to supply shortage http://www.marketwatch.com/story/zinc-producers-raise-premiums-as-supply-tightens-2014-02-08?dist=lbeforebell Link to comment Share on other sites More sharing options...
nikhil25 Posted February 18, 2014 Share Posted February 18, 2014 Beaver zinc plant to remain open 60 days longer than expected http://triblive.com/business/headlines/5614193-74/alavi-company-plant#axzz2thR5kgPD Link to comment Share on other sites More sharing options...
ni-co Posted February 22, 2014 Share Posted February 22, 2014 Good write-up of ZINC on, dare I say it, Seeking Alpha: http://seekingalpha.com/article/2036973-horsehead-holdings-is-significantly-undervalued-as-new-low-cost-facility-is-about-to-open The only thing I would add to it is the favorable long term outlook in consequence of the shale gas boom. Link to comment Share on other sites More sharing options...
cubsfan Posted February 22, 2014 Share Posted February 22, 2014 Thanks for posting my report Ni-co! I'm glad you enjoyed it. Alex Yes, very good article Alex - really enjoyed it. Link to comment Share on other sites More sharing options...
jeremykgold Posted February 22, 2014 Share Posted February 22, 2014 In the write up it says that "Commodity companies can have massive moats if they have a sustainable low cost advantage, which Horsehead will have" yet how is this possible for ZINC if its sustainable low cost advantage is due to the hiring of Tecnicas Reunidas to build the plant that is providing the low cost advantage. Therefore couldn't anyone just do this? Will they? Overtime I would think the companies near the top of the cost curve will move down over time. Link to comment Share on other sites More sharing options...
racemize Posted February 22, 2014 Share Posted February 22, 2014 In the write up it says that "Commodity companies can have massive moats if they have a sustainable low cost advantage, which Horsehead will have" yet how is this possible for ZINC if its sustainable low cost advantage is due to the hiring of Tecnicas Reunidas to build the plant that is providing the low cost advantage. Therefore couldn't anyone just do this? Will they? Overtime I would think the companies near the top of the cost curve will move down over time. This process is for zinc recycling, so it would only apply to recyclers (or for particular mines with impurities, such as sulfur). A competitor would have to invest in building the plant, and then try to compete on these long term contracts, which seems quite difficult. At least that is my understanding. Link to comment Share on other sites More sharing options...
yadayada Posted February 23, 2014 Share Posted February 23, 2014 I still don't really get how there is a moat. Commodity companies dont really compete with each other? They don't really affect each other? I can see how it is a good investment, if they can stay profitable even at low prices, but that technically isn't really a moat right? It is just a higher bottom in the investment. It is not like some zinc mine somewhere wont open just because they are low cost. Their capacity hardly means anything in the total zinc market. Their only threat is that there is not enough dust to maximize production, So i guess the contracts with the majority of steel mills is their moat. And the fact that there isn't enough dust for a second competitor to become a threat in this area. Link to comment Share on other sites More sharing options...
Mephistopheles Posted February 23, 2014 Share Posted February 23, 2014 Commodity companies with the lowest cost production have an advantage over their competitors. If prices collapse, they are the last one to fall. ZINC's advantage is not only in the long term contracts, but also the close proximity to steel mini mills. One question I have is, how is the cost structure for the steel companies? If they can't compete well with overseas companies, then wouldn't this effectively cause problems for ZINC? EDIT: removed the word "domino" because it made no sense. Link to comment Share on other sites More sharing options...
yadayada Posted February 23, 2014 Share Posted February 23, 2014 yeah but that is not a moat. Because it does not keep competitors out. It does not affect competitors at all, and that is one of the requirements of a moat. It simply makes it a less risky investment. But i guess we are just arguing semantics here. Link to comment Share on other sites More sharing options...
ni-co Posted February 23, 2014 Share Posted February 23, 2014 This is the same report I shared with the board back in December when Horsehead was at $14. Although the stock has run up since then, I still think its a very interesting idea. Alex Sorry, Alex, I did not realize that you were posting here already. Commodity companies with the lowest cost production have an advantage over their competitors. If prices collapse, they are the last domino to fall. ZINC's advantage is not only in the long term contracts, but also the close proximity to steel mini mills. It's not really a moat in the sense that nobody else can enter this market, but it's a competitive advantage. For me being a low cost producer is simply about margin of safety. This is no Coca Cola. However, if you look at the zinc supply and demand balance a few years out there seems to be a significant shortage indicating high prices. It's going to take years for competitors to open new zinc mines to meet this demand. Meanwhile, ZINC can earn FCF that is significantly higher than its current market cap. One question I have is, how is the cost structure for the steel companies? If they can't compete well with overseas companies, then wouldn't this effectively cause problems for ZINC? I haven't looked at the steel producers yet. However, cheap energy – again, insert shale gas argument here – is going to keep them in play for years. Cheap energy is not only a boon to zinc suppliers like ZINC but should also increase the demand side (steel, autos, chemical industry). Link to comment Share on other sites More sharing options...
maxprogram Posted February 23, 2014 Share Posted February 23, 2014 I think a sustainable low-cost advantage is the very definition of a moat.* But then again, "moat" in this context isn't in the dictionary so I guess you are free to define as you like :). (* Buffett: "Consumer franchises are a prime source of economic Goodwill. Other sources include governmental franchises not subject to profit regulation, such as television stations, and an enduring position as the low cost producer in an industry.") Link to comment Share on other sites More sharing options...
ni-co Posted February 23, 2014 Share Posted February 23, 2014 I think a sustainable low-cost advantage is the very definition of a moat.* But then again, "moat" in this context isn't in the dictionary so I guess you are free to define as you like :). (* Buffett: "Consumer franchises are a prime source of economic Goodwill. Other sources include governmental franchises not subject to profit regulation, such as television stations, and an enduring position as the low cost producer in an industry.") True, what I meant is that it might not be an enduring/sustainable competitive advantage. It's not going to keep other low cost competitors from entering the market. Thinking of Wallmart their low cost advantage gets larger with economies of scale. That's sustainable as it's nearly impossible to replicate once you reached a certain scale and keep being razor focused on keeping cost low. yeah but that is not a moat. Because it does not keep competitors out. It does not affect competitors at all, and that is one of the requirements of a moat. It simply makes it a less risky investment. But i guess we are just arguing semantics here. Exactly. Link to comment Share on other sites More sharing options...
Packer16 Posted February 23, 2014 Share Posted February 23, 2014 If you look at the ZINC site they have two potential moat characteristics. First, scale and location because they are located near large steel mini-mills. They also have LT contracts to remove this waste dust. This is similar to Covanta with there garbage incinerators, once one is built near a steel plant, it does not make sense to build a new one. They also have patented technology that EPA says is the best at this task. Packer Link to comment Share on other sites More sharing options...
original mungerville Posted February 23, 2014 Share Posted February 23, 2014 Packer, are you invested in this one? Light or heavily? Link to comment Share on other sites More sharing options...
Packer16 Posted February 23, 2014 Share Posted February 23, 2014 I am not. My commodities exposure is via Lukoil. Packer Link to comment Share on other sites More sharing options...
yadayada Posted February 24, 2014 Share Posted February 24, 2014 I think a sustainable low-cost advantage is the very definition of a moat.* But then again, "moat" in this context isn't in the dictionary so I guess you are free to define as you like :). (* Buffett: "Consumer franchises are a prime source of economic Goodwill. Other sources include governmental franchises not subject to profit regulation, such as television stations, and an enduring position as the low cost producer in an industry.") yeah but it does not affect their competitors. The point of a low cost advantage is that you can charge lower prices. You take market share, you become even bigger, and have even fewer costs. This drives out competition, and lets you control the market. That is the moat. But their low cost production here isn't really an advantage that affects the competition. And that is the prime characteristic of a moat. Their moat is like packer said really. Their scale and technology keeps out competitors that could take away the dust they so badly need. At current price it doesn't look that cheap. Zinc really has to take a hike here for this to be a double or triple. With the added risks of extra costs this year, or projections not being met, It doesn't look that good at current price. For this to work at 17$ you need a strong opinion on zinc. Link to comment Share on other sites More sharing options...
moody202 Posted February 24, 2014 Share Posted February 24, 2014 I still don't really get how there is a moat. Commodity companies dont really compete with each other? They don't really affect each other? I can see how it is a good investment, if they can stay profitable even at low prices, but that technically isn't really a moat right? It is just a higher bottom in the investment. It is not like some zinc mine somewhere wont open just because they are low cost. Their capacity hardly means anything in the total zinc market. Their only threat is that there is not enough dust to maximize production, So i guess the contracts with the majority of steel mills is their moat. And the fact that there isn't enough dust for a second competitor to become a threat in this area. Their business model creates competitive advantage/moat. For most of other zinc producers, the cost of raw materials goes up as price of zinc goes up. However, for Horsehead, the cost of raw material stays the same as price of zinc goes up as they are using EAF dust instead of Zinc from mines as raw material. So for most of the Zinc producers, their gross profit stays the same price of zinc goes up (both selling price and costs are going up). Horsehead has the advantage where their gross profit increases as price of zinc goes up (selling price goes up but cost stays the same). Link to comment Share on other sites More sharing options...
nikhil25 Posted February 25, 2014 Share Posted February 25, 2014 Horsehead Holding Corp. Reports Fourth Quarter 2013 Results http://www.businesswire.com/news/home/20140225005453/en/Horsehead-Holding-Corp.-Reports-Fourth-Quarter-2013#.UwzGT_ldWSo Conference Call Transcript: http://seekingalpha.com/article/2047313-horsehead-holding-management-discusses-q4-2013-results-earnings-call-transcript?part=single Link to comment Share on other sites More sharing options...
phil_Buffett Posted April 14, 2014 Share Posted April 14, 2014 stock down the last time. i bought more and more :) Link to comment Share on other sites More sharing options...
brker_guy Posted April 22, 2014 Share Posted April 22, 2014 Don't know if you guys saw this article today: China Turns Zinc Into Car Parts as Consumer Demand Surges http://www.bloomberg.com/news/2014-04-21/china-turns-zinc-into-car-parts-as-consumer-demand-surges.html Link to comment Share on other sites More sharing options...
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