PITTSBURGH Aug 7, 2015 (Thomson StreetEvents) -- Edited Transcript of Horsehead Holding Corp earnings conference call or presentation Friday, August 7, 2015 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Gary Whitaker Horsehead Holding Corporation - VP, General Counsel, and Secretary * Jim Hensler Horsehead Holding Corporation - Chairman, CEO, President * Bob Scherich Horsehead Holding Corporation - CFO ================================================================================ Conference Call Participants ================================================================================ * Paul Forward Stifel Nicolaus - Analyst * Garrett Nelson BB&T Capital Markets - Analyst * Ian Zaffino Oppenheimer & Co. - Analyst * Louis Hammond Hammond Investment - Analyst * Lee Jagoda CJS Securities - Analyst * Patrick Marshall CRT Capital Group - Analyst * Robert Espesis - Private Investor ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the Horsehead Holding Corp. Second Quarter 2015 Earnings Conference Call. My name is Richard and I'll be your operator for today's call. (Operator Instructions) I will now turn the call over to Gary Whitaker, Vice President, General Counsel, and Secretary. You may begin. -------------------------------------------------------------------------------- Gary Whitaker, Horsehead Holding Corporation - VP, General Counsel, and Secretary [2] -------------------------------------------------------------------------------- Good morning, everyone, and thank you for joining us on our second quarter 2015 earnings release conference call. My name is Gary Whitaker and I am Horsehead's Vice President, General Counsel, and Secretary. Before I turn the call over to Jim Hensler, I would like to quickly remind everyone that this communication may include forward-looking statements about our Company, our markets, and our prospects that are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. These risks and uncertainties include a variety of factors, some of which are beyond our control. These forward-looking statements speak as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after this communication. You should refer to our filings with the U.S. Securities and Exchange Commission, including our most recent annual report on Form 10-K filed on March 2, 2015, for a more detailed description of the risk factors that may affect our results. With that, I am pleased to introduce Jim Hensler, our President and CEO. Jim? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [3] -------------------------------------------------------------------------------- Thanks, Gary. I'd like to welcome you to this conference call to discuss the results of the second quarter of 2015. I will review the performance of our operations and markets, while Bob Scherich, our CFO, will review the financial results. The consolidated net loss for the quarter was $3.6 million, or $0.06 per share. This compares to a consolidated net loss of $5.1 million, or $0.10 per share for the second quarter of 2014. The quarter reflected lower shipments of zinc metal compared with the prior year's quarter, due in part to the sale of the remaining inventory from the Monaca, Pennsylvania facility in the prior year's quarter, offset partially by an increase in metal shipments from Mooresboro and higher brokered metal sales in the current quarter. The financial impact of the shortfall in shipments was partially offset by continued solid demand for our zinc calcine, completion of the sale of the Monaca property to Shell Chemical, and higher LME zinc prices. Production of finished zinc products increased 7.6% compared with the prior year's quarter, reflecting the transition of zinc production from the Monaca smelter to the Mooresboro facility in the prior year's quarter. Our primary focus during the quarter was the continued ramp up of the Mooresboro facility. The facility produced approximately 10,600 tons of zinc metal during the quarter, a 10% increase over the first quarter of 2015. The pace of the ramp up improved slightly as we exited the second quarter. And in July, the facility produced nearly 4,000 tons of zinc metal, a 7% increase over June's production, despite having taken a planned outage. We were able to ease the bottleneck in our bleed treatment circuit as a result of upgrades made during the planned outage and because of additional processing capacity supplied by Veolia, as noted in our last update, allowing us to demonstrate the capability to transfer zinc to the cell house at a rate of approximately 225 tons per day. As a result of easing this bottleneck during July, we began adding electrodes to the cell house in anticipation of higher production levels. We increased the number of electrodes by approximately 15% in July, and anticipate adding more electrodes throughout the third quarter as we further ease the constraint in bleed treatment. Progress was also made on the pilot plant we mentioned in our most recent monthly update and expect it to be operational in August. The pilot plant is expected to enable us to quickly add and evaluate incremental bleed treatment capacity using rental equipment, before finalizing the design and engineering of the full scale equipment. While there are no guarantees, if the pilot plant performs as expected we believe it will add sufficient capacity to debottleneck production by approximately 100 tons per day over current levels, assuming no new bottlenecks arise at higher production levels. We expected better performance in July but were hampered by unexpected production constraints caused by equipment reliability issues with pumps, filters, and tanks, the root cause of which were design deficiencies. We have remedied some of these issues and are still working on the others. Our actual realized production will be affected by our ability to both eliminate bottleneck conditions and achieve higher levels of equipment reliability. We have no specific plans to take an extended outage in the third quarter at this time. However, the work we deferred in July to install a bypass around the first solvent extraction settler to give us access to remove accumulated solvents may need to be scheduled if the alternative methods we are considering are not effective. We continue to believe once operating efficiently and at full capacity we will realize the $90 million to $110 million of incremental adjusted EBITDA compared to our former Monaca operation. However, the timing for completion of the ramp up cannot be determined with certainty at this time. Horsehead Corporation processed nearly 145,000 tons of EAF dust and other zinc bearing secondary materials during the quarter, which is essentially the same as in the prior year second quarter, but up about 2%--or but about 2% lower than during the first quarter of 2015. EAF dust receipts at 140--134,500 tons were almost 11% lower than the prior year's second quarter, but 3% higher than the first quarter of 2015. Steel industry output declined compared with the prior year's second quarter and compared with the first quarter of 2015. Steel capacity utilization was 76.4% during the prior year's second quarter and 73.2% in the first quarter of this year, according to published statistics, compared with 71.7% in the second quarter of this year. We saw signs of a slight recovery in steel production as we exited the second quarter. Based upon the expected rate of ramp up at Mooresboro, we expect to continue to produce zinc calcine from excess waelz oxide during the third quarter. We took maintenance outages on several kilns during the second quarter and expect to take advantage of this period of lower steel production in the third quarter to perform more kiln maintenance work. Given our system-wide inventory of recyclable zinc units, we expect to operate all of our kilns during the third quarter. The LME zinc price averaged $0.99 per pound during the second quarter, compared to $0.94 for both the prior year's second quarter and the first quarter of 2015. We had zinc hedge positions for the second quarter of 2015 at an average LME price of $0.97 per pound, and currently have hedge positions for the second half of 2015 at $1.07 per pound on more than half of our expected zinc shipments. This should help minimize the impact of further downward pressure on zinc prices on our cash flow during the continued ramp up of the Mooresboro facility. Realized premiums on metal were up about $0.02 per pound compared with the prior year's quarter, reflecting the higher premiums on metal produced at Mooresboro. Zochem's earnings before taxes for the quarter were $2.5 million, a reduction of 26% compared with the prior year's second quarter, due primarily to a 12% lower volume of shipments as Zochem sold the remaining Monaca inventory in the prior year's quarter, and due to the lag effect of lower LME zinc prices from the first quarter of 2015 carried over into the current quarter. This was partially offset by the favorable effect of lower conversion cost per pound compared with the prior year's quarter. Realized premiums for zinc oxide in the quarter were down $0.02 from the prior year's second quarter, reflecting this lag effect. Transactional prices for spot business are also slightly more competitive in some markets in 2015. Demand for zinc oxide from Zochem improved as we exited the second quarter, leading us to expect stronger shipments in the third quarter. INMETCO's earnings before taxes were $4 million for the quarter, an increase of 8.1% versus the prior year's quarter, due primarily to a 13% increase in production and an 11% increase in shipments, partially offset by a lower price of nickel. Tolling receipts were off 12% compared with the prior year's second quarter, reflecting some softening in domestic stainless steel production. INMETCO has been able to mitigate this impact by reducing the tolling backlog and inventory, and by increasing the range of steel mill waste streams it will accept. The 13% increase in production compared with the prior year's quarter is a reflection of upgrade installed during the past year. We have moved forward with some of the expansion plans previously announced for INMETCO, but we are delaying the furnace transformer upgrade until we get a clearer understanding of the outlook for domestic stainless steel production. The sale of the Monaca site to Shell Chemical closed in the second quarter. The total sales prices was $13.5 million, a portion of which was paid earlier as part of the option payments. The final payment of approximately $9 million was paid at closing on June 15, 2015. In total, since the start of the project, Horsehead has received nearly $30 million in compensation from Shell associated with the demolition and purchase of the site, and more importantly, avoided the remediation costs associated with an 85-year-old zinc smelter. I will now turn it over to Bob Scherich to review the financial results. Bob? -------------------------------------------------------------------------------- Bob Scherich, Horsehead Holding Corporation - CFO [4] -------------------------------------------------------------------------------- Thanks, Jim. Details of the second quarter's performance versus the same quarter last year reflect a decrease in revenue of $3.5 million, or 2.7%, to $122.8 million. The change in revenue, excluding unrealized hedge effects of $12.6 million, included an $11.3 million decrease related to the Horsehead segment as a result of reduced volume of finished product shipments. And that was partially offset by higher price realization and sale of zinc calcine. Zochem had a $3.8 million decrease in revenue on lower volume. And INMETCO sales decreased $0.3 million with 30% lower nickel prices, substantially offset by higher volume shipments. The average sales price realized for zinc finished products on a zinc contained basis was $1.19 per pound, or $0.20 per pound above the average LME price for the quarter, compared to $1.14 per pound, or $0.20 above the average LME price for the prior year's quarter. Sale of zinc metal decreased $4.3 million, or 10.8%, to $35.6 million for the quarter, reflecting a $6.7 million decrease in sales volume, partially offset by a $2.4 million increase in price realization, reflecting the higher realized premiums for the sale of zinc metal. Sales of zinc oxide from Zochem decreased $3.8 million, or 10.2%, to $33.3 million for the quarter. Volume of sales decreased $4.6 million as the prior year's quarter included shipments from remaining inventory from Monaca, partially offset by a $.8 million increase in price realization. EAF dust revenue for the quarter decreased $.9 million, or 8.9%, to $9.1 million, as decreased volume effect was $1.1 million, and price realization improved $.2 million. Sales from nickel, products and services, excluding unrealized hedge charges, decreased $.3 million, or 2% for the quarter, to $14.4 million, compared to the prior year's quarter as volume of shipments increased 11% and the average LME nickel price decreased 30%. Consolidated cost of sales decreased $7.9 million when compared with the prior year's second quarter, or 6.8%, to $108.2 million. The Horsehead segment's costs decreased $3.7 million, as $9.4 million of reduced volume of shipments was partially offset by $6 million of increased cost, including a lower cost or market charge of $1.3 million taken at the end of the quarter. Sochem costs decreased $3.2 million, due primarily to reduced volume of shipments. Depreciation increased $7 million for the quarter. This higher amount is associated with the new zinc plant and the Zochem expansion, but partially offset by reduced depreciation from the Monaca facility. Interest expense increased $6.1 million, reflecting reduced levels of capitalized interest and higher levels of debt. Other income for the quarter increased $12 million, reflecting the gain on the sale of our Monaca, PA site. Cash used by operating activities was $27.4 million for the quarter ended June 30, 2015, as accounts payable and accrued expenses decreased $6.2 million, and inventories and accounts receivable increased $13.3 million during the quarter. Capital spending was $10.1 million for the quarter, and net proceeds received during the quarter from the sale of the Monaca property was $9 million. Cash on hand and availability on our credit facilities totaled $53.9 million at the end of the quarter. In July, we completed a refinancing of two of our credit facilities, adding approximately $30 million of additional liquidity. We believe we have adequate liquidity to meet the capital needs of the business through completion of the ramp up of the Mooresboro facility. Adjusted EBITDA improved on a sequential quarter basis to negative $.9 million for the quarter, compared to negative $9.1 million for the first quarter of 2015, reflecting the higher LME zinc price, and increased volume of zinc products and shipments, along with the absence of the INMETCO maintenance outage that occurred in the first quarter. The favorable zinc hedges that we put in place during the second quarter for the second half of the year resulted in the recording of a $10 million unrealized gain during the quarter. At current zinc prices we would expect these unrealized gains to turn into realized gains. Our cash settlements on the July hedge position were $2.1 million. We are beginning to look at hedge positions for the first quarter of 2016. At this time, I would like to turn things back to Jim for some final comments. Jim? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [5] -------------------------------------------------------------------------------- Thanks, Bob. In summary, before we open the call for questions, I'd like to say that while the second quarter was challenging, operations in Mooresboro have started to stabilize and we are making steady progress toward addressing the various design deficiencies and equipment issues that we have discovered since startup, including those related to the most significant bottleneck associated with the bleed treatment system. We are implementing a plan to mitigate this bottleneck. Production in July was approximately 7% higher than in June, as we partially eased the bottleneck and as equipment reliability continues to improve. We believe production will continue to progress through the third quarter as we implement plans discussed earlier and in recent updates. We will be aided in these efforts by having extended our relationship with Hatch Associates to continue taking advantage of their hydrometallurgical engineering expertise, and by having made further additions to our in-house staff. We are particularly excited that one of the key technical experts involved in the commissioning and ramp up of the Scorpion zinc plant, which is similar in design to ours, has joined the Company and will be leading the technical efforts at Horsehead to support the ramp up. We are also very pleased to have finally closed on the sale of the Monaca property, which ends a long chapter in the history of this Company and eliminates a significant potential environmental liability. We continue to be bullish on the medium term outlook for zinc prices. However, we're also pleased to have locked in hedges at $1.07 per pound for the rest of 2015 for over half of our expected zinc production, given the current downward pressure on all commodity prices. And finally, we continue to evaluate the feasibility of adding additional EAF dust recycling capacity to serve new steel mill entrants to the market, as well as provide for market share growth. We have had very positive discussions with several steel mills and we're in the process of starting a site evaluation process and beginning preliminary engineering work to assess this opportunity. Thank you, and we will now open the call for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. (Operator Instructions) Paul Forward, Stifel. -------------------------------------------------------------------------------- Paul Forward, Stifel Nicolaus - Analyst [2] -------------------------------------------------------------------------------- Thanks a lot. Good morning. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [3] -------------------------------------------------------------------------------- Good morning, Paul. -------------------------------------------------------------------------------- Paul Forward, Stifel Nicolaus - Analyst [4] -------------------------------------------------------------------------------- Jim, I--you talked about in the release and in your comments here about some of the kind of design deficiencies at the plant that you've been addressing. I mean, obviously, the important thing here is to debottleneck in the near term, rather than point fingers about all of this. But I just wondered if you could go into maybe a little bit more detail about what those deficiencies were. And you've already addressed some of them. Do you see some of them as being expensive fixes or sort of longer term issues? Or how do you think the--how quickly do you think that those can be kind of worked around or resolved? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [5] -------------------------------------------------------------------------------- Yes. Well, the single biggest design deficiency is this shortfall in bleed treatment capacity. And as we have now assessed that situation, the current capacity of the bleed treatment circuit is--really sort of limits us to about no more than maybe 60% of nameplate capacity. And so, we've got this plan in place which starts with bringing in this pilot facility, which will add about another 20%, 25% capacity, allow us to test that concept. And then, we would hope by the end of the year to be able to put in place a solution that would get us up to 100% from a bleed treatment capacity. But that is probably the most significant deficiency that we've seen. We've also had problems with things like pump design that have poor reliability, high down time levels. And that's caused an up and down type of operation throughout the plant. We have also seen issues with the carbon filters that we have, which are designed to remove organic entrainment from the electrolyte going into our cell house. When we get organic in the cell house, that causes problems with plating efficiency and the designs that we have there are not very robust and the source of a lot of problems. We're addressing each of those systematically. In the pumps areas we've redesigned and resourced several pumps or we have plans to do that and have pumps on order. In the case of these carbon filters, we're trying to redesign them to make them more robust. In some cases we think we have an opportunity to recover some of those costs from the engineering companies and the technology providers. In other cases we're going to have to eat those costs. -------------------------------------------------------------------------------- Paul Forward, Stifel Nicolaus - Analyst [6] -------------------------------------------------------------------------------- Okay, thanks. And I think at the start of your comments you had talked about that the pilot plan, the debottlenecking, will boost the capacity or the production rate around 100 tons per day over current levels. I missed--did you mention in your comments what--from what to what? Because I think in the second half of June you were at 173 or so tons per day. Are we talking about 100 tons per day above that level? Or I might have missed--you might have mentioned it earlier and I might have missed your exact comments on the capacity. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [7] -------------------------------------------------------------------------------- Yes. I mean, we think that absent any other issue with--an equipment issue, like the ones I was just describing, the current bleed treatment system should allow us to transfer zinc to the cell house to support about a 230 ton per day type of production rate. This bleed--this pilot plant should add about 100 tons to that number. Now, we don't necessarily realize 230 tons a day every day because of other equipment reliability issues that are sort of independent of bleed treatment. But that constraint alone right now limits us to about 230, 240. And this pilot plant will allow us to move that up by about 100 tons. -------------------------------------------------------------------------------- Paul Forward, Stifel Nicolaus - Analyst [8] -------------------------------------------------------------------------------- Great. And I think--well, certainly earlier in the year you had been talking about rates of production at Mooresboro that would allow the facility to be cash flow breakeven at a certain rate of production. I think back in--earlier in the year we were talking about low 200s rate, but that was at a higher zinc price than we have in the current spot markets today. Is there a comparable rate that you could talk about today, maybe considering the fact that you've got most of your zinc hedged for the second half of the year? What rate is--would it be comparable where you could say at an X production rate you're pretty close to being cash flow breakeven, including the payment of interest at Mooresboro? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [9] -------------------------------------------------------------------------------- Yes. And with the hedging that's in place, we still think that applies here, Paul for the second half of the year. That 230 rate I think is pretty indicative of that. We do have a lot of continued, let's say, start-up costs. So we shouldn't look at that as being the long term view. That's where we're operating and how we'd expect to operate today. Eventually when we get to full capacity, we think we'll be able to take some of this extra cost out. So you wouldn't want to just extrapolate the 230 a day. -------------------------------------------------------------------------------- Paul Forward, Stifel Nicolaus - Analyst [10] -------------------------------------------------------------------------------- Right. Okay, thanks a lot. Thanks, Jim. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [11] -------------------------------------------------------------------------------- Thanks. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- (Operator Instructions) Garrett Nelson, BB&T Capital Markets. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [13] -------------------------------------------------------------------------------- Hi, good morning. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [14] -------------------------------------------------------------------------------- Morning, Garrett. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [15] -------------------------------------------------------------------------------- On the planned outage you took at Mooresboro in July, how many days was the plant down? And was that outage taken towards the beginning of the month, the middle, or towards the end? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [16] -------------------------------------------------------------------------------- The outage began, I believe, on July 7. It was a total outage of around 30 hours. And by that I mean we curtailed flow out of our--the front end of the facility for about 30 hours. In the cell house we cut power to the absolute minimum and held it there during the outage. And then consumed some zinc and solution, and it took about--I'd say the better part of the rest of that week to be able to ramp the production back up to the level it was before we took the shutdown. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [17] -------------------------------------------------------------------------------- Okay. On the hedged zinc that you have for the second half of this year, could you provide the actual number of tons that are hedged just for modeling purposes? -------------------------------------------------------------------------------- Bob Scherich, Horsehead Holding Corporation - CFO [18] -------------------------------------------------------------------------------- Well, I think we do disclose that in the Q, which was filed this morning. But roughly we've got about 15,000 to 16,000 metric tons per quarter hedged. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [19] -------------------------------------------------------------------------------- Okay, great. I'll take a look--. -------------------------------------------------------------------------------- Bob Scherich, Horsehead Holding Corporation - CFO [20] -------------------------------------------------------------------------------- --At the $1.07 that--. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [21] -------------------------------------------------------------------------------- --Okay, great. And then your CapEx guidance for the year? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [22] -------------------------------------------------------------------------------- Yes, we've been at about $15 million for the six months. We expect that to increase probably $4 million to $6 million in the second half of the year. So we have added a little bit. We think it's for the mid $30 million to upper $30 million level now for this year with some of these identified enhancements at Mooresboro. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [23] -------------------------------------------------------------------------------- All right, great. Thanks. That's all I have. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [24] -------------------------------------------------------------------------------- Thanks. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Ian Zaffino, Oppenheimer. -------------------------------------------------------------------------------- Ian Zaffino, Oppenheimer & Co. - Analyst [26] -------------------------------------------------------------------------------- Hi, thank you very much. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [27] -------------------------------------------------------------------------------- Hi, Ian. -------------------------------------------------------------------------------- Ian Zaffino, Oppenheimer & Co. - Analyst [28] -------------------------------------------------------------------------------- How are you guys doing? A question would be, I know you've talked about it in the past, about maybe some legal disputes with the equipment suppliers, maybe some claims that you could make. Is there an update there? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [29] -------------------------------------------------------------------------------- The process is going forward with one engineering company that's kind of in the litigation process. And we're in kind of in the discussion stages with another technology supplier. We really can't get into the details, though, at this point. -------------------------------------------------------------------------------- Ian Zaffino, Oppenheimer & Co. - Analyst [30] -------------------------------------------------------------------------------- Okay. And then on your work with Hatch, I guess you guys reiterated the $90 million to $110 million again. Is there anything you maybe went over with Hatch that kind of gave you more confidence in that number? Do they have models that maybe show what the ramp might look like as you try to get back up to 100%? Or is there any kind of insight that they're providing that kind of gave you confidence in that $90 million to $110 million, or is that just kind of what you've seen previously? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [31] -------------------------------------------------------------------------------- Yes. We really haven't gotten into that with Hatch. I mean, what we've been talking with them about is really specifically related to equipment redesign and process flow sheet type issues. I think certainly what we've heard from them supports our underlying assumptions about the plant and our ability to address the issues we've talked about. But we haven't really gotten to the specifics about modeling the financial benefit of the plant with them. -------------------------------------------------------------------------------- Ian Zaffino, Oppenheimer & Co. - Analyst [32] -------------------------------------------------------------------------------- Okay. And then the final question would be, as far as the potential new dust recycling facility, what would be your cost there, and how does that--maybe walk us through the economics and how you feel about going out and spending that money versus maybe keeping it for excess liquidity as you ramp up the facility. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [33] -------------------------------------------------------------------------------- Yes. We don't really have the capital cost number yet because it's site-dependent and we're kind of at that early--that stage where we're developing what the costs would be and what the configuration of the plant would be and how we might phase the construction. And we also haven't finalized the commercial structure. And who would be putting all the capital in, whether it would be us or whether we have a partner, or whether we would do that and how we might finance it. So I think it's a little premature in terms of understanding the impact on liquidity. But just to put a ballpark number in, when we built our Barnwell facility it was about $65 million. But there are two kilns there, and we built those at the same time. We could have phased that in if we wanted to minimize cash flow--cash investment. And those are some of the considerations we would take. To a great extent we'd like to fund this out of cash flow from Mooresboro. And it really depends upon where we are in the ramp up and what the timing of cash would be for a facility like this one to get ready to build it. -------------------------------------------------------------------------------- Ian Zaffino, Oppenheimer & Co. - Analyst [34] -------------------------------------------------------------------------------- Okay. So I guess that this--they're really not mutually exclusive. So you're basically saying hey, we're going to ramp up Mooresboro, take that cash from that and maybe fund it. So they wouldn't be competing uses of funds. They'd be more linked to one another instead. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [35] -------------------------------------------------------------------------------- Yes, and I think it also depends upon how the deal is structured and how much cash we would actually be putting into it. -------------------------------------------------------------------------------- Ian Zaffino, Oppenheimer & Co. - Analyst [36] -------------------------------------------------------------------------------- Okay. All right. Great, thanks, guys. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [37] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Louis Hammond, Hammond Investment. -------------------------------------------------------------------------------- Louis Hammond, Hammond Investment - Analyst [39] -------------------------------------------------------------------------------- Thanks for taking my call. A longer term question. In fits and starts the EAF furnaces are moving toward increased use of DRI. And as that happens there will be less zinc in the dust. How will that affect your business model and the efficiencies of your plant? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [40] -------------------------------------------------------------------------------- That's a great question. The move toward DRI is primarily limited to one segment of the steel market. It's mostly in the flat-rolled part of the market. You really don't see much use of DRI in long products. To the extent that there's more DRI in there, there could be less zinc in the EAF dust. But we tend not to see that. In the shops that we're servicing that are using DRI today, they're not using 100% DRI. They're using a combination of DRI and generally galvanized scrap recycled from shredded auto bodies, which have a lot of zinc in them. So from a technical standpoint, if you're willing to pay the extra cost to put DRI into these furnaces, then the other scrap that you want to have in there has to be very clean. Otherwise it sort of defeats the purpose of putting the DRI in. That other clean scrap tends to be mostly automotive scrap, which tends to be galvanized. So there's still a fair amount of zinc, even in these shops that are using DRI. -------------------------------------------------------------------------------- Louis Hammond, Hammond Investment - Analyst [41] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Dan Moore, CJS Securities. -------------------------------------------------------------------------------- Lee Jagoda, CJS Securities - Analyst [43] -------------------------------------------------------------------------------- Hi, this is actually Lee Jagoda for Dan Moore. Good morning. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [44] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Lee Jagoda, CJS Securities - Analyst [45] -------------------------------------------------------------------------------- Just a couple of questions on your capacity. So exiting July, what was the percent of nameplate capacity at Mooresboro? And then just following up to that, do you care to comment on the previous guidance of 75% capacity as the goal by the end of September, and given the various changes regarding the pilot plant coming online, did that shift out? And do you have a new timeframe for that capacity? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [46] -------------------------------------------------------------------------------- Yes. Well in it we did 4,000 tons in the month. The nameplate capacity would be about 13,000 tons a month. So the simple math is we were at about 30% of nameplate capacity. The ability to get to 75% is really contingent upon two things. One is getting the realized benefit out of this pilot plant that we've discussed, which would give us, at least from a bottleneck standpoint, an incremental 100 tons a day of capacity, and being able to make progress on some of the equipment reliability issues that we've talked about. It really takes making progress in both of those areas to be able to get to that 75% level. -------------------------------------------------------------------------------- Lee Jagoda, CJS Securities - Analyst [47] -------------------------------------------------------------------------------- Okay. And then just switching gears, I know you mentioned you extended the relationship with Hatch during the quarter. What was the expense related to Hatch in Q2, and how long do you expect them to be engaged in--is the agreement based on a success fee? And if they can bring it up to a certain point, do they get paid in excess of just the normal retainer? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [48] -------------------------------------------------------------------------------- No, there's no incentive structure tied to it. It's really a payment for services and payment for potentially the time of engineers that are on site. -------------------------------------------------------------------------------- Bob Scherich, Horsehead Holding Corporation - CFO [49] -------------------------------------------------------------------------------- It's primarily engineering services associated with capital projects. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [50] -------------------------------------------------------------------------------- Right. -------------------------------------------------------------------------------- Bob Scherich, Horsehead Holding Corporation - CFO [51] -------------------------------------------------------------------------------- It falls with our capital spending--. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [52] -------------------------------------------------------------------------------- --Yes, it's part of our capital spending forecast. I think in the quarter, at least in the first engagement we had, I think we spent about $400,000. -------------------------------------------------------------------------------- Lee Jagoda, CJS Securities - Analyst [53] -------------------------------------------------------------------------------- Okay. And then one more question and I'll hop back in queue. In the past, regarding liquidity, you've stated that $50 million is sort of the threshold you would not want to drop below. In your mind, is there a likelihood that we could approach that level? And then as a follow-up; beyond any additional equity, what other options are out there to secure incremental liquidity if in fact you do have to go that route? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [54] -------------------------------------------------------------------------------- Yes, and good question. We've repeatedly said for the past couple of years as we were entering this transition period, we want to maintain approximately $80 million of liquidity. As that dips down that's when we kind of have stepped in and taken action with it. The refinancing we just did on our two credit facilities has added about $30 million of availability here in July, so that takes the pro forma up over $80 million at the end of June. So we think that holds fairly steady, given the hedging that's in place and kind of the steady progress that we're making. So we're not anticipating the liquidity changing much here for the balance of the year. But it could, and one of the things that's still out there is the capacity to add up to $50 million of additional unsecured debt. And that's something that's always a next available alternative. -------------------------------------------------------------------------------- Lee Jagoda, CJS Securities - Analyst [55] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- Patrick Marshall, CRT Capital Group. -------------------------------------------------------------------------------- Patrick Marshall, CRT Capital Group - Analyst [57] -------------------------------------------------------------------------------- Hi. My questions are already addressed. Thanks, though. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [58] -------------------------------------------------------------------------------- Thanks, Patrick. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- (Operator Instructions) Robert Espesis, private investor. -------------------------------------------------------------------------------- Robert Espesis, - Private Investor [60] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [61] -------------------------------------------------------------------------------- Morning. -------------------------------------------------------------------------------- Robert Espesis, - Private Investor [62] -------------------------------------------------------------------------------- What has Hatch reported to you thus far? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [63] -------------------------------------------------------------------------------- They've--we've been using them to sort of go systematically through the plant and identify kind of evaluate the design we have and give us recommendations on its adequacy or areas that could be improved. And we've also had them focused in on areas that have been particularly problematic from a reliability standpoint. And so we've received a number of reports from them in each of those areas, with very helpful suggestions, some of which we think are worth implementing right away, and others we'd be putting on a list of something we ought to consider in the future. So what we've been able to get from them is--they've got a wealth of experience in hydrometallurgical processing applications and have been helpful in reviewing our engineers' work as well as making recommendations that we hadn't considered. -------------------------------------------------------------------------------- Robert Espesis, - Private Investor [64] -------------------------------------------------------------------------------- In the last call you had identified four big issues--water, solids, cathodes, and pumps as the main four issues. Have any of them been completely resolved yet, and what's the progress? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [65] -------------------------------------------------------------------------------- Yes. So just to touch base on each of those. So the water issue is--really gets back to this bleed treatment problem we've discussed. And as I said, we've started to ease that bottleneck. We've got a plan that starts with this pilot plant, and we'll learn a lot from that here in August. And then we are beginning to engineer the full scale solution which we would expect to have ready by the end of the year. So I think we've clarified the situation there and we've got a plan to address it. In terms of the solids issue, we're specifically referring to solids accumulation in one of the settlers in our solvent extraction facility. And we had planned on including installing a bypass on that settler during the July outage. We elected not to do that, and that was really driven by the fact that we had developed a leak in a mixer associated with a different settler, and we couldn't take both of those settlers down at the same time. So we opted to repair the lead and defer the work on the settler that has the solids in it. That wasn't threatening production. And we've also considered another method for removing those solids using a system that we could install in the settler to essentially suck up the solids from the bottom of the settler. And we're going to evaluate that and see if that works. And if that works, perhaps we don't install that bypass and take the outage. But we still have that decision yet to make. In terms of cathodes, we made progress in the month of July. We increased the number of cathodes from 68 per cell to 80 per cell. So that's about a 15% increase. And at the present time it's really the number of cathodes in the cells that dictates the rate of production. And so we're going to be continuing to add cathodes and anodes in August and in September. And assuming everything goes as we hope with this pilot plant, we should be up over 100 anodes and cathodes by the end of the quarter. But of course that depends upon what happens with the pilot plant. And in terms of pumps, in pumps there is a long list. We've re-engineered and replaced some of the pumps. And one of the issues that held us back in July was the fact that we lost a significant recirculation pump. This pumps 4,000 gallons a minute of solution. And in the same 24 hour period we also lost the inline spare, which you don't expect to happen. So these are pumps that should last 20 years, and they only lasted about a year. So we discovered a design issue with those pumps. We already put in place a temporary pump that had lower capacity that kept us running for several days, but our engineers did a fantastic job of essentially putting in a redesigned, larger scale pump that addressed the design deficiency and got that up and running within ten days, which was really phenomenal. So yes, we still have some work to do on pumps, but we're making progress there. -------------------------------------------------------------------------------- Robert Espesis, - Private Investor [66] -------------------------------------------------------------------------------- So how long after a full scale implementation of the test solutions will be required to evaluate the success of the solutions? -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [67] -------------------------------------------------------------------------------- Again, I think we should understand within--fairly quickly whether this pilot plant has any issues. The pilot uses a slightly different flow sheet and uses different reagents than our current bleed treatment system, and that's why we want to test it at a smaller scale before we go to the larger scale. And I think we'll understand I'd say within 4 to 6 weeks whether there are issues there, and we've already begun the engineering on the full scale solution, assuming success. But we'll have the opportunity to make adjustments if something shows up in the pilot plant. I should point out we tested this pilot plant on a bench scale, just to verify that we were on the right track. And so we have a high degree of confidence it will work. But if something turns up at the pilot scale that we didn't expect, we'll have an opportunity to make an adjustment. -------------------------------------------------------------------------------- Robert Espesis, - Private Investor [68] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Operator [69] -------------------------------------------------------------------------------- And at this time I see we have no further questions. -------------------------------------------------------------------------------- Jim Hensler, Horsehead Holding Corporation - Chairman, CEO, President [70] -------------------------------------------------------------------------------- Okay. Well thanks, everybody, and we'll talk again at the end of this quarter. Take care. -------------------------------------------------------------------------------- Operator [71] -------------------------------------------------------------------------------- Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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