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HORSEHEAD HOLDING CORP. Reports Operating Results (10-Q)

November 09, 2010 | About:

HORSEHEAD HOLDING CORP. (ZINC) filed Quarterly Report for the period ended 2010-09-30.

Horsehead Holding Corp. has a market cap of $503.8 million; its shares were traded at around $11.62 with a P/E ratio of 31.4 and P/S ratio of 2.3. ZINC is in the portfolios of Mohnish Pabrai of Pabrai Mohnish, Donald Smith of Donald Smith & Co., Donald Smith of Donald Smith & Co., Chuck Royce of Royce& Associates, Jim Simons of Renaissance Technologies LLC, Mario Gabelli of GAMCO Investors.

Highlight of Business Operations:

Market Price for Zinc and Nickel. Since we generate the substantial majority of our net sales from the sale of zinc and nickel-based products, our operating results depend greatly on the prevailing market price for zinc and nickel. Our principal raw materials are zinc extracted from recycled EAF dust, for which we receive revenue from the carbon steel mini-mill companies, and other zinc-bearing secondary materials (purchased feedstock or purchased feed) that we purchase from third parties. Costs to acquire and recycle EAF dust, which, during the first nine months of 2010, represented approximately 69% of our raw materials, are not directly impacted by fluctuations in the market price of zinc on the London Metal Exchange (LME). However, the cost for the remaining portion of our raw materials is directly impacted by changes in the market price of zinc. The price of our finished products is also impacted directly by changes in the market price of zinc and nickel, which can result in rapid and significant changes in our monthly revenues. Zinc prices experienced a period of general decline between 2000 and 2004, primarily due to increased exports from China and declines in global zinc consumption. During 2004, however, zinc prices began to recover, primarily due to increases in global zinc demand, including in China, and to declines in global production due to closed or permanently idled zinc mining and smelting capacity. Zinc prices rose throughout 2005 and 2006 to a historical high of $2.08 per pound on December 5, 2006 then began a steady decline to $0.47 per pound on December 17, 2008 for an average of $0.85 per pound for 2008. Zinc prices began to strengthen in 2009 reaching a high of $1.17 per pound on December 31, 2009 for an average of $0.75 per pound for the year.

Monthly average zinc prices have fluctuated between $0.79 per pound and $1.10 per pound in the first nine months of 2010, for an average of $0.96 per pound for the period. The movement and level of zinc prices reflect the gradual improvement in economic conditions and continued investor activity in the metal markets. For the nine months ended September 30, 2010, LME average nickel prices ranged from $8.36 per pound to $11.81 per pound and averaged $9.62 per pound.

In 2009, we purchased put options for 2010 at a cost of $5.3 million to serve as a hedge and to mitigate the effects of decreases in the LME average zinc price. Through the purchase of the options, we will receive a minimum price per pound for the quantity hedged. The options have a strike price of $0.65 per pound. At the time of the purchase, the options for 2010 represented approximately 80% of our expected zinc production in 2010. In 2010, we purchased put options for 2011 having a strike price of $0.65 per pound for approximately 94,000 tons of zinc at a cost of $2.9 million. We also sold put options for 2011 having a strike price of $0.55 per pound for approximately 30,000 tons of zinc and received $0.2 million. The options we purchased provide that we will receive a minimum of $0.65 per pound for the quantity hedged and the options we sold provide that the buyer will receive a minimum of $0.55 per pound for the quantity hedged.

We are pursuing recovery of the cost of repairs and the lost profit from our zinc oxide and refined metal during the rebuilding period, subject to customary deductibles, under our business interruption and property insurance. In the third quarter, we received a $4.5 million advance from our property insurance carriers and have applied $2.2 million in clean-up and repair cots against it. While the full financial impact of this incident is not known at this time, absent insurance recoveries, earnings will be negatively affected for the remainder of the year. We believe that we will continue to have adequate liquidity to support the business.

We have experienced fluctuations in our sales and operating profits in recent years due to fluctuations in zinc prices. Historically, zinc prices have been extremely volatile, and we expect that volatility to continue. For example, the LME price of zinc rose from $0.58 per pound on December 31, 2004 to $2.08 per pound on December 5, 2006 and fell to as low as $0.47 per pound on December 17, 2008. In 2009, the LME price of zinc ranged from a low of $0.48 per pound on February 20, 2009 to a high of $1.17 per pound on December 31, 2009. The average price was $0.96 per pound for the first nine months of 2010. Changes in zinc pricing have impacted our sales revenue since the prices of the products we sell are based primarily on LME zinc prices, and they have impacted our costs of production, since the prices of some of our feedstocks are based on LME zinc prices. Therefore, since a large portion of our sales and a portion of our expenses are affected by the LME zinc price, we expect that changing zinc prices will continue to impact our operations and financial results in the future and any significant drop in zinc prices will negatively impact our results of operations. We employ various hedging instruments in order to attempt to reduce the impact of decreases in the selling prices of a portion of our expected production.

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Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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