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Mohnish Pabrai Bumps Up Ownership of Horsehead Holding to 11.5%

October 31, 2013 | About:
Holly LaFon

Holly LaFon

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In his sixth increase to the company in the past quarter, Mohnish Pabrai added 2,300 shares of Horsehead Holding Corp. (ZINC) bringing his total ownership of the company to 11.5% of shares outstanding, as reported by GuruFocus Real Time Picks on Oct. 28. The Warren Buffett-style investor now holds 5,072,300 shares of the company.

Of Pabrai’s portfolio of just six stocks, Horsehead Holding is the fifth largest, but is the only company of which he owns more than 5%. The total value of the portfolio is $421 million.

Pabrai has been buying shares of the company since the first quarter 2013, when the price averaged around $10.50.

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Horsehead’s stock price:

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Horsehead Holding Corp. is the parent company of Horsehead Corp., the largest recycler of electric arc furnace (EAF) dust, a hazardous waste generated by the North American steel industry. The company owns seven facilities located in Oklahoma, Pennsylvania, Texas, Illinois, Tennessee and Pennsylvania, with headquarters in Monaca, Penn. The EAF dust produced from galvanized scrap melted steel contains 20% zinc, making Horsehead the also largest zinc producer and leading manufacturer of specialty zinc products in North America.

Horsehead Corp. is currently undergoing a transition and expansion. The company is idling its 80-year-old zinc smelter in Monaca and building a new state-of-the-art, “green” plant in North Carolina. Production at the new plant is expected to begin by the end of 2013, and take six months to reach full capacity. Management is expecting the new facility to increase EBITDA by $90 million to $110 million and “transform the business,” it said in an investor presentation from August.

Second, it is in the process of moving its zinc oxide business entirely to its Zochem segment, located in Brampton, Ontario. The company has invested $15 million to expand its Zochem capacity from 50,000 tpy to 72,000 tpy, which it anticipates will increase the segment’s annual net earnings by three or four times.

Horsehead Corp. in 2012 reported declined revenue to $436 million and a net loss of $30 million, compared to a profit for the previous two years. It also did not produce free cash flow for the past two years. For 2012 it had negative return on equity and negative gross and net margins, compared to positive results in 2011. The gross margin in 2012 was 0.7%, compared to 16.4% the previous year and double digits since 2005, except a negative number in 2009.

The company has a cash balance of $127 million, with long-term liabilities and debt around $324 million.

Horsehead’s revenue and earnings history since its 2002 IPO:

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Both Horsehead’s Thursday stock price and P/S ratio are near two-year highs, at $12.83 and 1.3, respectively. It also has a P/B 1.5.

For more on Mohnish Pabrai, see his portfolio here.

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