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ZINC - Horsehead Holding Corp

wknecht

By wknecht
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Deepdive Newbie

Deepdive

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I find it interesting that Pabrai blames the realized loss in ZINC on his position size. People can just find his holdings in ZINC via his 13Fs anyway. I agree with his initial investment thesis, but at some point, the company was betting the farm on the Mooresboro plant. Pabrai should have been smart enough to understand that there is a chance that ZINC could have gone bankrupt despite the unlikely probability. His solution of not going over 5% in the future won't solve his problem of investing in companies suffering from permanent impairment.

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abyli Newbie

abyli

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Agree. Commodity is lousy business. Stay away from lousy business.

 

I find it interesting that Pabrai blames the realized loss in ZINC on his position size. People can just find his holdings in ZINC via his 13Fs anyway. I agree with his initial investment thesis, but at some point, the company was betting the farm on the Mooresboro plant. Pabrai should have been smart enough to understand that there is a chance that ZINC could have gone bankrupt despite the unlikely probability. His solution of not going over 5% in the future won't solve his problem of investing in companies suffering from permanent impairment.

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Picasso Newbie

Picasso

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Being a value investor in the resource related sector is hard because you sort of need to flip your thinking with these super cyclical securities.

 

Of course Pabrai made a killing on ZINC in 2009.  He bought it at a cyclical low.  He could have bought CAT and made just as much.  But at a certain point you're long a cyclical business at peak earnings.  It's easy to fool yourself that it's still cheap in 2013 when it's actually quite expensive.  Even Buffett has done this a few times with COP or XOM. 

 

The best resource investors know what part of the cycle they're at and size/position accordingly.  Taking your price to earnings/book values or whatnot is not as useful as it is to other types of businesses.  I feel like a lot of investors are making this mistake in the energy space today.  It feels way too early to bet on the kind of rebound a lot of these securities are pricing in. 

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Guest roark33

Guest roark33

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Picasso--the risk in this name was not just commodity-related, but execution risk with the new plant.  I think that's something that he and others ignored.  Also, something that provided investors ample time to get out as their delays kept coming right up until they filed for bankruptcy. 

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Picasso Newbie

Picasso

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I mean sure that plant was the nail in the coffin. 

 

But for example, look at this Barron's article from 2014.  http://www.barrons.com/articles/SB50001424053111904255004580029251440218026

 

Jul 19, 2014.  That was less than 2% away from the peak price on zinc (the commodity not the stock).  I don't think the stock had any upside even if things went according to plan.  That was one hell of a headwind and we haven't even seen a recession yet.  Value investors have a habit of thinking these resource stocks are cheap when they're expensive and vice versa.  Maybe if the guys at Glencore started buying a stake in Horsehead I'd get more interested.  They probably have a better idea of the cycle.  But it was just a bunch of tourists in ZINC waiting to be taken out to the cleaners.

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Uccmal Newbie

Uccmal

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Picasso--the risk in this name was not just commodity-related, but execution risk with the new plant.  I think that's something that he and others ignored.  Also, something that provided investors ample time to get out as their delays kept coming right up until they filed for bankruptcy.

 

First, I have had bad mistakes in investing - more than one.  They got caught in the story. 

 

I do know a thing or two about garbage and scrap plants from my past.  I have personally been involved with pilot plants.  Things always go wayyyy over budget and way over time.  History is riddled with these companies in Canada.  They are always complex projects with masses of permits and legislation involved.  As the delays start, the engineering companies see a gravy train of time and materials billing.  If it gets out of control, costs multiply, and the owner suddenly finds themselves with engineers, procurement officers, and various other experts all attaching billable hours to a project.

 

Add to the issues with a start up plant are of course the commodity price dependency.  Why would one think that Zinc - the metal - was a good investment after the end of the biggest buildout in modern history? 

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ERICOPOLY Newbie

ERICOPOLY

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Value investors have a habit of thinking these resource stocks are cheap when they're expensive and vice versa. 

 

How do you value something when you don't know the future price of a commodity?  Take a company that sells diapers -- the price of diapers can't swing up and down really wildly.  And a name branded diaper reinforces that price stability with a better profit padding.

 

Isn't that why Buffett doesn't like commodities -- his word for it is "price takers", I think.

 

 

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Picasso Newbie

Picasso

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Value investors have a habit of thinking these resource stocks are cheap when they're expensive and vice versa. 

 

How do you value something when you don't know the future price of a commodity?  Take a company that sells diapers -- the price of diapers can't swing up and down really wildly.  And a name branded diaper reinforces that price stability with a better profit padding.

 

Isn't that why Buffett doesn't like commodities -- his word for it is "price takers", I think.

 

I've always thought that you value resource related stocks on what can't happen rather than what you think should happen.  If everyone is under water, only the low cost guys can survive long enough for the rest of the sector to go out of business.  A certain percentage won't be running losses forever.  Then you at least get the future macro/cycle optionality for free and you'll eventually reset to the cost curve.  It didn't seem like that was the ZINC thesis.

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Steven B Newbie

Steven B

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When he bought back in '08 it was a net-net. From there it just seemed that he really really trusted in management.  I mean, the incessant quoting of the "automatic" 90-110 EBITDA boost management said new plant was to give was taken as gospel, and was the launching point for many a thesis. That might make sense for a 2% position but a 30% one? I took a very small position at 3 (after being short) so I can't say I'm innocent here but in retrospect I see that. Also, the so called "40 cent breakeven" that the general public was quoting that gave ZINC the "lowest cost producer moat" was completely inaccurate. Sure that's what it said in some of their presentations, but when you did the math it clearly didn't make sense and upon clarification from IR it was a number with a huge asterisk qualifier.

 

Basically I'm saying that I thought the post-mortem's would also take these simple (in hindsight) mistakes into account. Just goes to show that the best investors on the planet, checklist and all,  can make terrible mistakes. Scary thought for the rest of us.

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ERICOPOLY Newbie

ERICOPOLY

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Value investors have a habit of thinking these resource stocks are cheap when they're expensive and vice versa. 

 

How do you value something when you don't know the future price of a commodity?  Take a company that sells diapers -- the price of diapers can't swing up and down really wildly.  And a name branded diaper reinforces that price stability with a better profit padding.

 

Isn't that why Buffett doesn't like commodities -- his word for it is "price takers", I think.

 

I've always thought that you value resource related stocks on what can't happen rather than what you think should happen.  If everyone is under water, only the low cost guys can survive long enough for the rest of the sector to go out of business.  A certain percentage won't be running losses forever.  Then you at least get the future macro/cycle optionality for free and you'll eventually reset to the cost curve.  It didn't seem like that was the ZINC thesis.

 

I just love the "swimming naked when the tide goes out" analogy.  Initially I think Buffett used it with regards to margin leverage, but I think doing risky things in the resource sector applies as well.  Given that resource prices can be really volatile just like stock prices.

 

The swimming naked part was the bit about the factory not working.  That was risky to take on in a resource stock where the commodity price swings wildly like a tide.

 

In other words, the risks of swimming naked at the lake (no tide) are different risks compared to swimming naked at the ocean's shore (tide).

 

So if you have a stock that's discounted because they can't get their factory up and running, it would be less risky if their other profitable business is selling name branded diapers (you're swimming at the lake, not the ocean).

 

So, perhaps the resource sector is well and truly exciting enough without adding in broken-factory related drama.

 

 

 

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RadMan24 Newbie

RadMan24

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Judge Approves Voting on Horsehead's Bankruptcy Plan

Katy Stech

July 07, 2016

 

Horsehead Holding Corp. won approval on Thursday to move forward on the company's reorganization strategy, which would keep the company operating with a $160 million infusion under a deal with existing lenders.

 

From his Wilmington, Del., courtroom, U.S. Bankruptcy Court Judge Christopher S. Sontchi cleared the Pittsburgh-based company to send out a summary of the reorganization plan to creditors who have the power to vote on the deal.

 

Under the plan, some of the company's lenders would take over ownership of its factories in South Carolina, North Carolina, Illinois, Tennessee and Pennsylvania that make zinc products and the protective coating that prevents rust on steel and iron.

 

The 730-worker company struggled after building a $550 million zinc processing factory in Mooresboro, N.C., a project that cost more than expected and hasn't run at full capacity since opening in May 2014 because of equipment problems.

The factory's operational problems hit as demand fell for its zinc products, including from some automotive companies who replaced galvanized steel parts with lightweight aluminum sheets, Chief Executive James M. Hensler said in earlier court papers.

Meanwhile, he added, the strong U.S. dollar has made it cheaper for U.S. companies to import stainless steel and galvanized carbon steel.

 

The unfavorable market conditions meant that the company couldn't afford fixes at its Mooresboro, N.C., factory, which halted production on Jan. 22.

 

The trouble has also extended to other Horsehead-affiliated companies, including an Ontario, Canada, factory that can produce up to 72,000 tons of zinc oxide a year for manufacturers of tire and rubber products, chemicals, paints and plastics, according to court papers.

 

Aside from zinc production, the company is also the country's largest recycler of a hazardous dust generated at steel mills that melt and refine scrap metal.

 

Horsehead has struggled with more than $420 million in debt. One lender that said company broke a borrowing requirement froze some of its bank accounts earlier this year.

 

The company, whose operations date to the mid-1800s, filed for bankruptcy on Feb. 2. Its reorganization strategy once drew criticism from shareholders who are slated to receive nothing. Its shares, which trade publicly on Nasdaq under the ZINC ticker, are owned by a number of individual investors, none of whom held more than 11% of its total ownership as of Sept. 30.

 

Company lawyers at Thursday's hearing said that shareholders who objected to the creditor voting process withdrew those concerns.

 

Write to Katy Stech at katy.stech@wsj.com

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