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Management Quality of Horsehead Holding Corporation - A Mohnish Pabrai Investment
Posted by: Itzar Juna (IP Logged)
Date: February 20, 2014 10:19AM

In this article I would like to discuss some of the points about the management of Horsehead Corporation (ZINC). These are my takeaways after reading the annual reports of Horsehead Corporation.

There are a lot of things a investor looks at in analyzing the quality of a managment.
Here I'll be discussing a few which stood out for me.

1. Frugal Management

When we invest in a company we want to make sure the management uses shareholder money wisely. One of the methods I apply in identifying the frugality of the management is by looking at the annual report. A dull and bland colorless annual report with no photos is my kind of annual report. This is something I learned from reading Buffett letters. As long as the management can convey the message using numbers and graphs there is no need for glossy colorful pages. Horsehead's annual reports meets this criteria.

I've read many annual reports but none where I had seen someone use the back of the main cover page to write a chairman's letter (in 2008 AR).

This is very interesting because if you see they had not done this they would have ended up using one additional page.Though one can argue what big is that one page saving ? But for me it speaks a lot about the frugality of the management.

2. Management Supplements Its Claims with Facts and Figures:

One of the things we frequenlty come across is the claims made by management without supplementing with data.

We often read claims by managements like, "We increased the bottom line by efficient controls, cost savings and better employee utilization."

Claims like that above will not clearly explain in numbers or in detail what was the method applied? Or how much was the saving?

In Horsehead's AR I was able to see management clearly explain what steps they took and what was the result in detail.

See below the note from Horsehead's 2008 annual report.

Continue to Focus on Production Efficiencies and Operating Cost Reductions

"We have reduced our manufacturing costs by increasing our usage of low-cost feedstock, streamlining our organizational structure and implementing “Six Sigma” (a business process improvement methodology) initiatives, and we intend to continue to focus on these and similar initiatives in the future. As part of our “Six Sigma” initiatives, we made a series of operating improvements at certain facilities. For example, at our Calumet plant we have reduced the amount of non-zinc materials fed to our smelter, thereby reducing operating costs by approximately $1.4 million on an annual basis without significant capital expenditures. At our Monaca facility we implemented the use of larger coke in our furnaces in 2007 resulting in savings in excess of $1.5 million. We also improved the performance of the Monaca facility’s furnace preheaters by increasing the preheat temperature of the charge to our electrothermic furnaces resulting in savings in excess of $0.5 million in 2007. In 2005, we converted our power plant to the burning of Powder River Basin Coal (“PRB”) coal, avoiding an increase in operating costs of approximately $10 million per year with a one-time investment of approximately $3.5 million"

If you see above they have clearly explained the action they took and quantified the savings with the numbers.

3. Management Makes Acquisitions That Increase Shareholder Value

Some managements make acquisitions in the name of diversification leading to diworsification.

Thankfully Horsehead management does not do "diworsification" but does acquisitions that make sense.

Following info from 2010 AR available at

Diversify and Expand Environmental Services Business

Our core strengths relate to our proven ability to manage hazardous and non-hazardous wastes generated by industrial processes and our experience and capabilities to recover valuable metals from these waste streams. We expect to expand our environmental services business into a broader range of metal-bearing wastes. The acquisition of INMETCO is an example of this diversification and we believe that INMETCO will be a platform for further growth. We expect to continue to pursue capital investment and acquisition opportunities in this area and believe this will reduce our exposure to changes in zinc prices.

On December 31, 2009, the Company purchased all of the issued and outstanding capital stock of INMETCO, from Vale Inco Americas Inc. Under the terms of the stock purchase agreement, the Company estimates that it will pay cash of $38,802, of which $33,237, net of cash acquired, was paid at closing. The remainder is expected to be paid in the first quarter of 2010. The Company also assumed certain financial assurance obligations associated with environmental regulatory requirements. The assurance was provided in the form of a $5,890 letter of credit supported by a $6,185 increase in the Company’s restricted cash balance. See Note L.

The acquisition of INMETCO will enhance the Company’s hazardous waste services platform and diversify its range of capabilities and products including the recycling of EAF dust and stainless steel flue dust for the recovery and reuse of a wide range of valuable metals. It expands the Company’s industrial metals portfolio while leveraging the Company’s key strengths in hazardous waste management and high temperature metals recovery.

Did the Acquisition Make Sense?

From AR's 2011 letter to shareholders:

"In an effort to diversify and expand our environmental services business , we acquired INMETCO at the end of 2009. We have been very pleased with this acquisition which turned in another excellent year in 2011. This Business, which we acquired for $39 million, genrated EBITDA of $21 Million in 2011 after posting $17 million in 2010."

Year Ended December 31, 2010 Compared with Year Ended December 31, 2009

Consolidated net sales increased $165.9 million, or 76.6%, to $382.4 million for 2010, compared to $216.5 million for 2009. The increase includes a $111.7 million increase in net sales for Horsehead and $54.2 million in net sales related to INMETCO.

The company invested $39 million in 2009 and earned an EBITDA of $38 million in two years. Not bad, I would say.

4. Risk Management

The management of Horsehead has managed the commodity price risk pretty well.

Horesehead Coporation is a "heads I win, tails I don't lose much" kind of investment. Which is a concept mentioned in Dhandho investor written by Mohnish Pabrai (Trades, Portfolio).

See below from the 2007 letter to shareholders of Horsehead:

"And finally, we have reduced our exposure to the volatility of Zinc market by purchasing put options for 2008 and 2009. This will allow us to enjoy the upside of any zinc price volatility while protecting our cash flow from the downside."

So what happened to those put options in 2008?

Find below the note from 2008 annual report.

"We purchased put options for 2008 and 2009 to reduce our expsoure to the volatility of the zinc market and proect the cashflow required to support our growth initiatives That proved to be a fortuitous decision, as we witnessed a steep drop in the market price of zinc during 2008."

These were some points I discovered going through the annual reports. Hope these are helpful to the readers.

Thanks for reading.

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Re Management Quality of Horsehead Holding Corporation - A Mohnish Pabrai Investment
Posted by: Jean-Francois Nobert (IP Logged)
Date: February 20, 2014 08:19PM

Great article:

“A well-managed factory is boring. Nothing exciting happens in it because the crises have been anticipated and have been converted into routine. Similarly a well-managed organization is a ‘dull’ organization.Peter Drucker 

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Re Management Quality of Horsehead Holding Corporation - A Mohnish Pabrai Investment
Posted by: Arjun Chan (IP Logged)
Date: February 20, 2014 09:09PM

Thanks Ecotycoon . Great Quote from Peter Drucker.

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Re Management Quality of Horsehead Holding Corporation - A Mohnish Pabrai Investment
Posted by: Hoang Quoc Anh (IP Logged)
Date: February 21, 2014 08:15PM

Thanks man. Great article about reading annual reports. It's true that if we take time to read annual reports in the past five years and see how management writing over time, we will discovered a lot of interesting things 'bout the management itself and the organization. 

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Re Management Quality of Horsehead Holding Corporation - A Mohnish Pabrai Investment
Posted by: Arjun Chan (IP Logged)
Date: February 21, 2014 11:34PM

Thanks Anh. Agree with you . There is nothing better than reading 5years of AR.

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Re Management Quality of Horsehead Holding Corporation - A Mohnish Pabrai Investment
Posted by: newhigh (IP Logged)
Date: April 11, 2016 03:04PM

How did this investment turn out so badly?  

What went wrong?

How can we learn from this? 

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