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Horsehead Holding Corp. (NASDAQ:ZINC)

Q3 2008 Earnings Call Transcript

November 7, 2008 11:00 am ET

Executives

Ali Alavi - VP of Corporate Administration, General Counsel and Secretary

Jim Hensler - President and CEO

Bob Scherich - CFO

Analysts

Brian Grad - DLS Capital

Adam Adelman - Capstone Investments

Bill Fisher - Raymond James

Ron Silverton - Asgard

John Francis - Francis Capital Management

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Horsehead Holding Corporation Third Quarter 2008 Earnings Call. At this time, all participants are in a listen-only mode. Later, there will be a question and answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today’s call is being recorded.

At this time, I would now like to turn the conference over to Ali Alavi. Please go ahead sir.

Ali Alavi

Thank you. Good morning everyone and thank you for joining us on our third quarter 2008 earnings release conference call. My name is Ali Alavi and I’m Horsehead’s Vice President of Corporate Administration, 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 market 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 US Securities and Exchange Commission, including our most recent Annual Report on Form 10-K filed on March 31, 2008 for a more detailed description of the risk factors that may affect our results.

With that, I'm pleased to introduce Jim Hensler, our President and CEO. Jim?

Jim Hensler

Thanks, Ali. I'd like to welcome you to this conference call to discuss the third quarter 2008 results. I will review the performance of our operations and markets then turn it over to Bob Scherich, our CFO, who will review the financial results.

Our primary focus during the quarter was to reduce costs as the commodity price for zinc continued to decline. This led to the decision to reduce operations from six furnaces to five in the Monaca smelter, while reducing the intake of higher priced feed sources and negotiating lower prices for the purchased feed that we consume.

As a result of these changes and the 23% increase in EAF dust receipts versus the prior year quarter, we have increased the proportion of smelter feed produced from lower cost EAF dust sources to 70%.

EAF dust receipts which were at an annualized rate of 555,000 tons during the quarter began to decline in September reflecting a rather sharp decline in steel production. In response, we have isled our smallest recycling plant located in Beaumont, Texas, and moved the roughly 25,000 ton per year dust processed at that plant to our other lower cost facilities. In addition, we are pursuing new dust sources during the fourth quarter.

We expect to process dust at our new effective capacity rate of approximately 550,000 tons per year until we start up our new facility in South Carolina in the second half of 2009.

We have received all of the required permits and has started construction activity at the Barnwell site. The project is on track for the first 80,000 ton per year kiln to start up before the end of the third quarter next year and while we put on hold capital investments related to expanding zinc production in Monaca, the Barnwell project continues to be an important part of our long-term growth strategy as well as a significant step in lowering feed cost to our smelter and returning to a six furnace operation.

Market demand for zinc metal remained strong during the quarter, but the slowdown in the general economy and specifically the auto sector reduced demand for zinc oxide in the tire and rubber markets.

Zinc product shipments increased by 5.5% compared to the third quarter 2007 to about 40,000 tons. However, shipments declined by about 8% compared with the second quarter of 2008. Demand in the general galvanizing market continues to be steady however, in response to the decline in zinc oxide demand, we have decided to idle zinc oxide production at our Larvik furnaces in Monaca.

Our Larvik furnaces produce about 9,000 tons per year zinc oxide and are fed with high cost metallic troughs. We will continue to produce zinc oxide in our more efficient refining columns.

The zinc price declined 45% since the prior year quarter and another 30% since the end of September. The 30 days since the end of the third quarter represented historic change in many commodity prices, including zinc.

Inflation adjusted terms prices are now below the average price for the 15 years through 2005 before the latest rally and are trading close to or below the levels reached in the two previous zinc market recession at 1991-92 and 2002-2003.

Given the lower zinc price that we are facing, the focus of the business is to reduce cost and conserve cash. We are please to have a strong liquidity position in the phase of these difficult financial markets. The hedges that we purchased earlier in the year have generated cash to partially offset the decline in zinc prices and to support our investment plans.

In order to reduce the potential for counterparty risk surrounding these hedges, we sold our 2009 put options in October at an effective settlement price of $0.54 per pound or $64.5 million before taxes and purchased new hedges for 2009 having a strike price of $0.50 per pound at cost of $10.5 million. We continue to hold 2008 put options having a strike price of $1 per pound.

As [entered] the last quarter, we have identified and are implementing $35 million in potential cost savings which target a wide range of opportunities throughout the business. In the third quarter we realized cost savings of $5.5 million from these initiatives and we continue to negotiate lower feed prices, reduced labor usage, and energy consumption and implement process improvements throughout our operations.

Moving on to discuss the pricing environment. The realized premiums on metal averaged about $0.05 during the quarter, lower than the premium from the prior year’s quarter of $0.11, and down slightly from the second quarter reflecting the downward pressure from additional supply in the market. Transactional premiums for the zinc oxide remains steady while realized premiums increased reflecting the lag effect as LME prices declined from the second quarter.

Finally, we continue to focus on revenue enhancement projects such as our initiative to market the iron-rich co-product of our EAF dust recycling process to the iron and steel industry. We have made several contacts over the past quarter and we are organizing our first mill trial which we hope to complete before the end of this year.

I will now turn it over to Bob Scherich, Horsehead’s CFO, to review the financial results.

Bob Scherich

Thanks Jim. For the third quarter, earnings per share were $0.27. I would like to provide a summary bridge of these earnings to the prior year third quarter earnings per share of $0.73. As a starting point, the prior year earnings adjusted to the same share base and tax rate as the current quarter were $0.67 or $0.40 higher than the current quarter.

The lower average LME price resulted in a net reduction in sales and cost of $0.72 per share which was partially offset by a $0.05 effect from settlement of hedges. Growth in volume of shipments added $0.08, higher costs, notably energy decreasing earnings $0.11 and finally the effect of mark-to-market adjustments for open hedge positions added $0.30 to the quarter.

In summary, after adjusting for the change in the share base and tax rate, a $0.40 per share reduction in earnings resulted from a $0.72 reduction in the LME price for zinc and $0.11 decrease due to higher cost partially offset by an $0.08 effect from higher volume of shipments and $0.35 effect from hedging.

Detail of the quarter’s performance reflects a decrease in sales of $24.8 million or 18.5% compared to $134 million for the prior year quarter. The decrease was a result of a $52.9 million decrease in price realization due primarily to a lower average LME zinc price. Partially offsetting this decrease was the sales volume increase of $9.3 million reflecting an increase in shipment of zinc products and increased EAF dust receipts.

The average sales price realization for zinc products on a zinc contained basis was $0.99 per pound or $0.19 per pound above the average LME for the quarter compared to a $1.73 per pound or $0.27 above the average LME for the prior year quarter.

Our hedging positions partially mitigated the reduction in revenues caused by the change in LME price as settlements of hedges net of carrying values added $2.2 million to sales. A favorable non-cash mark-to-market adjustment of $14.8 million on our open hedge positions was recorded to sales during the quarter.

Sales of zinc metal decreased $19.3 million or 34.9% to $36.1 million for the quarter, compared to $55.4 million for the prior year quarter. The decrease was attributable to a $30.4 million decrease in price realization partially offset by $11.1 million increase in sales volumes.

Sales of zinc oxide decreased $25.7 million or 42.6% to $34.7 million for the quarter compared to $60.4 million for the prior year. The decrease was attributable to a $21.2 million decrease in price realization and a $4.5 million decrease in sales volume.

Sales from EAF dust recycling increased $1.7 million or 15.7% to $12.9 million for the quarter compared to $11.2 million for the prior year. Of this increase, $2.6 million was from higher volume of receipts, partially offset by $0.9 million reduction due to a 6% decrease in price realization.

Net sales from EAF dust receipts for the quarter were based upon 138,337 tons versus 112,056 tons for the prior year quarter.

Cost of sales decreased $3.4 million reduced purchased feed cost as a result of the decline in the average LME were offset by the effect of higher volume of shipments, increased energy cost, and the lag effect of cost flowing out of inventory. With inventory carried at a weighted average actual cost, higher cost from the prior months flow through to the current period resulting in a lag in realized reduced cost as the LME decline.

If purchased feeds consumed in the current period had been purchased at the current period LME price, cost of sales would have been $5.1 million lower. A similar lag effect occurs with finished and work in process inventory albeit to a lesser extent. This lag effect due to the inventory method takes approximately four months to flow completely through cost of sales assuming the LME price remains constant.

For the quarter, purchased feed cost reduced $13.5 million primarily due to the change in the LME price and our initiatives to reduce the price we pay as a percentage of the LME. These decreases were partially offset by a $4.2 million increase in shipment volume and a $1.2 million increase in our recycling and other cost. Energy cost increased $3.2 million versus the prior year quarter.

Selling, general and administrative expenses increased $0.9 million to $4.7 million for the quarter compared to $3.8 million for the prior year quarter. The increase reflects primarily increased legal and audit expenses not included in the prior year.

Interest expense decreased $1.1 million to $0.4 million for the quarter compared to $1.5 million for the prior year quarter reflecting lower debt levels.

Our effective tax rates were 35.7% for the current quarter and 33.9% for the prior year quarter. The effective tax rate for the nine months was 36.8% which is our estimate for 2008.

Cash flow from operating activities was $20.6 million for the quarter, capital spending was $9.3 million for the quarter, and $27.2 million for the nine months. Availability on our revolver remains at approximately $60 million.

Our hedges continue to have a significant impact on our liquidity and reported earnings. The value of our put options for 2009 increased from $22.4 million on June 30 to $33.9 million on September 30. This is in comparison to $14.2 million that we paid for the hedges earlier in the year.

Given increased concerns over counterparty risk, we sold these hedges for $64.5 million in October. The total gain before taxes will be $50.3 million of which $19.7 million was recorded during the first nine months, leaving $30.6 million in the fourth quarter.

Our remaining 2008 put options had a value of $11 million on September 30. If the LME average is $0.55 during the fourth quarter, these hedges would settle for approximately $20 million. Our primary reason for purchasing the hedges was to manage the risk to cash flow associated with the decline in the LME and we believe that they have served that purpose very well. The sale of the 2009 hedges was a continuation of our management of risk.

In closing, the profile for the third quarter was very similar to the second quarter and then a large part of the effect of the decline in the LME was offset by higher shipment volumes and the benefit of hedges when compared to the prior year quarter.

On a sequential quarter basis, the inventory lag continued to negatively affect earnings. At the current outlook for zinc price for the fourth quarter, we expect to see a continuation of this trend.

At this time I would like to turn things back to Jim for some final comments.

Jim Hensler

Thanks Bob. In summary, before we open the call for questions, I would like to say that even though in the short-term the zinc industry as a whole is facing historically low zinc pricing on an inflation-adjusted basis and an uncertain outlook for zinc demand. Horsehead is well positioned to deal with the current situation.

We have essentially no debt, $80 million in cash on the balance sheet at the end of the third quarter, put options for the $1 strike price covering 70% of our production for the balance of 2008 and additional $55 million of net cash received before taxes from the sale of our 2009 put options.

We have one of the lowest cost feed sources in the world from our recycled EAF dust and we are aggressively pursuing cost reductions at all of our facilities. While we cannot predict how long zinc prices will remain at this low levels we note that Brook Hunt reports perhaps more than 25% of zinc mines are operating below their cash cost at these prices. Therefore history dictates that a supply side reaction must eventually occur and prices will eventually recover.

We will defer some capital projects in this environment that continue to believe the EAF dust recycling side of our business offers attractive investment potential. In addition, we’ve started to develop projects outside of the zinc industry which can leverage our expertise in high temperature metals recovery and hazardous waste recycling. It is in times like these that we work to lower our breakeven point and position the business to be more profitable when markets eventually recover.

Thank you very much and we would now like to take your questions.

Question-and-Answer session

Operator

Great. Thank you. (Operator Instructions). We are showing a question from the line of Brian Grad with DLS Capital. Please go ahead.

Brian Grad - DLS Capital

Hi guys. How are you? Just let you know, I am new to the company, but optimistic about your future. Could you give me a little bit of color on CapEx plans as they were publicly stated and kind of where are you headed with that over the next couple of years and also if you could give me an idea, what would this company look like if zinc prices stayed at $0.50 for the next two or three years.

Bob Scherich

On the capital spending plan, what we had publicly published up until now has really been our growth initiatives as we were seeing higher commodity prices and that’s where we were looking to expand capacities both on the zinc finished product side as well as the EAF dust processing.

Given the current environment, that capital spending plan is now moved to more, as Jim mentioned, simply to continuing with our EAF dust processing capacity but for now deferring further expansion on zinc products.

Brian Grad - DLS Capital

What is the maintenance CapEx if you would and also what is going to be the total cost to build out the South Carolina plant?

Bob Scherich

Maintenance CapEx has been, we’ve stated as being in the $10 million to $12 million level. We think for short period of time we can probably operate slightly under that. The South Carolina facility is right now targeted to about an $82 million to $85 million project which is underway.

Brian Grad - DLS Capital

And how much has been spent already?

Bob Scherich

Maybe 5 million.

Brian Grad - DLS Capital

Okay.

Bob Scherich

Although the pace on South Carolina is now picking up rapidly. We would expect to spend $10 million or $15 million here for the balance this quarter.

Brian Grad - DLS Capital

Do you think that you are going to be able to do that with the cash on hand or you have take some of your revolver down for that?

Bob Scherich

I think we continue to believe that we can operate the business and fund these investment from current cash flow and cash on the balance sheet.

Brian Grad - DLS Capital

The second part of the question which was if you are ceasing at $0.50 for the next two or three years, I mean how does the business look there and what are your kind of breakeven run rate?

Bob Scherich

Well, I think at $0.50. We have to continue to move down the cost curve and it moves us away from purchased feeds unless we can buy them at even lower pricing. So, it’s really a profile of maximizing the low cost feeds from EAF dust and continuing to reduce cost. So, it becomes very important to continue to focus on cost reduction to maintain a breakeven at that level.

Brian Grad - DLS Capital

Okay. I’ll get back in the queue.

Operator

Great, thank you and we do have a question from the line Adam Adelman with Capstone Investments. Please go ahead.

Adam Adelman - Capstone Investments

Hi guys.

Jim Hensler

Hi, Adam.

Adam Adelman - Capstone Investments

Quick question about the hedging for that the put options that you bought for 2009, was that again for 90,000 tons?

Bob Scherich

Yes, same quantity, same monthly settlements.

Adam Adelman - Capstone Investments

Okay. And could you just tell us a little bit about how that will show up accounting wise, I assume that will land in the fourth quarter and maybe a little bit about why you sold the put options that you already had only to repurchase them and I am assuming it looks to mitigate some counterparty risk?

Bob Scherich

Yeah, it's kind of the latter first. As we stated, that’s exactly what we did. We sold the previous 2009 put options eliminating the current risk, counter party risk and then new strike prices really for continued risk protection.

The accounting for it kind of stays the same. If you walk through kind of what happened with the 2009 original ones, we put them on the balance sheet, when we bought them as an asset, it’s $14.2 million, they get mark-to-market each reporting dates so as of June that $14.2 million was moved to higher level and then again as of September that went from $22.4 million in June to $33.9 million in September then we sold them for $64 million.

So, the new put options will be put on to the balance sheet as we bought them in October at $10.5 million and they will be mark-to-market also on December 31. So, that value could be higher or lower at that point of time.

Adam Adelman - Capstone Investments

Okay, and does that gain of the $64 million flow through the income statement?

Bob Scherich

Yes, yes.

Adam Adelman - Capstone Investments

In the fourth quarter

Bob Scherich

Again zinc product so it shows up through the sales line. And the portion of the game that had not already been reported which is about $30 million will show up in the fourth quarter because previously, we’ve already recorded $19.7 million of that gain during the second and third quarter combined.

Adam Adelman - Capstone Investments

Okay. What was your smelter yield for the quarter, the zinc recovery in the smelting operations?

Jim Hensler

We were right around 95%.

Adam Adelman - Capstone Investments

95%? So, I know it was 95% last quarter and it’s been trending a little higher. Is this a range that we can expect as sustainable?

Jim Hensler

We think it’s sustainable. We're also expecting further improvements to the pelletizer project that we are installing in our Palmerton plant should result in even further improvements in furnace recovery because we’ll have less iron carryover coming into our smelter which negatively affects the recovery. So, we would expect to see further improvements next year.

Adam Adelman - Capstone Investments

Okay. And I have one more quick question and I'll jump back in the queue. You mentioned that there was some softening in demand for tire and rubber for zinc oxide and I know there is some seasonality in the July and in December month. Is this something outside of that typical seasonality and if so do you still expect that you’ll be able to sell your full capacity of zinc oxide and or is that part of the reason you are idling some of the 9,000 tons.

Jim Hensler

There is a normal third quarter seasonality you see in this market and we did experience some of that in the third quarter but we are also getting indications from the major tire producers that their business may be up off by about 10% next year. And so while we think that these prices, it does not make sense for us to try to run at full capacity and that we are better of to operate to idle our higher cost Larvik furnaces which have capacity of about 9,000 tons and then maximize the amount of oxide we can produce in our lower cost refining columns.

So, our expectations would be that we would produce, we will run those columns closer to capacity but we would not be operating Larvik furnaces until we see tire volume begin to come back.

Adam Adelman - Capstone Investments

Okay. So, should we still expect something around like 80,000 tons per year…?

Jim Hensler

Yeah, I think 80,000 would be the max I think our outlook right now is about 75.

Adam Adelman - Capstone Investments

75. Okay. All right. Thanks very much. I’ll jump back in the queue.

Jim Hensler

Thank you.

Operator

Thanks. And our next question comes from the line of Bill Fisher with Raymond James. Please go ahead.

Bill Fisher - Raymond James

Good morning. I just had a couple of questions on if you look at our Q4 and that the hedges settle on ’09 and I assume obviously you have settled the ’08. After-tax, could you end the year with north of a $120 million in cash or kind of give a range on what might be the input there?

Bob Scherich

Yeah, I think from where we are setting today with the couple of months left in the quarter, the profile is the commodity price stays kind of where it's at. We are going to have the positive cash coming from the 2008 settlements. Working capital is continuing to be managed down, but that’s going to be partially offset with increased capital spending on the South Carolina project. We think it’s stays relatively neutral in the fourth quarter.

Bill Fisher - Raymond James

But you got the receipts of those cash settlements as well.

Bob Scherich

Yeah, we’ve already got that. So, I have added that in. We will have estimated tax payments in December, but we think from where we are sitting today cash outlook for the balance of the quarter is relatively flat.

Bill Fisher - Raymond James

Okay. And then on your, they have all cost of planning being, I think you said 80 or something. Can you just build out one kiln originally or how does that capital flow?

Jim Hensler

Our plan right now is to build them essentially in parallel although the second kiln will be staggered by about three to four months. There is some synergy on the construction cost side to building them at the same side and if we delay the building of the second kiln, the cost to remobilize is fairly high. So, we will build them essentially in parallel with a slight offset in the startup.

Bill Fisher - Raymond James

Okay. And is there any carryover of CapEx for the wash facilities or the other some productivity capital in ’09 or will that be mostly spend this year?

Jim Hensler

There will be a little bit of carryover. This pelletizer project in Palmerton will spill over little bit in the first quarter next year but most of the capital relative to the wash circuit should be completed this year.

Bill Fisher - Raymond James

Thanks, and this is just unrelated but Jim you mentioned on well including the IRM material, what kind of has to obviously you have to do the test next but what are the steps that have to happen to get it to where you are commercially selling that product?

Jim Hensler

Well I think we need to have a couple of success stories that we can go and start to market and it starts with getting some mill trials going and we are seeing some receptivity.

I think that the slowdown that we are seeing in the steel industry, actually may work to our advantage here because initially, we were seeing that, some mills, we are not interested in scrap alternative type materials, because they are mostly concerned about productivity and now their focus seems to be more on cost and so we think that some of these alternative materials will maybe get some greater interest. So, we need to get a couple of successes under our belt and use that to market further penetrations.

Bill Fisher - Raymond James

All right. Thank you.

Operator

Thanks. And your next question comes from the line of [James Angeles] with myTriggers.com. Please go ahead.

Unidentified Analyst

Sure. On the EAF dust market, you talked about competitors in your last annual American Ecology and some of the other waste sites that take the dust. How successful have they been in penetrating market or penetrating any of your current customer base?

Jim Hensler

The landfills, we sort of seem going the other way. We are seeing business being taken away from them. We have picked some business from landfills and as I think that’s going to be the general trend.

Unidentified Analyst

And your current customer base, are they signing multi-year contracts with you or they are cancelable upon 30, 60, 90-day, how do you structure your current EAF dust contracts?

Jim Hensler

All of our contracts are for the full term of the contract. We have contract ranging from annual contracts up to as long as 12 year contracts in some cases. But they are not cancelable.

Unidentified Analyst

And your average contract timeline mix out of your business if you were to age?

Jim Hensler

We don’t actually calculate that number, but I would have to shoot from the head I would say it’s…

Bob Scherich

On weighted average.

Jim Hensler

On weighted average basis, probably in the neighborhood of three years.

Unidentified Analyst

Three years, okay. And any resistance upon renewal or any re-negotiation of terms or is it a fairly easy renewable process.

Jim Hensler

We are seeing a more competitive market. I mean we’ve got new entrance that have come in that are starting to increase the competition for dust and we are seeing that reflected a bit in lower service fees. But prior to this recent cutback in the steel industry that I mentioned we've had no problem operating at full capacity.

Unidentified Analyst

Any thing proprietary or ways to protect your current technology or is your first mover advantage with your current client base?

Jim Hensler

The advantage we have is the integrated nature of our business. We have a smelter which can use this material which I think is in this market perhaps one of the barriers to entry.

Unidentified Analyst

A financial question, your previous relationship with Sun, are there any tails on any of the lines of credit, the management fees or financings where they are entitled to the additional fee as you move forward.

Bob Scherich

No.

Jim Hensler

No.

Unidentified Analyst

And so any of these existing lines that they helped the range, there is no tail on earnings.

Bob Scherich

No.

Jim Hensler

No.

Unidentified Analyst

Okay. And one last question please, when you restart a particular smelter or furnace or kiln, are this restart cost significant and do you face any other hazards of kiln cooling and then restarting and damaging the equipment or do you restart and start periodically through your business at these various sites?

Jim Hensler

On the recycling side of our business, we have kilns and then internally those kilns are all fully operational. The only one we have shutdown right now are the smelting furnace at are Monaco facility which I guess is what you are really referring to and we also have taking down our flame reactor at Beaumont.

The flame reactor is relatively easy to start up. There is no rebuild involved in that and it's just a matter of calling back the workforce. The furnace at our Monaco facility which is down right now is also something that we do periodically. We typically take furnaces down once a year for a rebuild. So, we would incur rebuild cost to bring a fixed furnace back on, that sort of a normal thing for us and then we would have to also recall labor associated with running at that level.

Unidentified Analyst

Thank you.

Operator

Great thanks. And our next question then comes from the line of [Simon Zolitarolf] with Harborside Capital. Please go ahead.

Unidentified Analyst

Thanks. Hi guys.

Jim Hensler

Hi.

Bob Scherich

Hi.

Unidentified Analyst

Just two quick questions; the first one is you mentioned that you are working on getting new dust sources. Do you just mean from new mini mills or other sources in general?

Jim Hensler

From new mills.

Unidentified Analyst

New mills. And the last question is on the new puts of [$0.50] puts, I just want to get your thought process as to why put those on at $0.50 zinc.

Jim Hensler

Well, that's simply where the market was to buy future put options at slightly below the future price and the thought process is simply risk management really for disaster insurance. If the zinc price moves to $0.40 or $0.45 and stays there through next year, we want to have that level of kind of very low price protection.

Unidentified Analyst

Great. Okay, that’s it. Thanks guys.

Operator

Thank you. And we have a question now from the line of David Shapiro with [BGB Securities]. Please go ahead,

Unidentified Analyst

Hi guys. I'm just sort of wondering I guess the thought process behind going ahead with the new kilns in South Carolina given the fact you were seeing the dust supply start to come off so essentially you are putting on a new kilns and shutting some other ones, the less effective ones. What was sort of the thought process rather than just canning the project for now?

Jim Hensler

Well, we think that the slowdown we're seeing in the steel industry right now which has been rather sudden. We don’t see that going on for a long period of time. So, we do think that dust volumes are going to come back and that we are operating at full capacity or we are operating at full capacity before that.

We also have a long-term contract with Nucor that involves putting a facility in that area. And there are other steel mills in the South Carolina area that we don’t business with today and without that capacity in that region, we don’t have the ability to go after it.

The last point is that the additional volume coming into this facility is going to be critical in terms of lowering the production costs in through our smelter. We at these low zinc price levels bringing in more low cost feed as an important part of price levels bringing in more low cost feed is an important part of our plan to lower the breakeven point of business.

Unidentified Analyst

Given the fact to build those new kilns I guess in the $80million, $85 million range and you compare that you have a pretty sizable cash pile you are looking at coming at the end of this quarter and you had your stock here at I guess, may be even a dime on the dollar of the replacement cost of your assets. What was the thought process there going after these new kilns putting the money in there versus sort of buying your own assets and may be a dime on the dollar.

Jim Hensler

Well, we still think that even at these zinc prices, this investment is a good long-term investment for the company, it has a good return. We also think that the stock price is undervalued and that the stock is an attractive investment and it’s one that as a company we need to take a closer look at it and we will be discussing it with the board at our upcoming board meeting.

Unidentified Analyst

Okay. Thank you.

Operator

Great. Thanks. And our next question then comes from the line of Jonathan Edwards with [DCS Capital]. Please go ahead.

Unidentified Analyst

Hey, how are your guys doing?

Bob Scherich

Okay.

Unidentified Analyst

Can you talk a little bit about the EAF dust receipts and on mini mill activity in general?

Jim Hensler

We are seeing the mill activity off. I’d say about 25% to 30% in the recent period. They compared to where we were in the July-August time period. We began to see some reduction in September.

Unidentified Analyst

That’s even a greater drop of then you would see as steel industry wide and you think that given the cost advantage of the mini mills that the fall could be greater in the blast furnace folks, no?

Jim Hensler

It’s actually pretty close to where, if you look at the total steel production in the US, it’s off about that much right now. And so we are pretty much like our furnace steel production is roughly 60-65% of steel production, so it’s going to go pretty much in line with the overall market.

Unidentified Analyst

How are fourth quarter receipts looking relative to third quarter?

Jim Hensler

Well we expect to pickup a new supplier and I think the important thing is that we expect to see our processing rates remain about the same. We have an inventory of EAF dust that it’s actually fairly significant at this stage and so we are going to continuing to operate our kilns pretty much to capacity for the foreseeable future.

Unidentified Analyst

Okay. What about coke cost in the fourth quarter in 2009 versus where they were in the third quarter?

Jim Hensler

Yeah, we think coke costs are the one energy area that hasn’t moved yet and we're seeing relatively higher coke cost projected for the fourth quarter although we don’t think that's sustainable. We think that there’s got be some correction with both coal prices and coke prices but at this stage hard to predict when that will occur.

Unidentified Analyst

What do you think that will be…

Jim Hensler

We don’t think, it’s time to go long on coke though.

Unidentified Analyst

Yeah. What do you think the impact would be to your cost structure in the fourth quarter from the coke? It will be material?

Jim Hensler

I don’t think it would be that significant. I think our estimates are that we will probably average our estimates are that we will probably average through our inventory position maybe $20 a ton higher for the current quarter. And we are consuming coke annual rate right now at the Monaca facility at maybe 80,000 tons a year roughly, so $20 on 20,000 tons roughly.

Unidentified Analyst

And have you contracted for '09? It sounds like you are not.

Jim Hensler

No. We are talking. That negotiation is going, but we don't think it's the time to go along at.

Unidentified Analyst

And last question at $0.50 zinc, do you guys can operate profitably or break-even?

Jim Hensler

We are working on a number of cost reduction initiatives. Once we implement those and also important to get the additional dust from our South Carolina account, we can operate profitably at that kind of price level.

Unidentified Analyst

All right. Great, thank you.

Operator

Great, thanks. And our next question then comes from the line of John (inaudible) with Rockmount Capital. Please go ahead.

Unidentified Analyst

Great, I appreciate it. Just a follow-up on a couple things and you've mentioned that the end of 2008 cash balances will be pretty flat to today's balances. What are today's balances?

Bob Scherich

It's roughly the end of quarter $80 million plus the settlement on the sale of the hedges, which was about $50 million, so roughly $130 million level.

Unidentified Analyst

Okay. I just wanted to clarify that. Second, I think you covered kind of with some cost reductions and with the South Carolina mill up you could probably operate profitably at $0.50. Kind of looking out in the future, what would you look at as today's break-even point?

Bob Scherich

Well, I mean our break-even point keeps moving as we adjust the cost. We’ve been moving that down as we've shutting purchase feeds and at current prices we continue to move down that cost curve by less purchase feed or what purchase feed we have at lower price so.

It's kind of moving target because as the commodity prices is moving down, we are adjusting cost and shutting cost to stay pace with it. Although I have to say it, it moved off a fast here in October, we are not...

Unidentified Analyst

You are working with some…

Bob Scherich

It is a transition period, we are not moving as fast as the commodity price moved in October.

Unidentified Analyst

Yeah, there is obviously some very fluid metrics out there but just as order of magnitude that you are looking at, even today be $0.77 a pound break-even and moving to $0.50 overtime or kind of what kind of general metrics are you looking at today?

Bob Scherich

I think coming into the year as we were operating at full capacity and buying purchasing units at the higher prices, that break-even was probably in the 70s somewhere and we've shed part of that and reduce cost and we are moving it down through the 60s into the 50s is as the market is requiring. But as Jim said in the earlier comments the focus at this level of commodity price is really maintaining cash flow break-even. There's really not strong opportunities to maximize earnings in this types of [environment].

Unidentified Analyst

I realize that. I am looking at it from just a degradation of cash balances. I mean in this kind of market at $0.50 zinc, are you able to kind of maintain pretty close to plus or minus cash flow break-even?

Bob Scherich

That’s our primary focus is to operate the business in a mode to add a minimum be break--even cash flow before capital spending on investment projects.

Unidentified Analyst

Okay. And do you think you can accomplish that here over with $0.50 prices?

Jim Hensler

It’s going to take some work here in the next couple of quarters to shed some cost and then getting this South Carolina come up and running. So, I think we get to that point and we can get to a cash generating business at $0.50.

Unidentified Analyst

Just final question I understand this is subject to anything else that might happen here but at $0.50 prices and kind of going down the cost curve to try to get the break-even and ignoring the capital expenditures. How much is potential loss of 10,20, $30 million of cash or is it more or less than that before you get to that South Carolina up and break-even. Assuming stable commodity prices.

Jim Hensler

It’s too hard to say right now. I mean as we’ve said, we’ve got the hedging in place through the balance of this year. Working capital continues to reduce as the commodity price comes down. So, the key is to continue to shed cost to maintain that break evenly. We think that’s feasible but there is a lot of heavy lifting involved with that.

Unidentified Analyst

Okay, thanks.

Operator

Great. Thank you. And we’re going to return to the line of Brian Grad with DLS Capital. Please go ahead.

Brian Grad - DLS Capital

To kind of get back to the point of the gentlemen, what do you think the minimum cash balance you need to have as a safety med to run this company?

Bob Scherich

That depends on a lot of things. I mean it depends on the strength of the credit markets and whether you can rely on availability on credit which has been certainly a question mark over the past few months.

We’ve operated this business in the past in low price environments at very low cash balances and very low availability of capital. That was the mode we operated in and 2004 and most of 2005. So, I think we've demonstrated in the past that we can operate at break-even.

Brian Grad - DLS Capital

What are the terms of your revolver at this point?

Bob Scherich

Revolver doesn't expire until middle of 2010, so we've got a $75 million revolver with about $60 million availability on it.

Brian Grad - DLS Capital

Okay. What are the minimum covenants for…

Bob Scherich

There is capital spending and a minimum EBITDA covenant that actually the structure of this credit facility or revolver is one that if we maintain availability there is not, I think availability of $30 million on it roughly. We really don't have covenant test as long as we maintain that availability on the revolver.

Brian Grad - DLS Capital

So you have drawn down $15 million so far on that?

Bob Scherich

That’s really just used for letters of credit and insurance purposes. So, we don’t have any outstanding borrowings.

Brian Grad - DLS Capital

So, you could borrow up to another $30 million before you had any covenant issues?

Bob Scherich

But we think we are still in compliance with covenants as…

Brian Grad - DLS Capital

No, that wasn’t my doubt, I wasn’t [intermediating] that you weren’t. I am just saying that before you actually had to really start doing covenant tests…

Bob Scherich

That’s right

Brian Grad - DLS Capital

You could take another $30 million down.

Bob Scherich

That’s right.

Brian Grad - DLS Capital

Okay. Thank you very much.

Operator

Thanks. And we have a question from the line of Adam Adelman with Capstone Investments. Please go ahead.

Adam Adelman - Capstone Investments

Hey guys. Just wanted to circle back with the iron opportunity quickly; I know and I think you have 350,000 tons of IRM but if I am right, 200,000 tons comes from the pelletizing process, is that the amount we should be looking at as the iron opportunity?

Jim Hensler

I think that’s probably a reasonable assumption. That not a 100% of it is going to be interesting to steel mills for various reasons. Some of it related to whether it’s been palletized and the chemistry is right. In some cases the iron contents may be too low to be interesting, but I think maybe in the neighborhood of two-thirds is possible if we were able to sell all of what we think is marketable.

Adam Adelman - Capstone Investments

Two-thirds of the 200,000 tons or….

Jim Hensler

Two-third of 350,000

Adam Adelman - Capstone Investments

Okay. And you have mentioned in the past that you think $50 to $75 a ton range seems reasonable, could you tell us what you base that on and may be took a little more color about how far you are in the trial?

Jim Hensler

Well, I think that you would benchmark this material relative to where certain types of scrap pricing and obviously those prices are lower today than they were last quarter when we called at that range.

But we would look at this as something that at least for steel mill application like an EAF dust feed, might benchmark pretty close to the price of machine sharp turnings and that sort of commodity. So on iron contained basis, we would benchmark against that pretty well.

Adam Adelman - Capstone Investments

And that's…

Jim Hensler

So, in today’s market with machine sharp turnings it’s probably more on the order of $20 to $25 a ton rather than a $50 to $75 dollar range, because scrap prices have come up that much.

Adam Adelman - Capstone Investments

Fine, okay. Okay, thanks

Operator

Thank you. And we have question then from the line of [Brad Oar] with Boston Company. Please go ahead.

Unidentified Analyst

Hey guys. Just what level of incremental costs if any do you expect from the new EAF dust supply that you are looking to procure here in the near future. Just transportation cost or otherwise you’re bringing in from [for the '08]?

Jim Hensler

Well, we’ll be paying the transportation cost. The incremental cost will be just the cost of processing in the kiln which is mostly additional cost for coke energy and…

Unidentified Analyst

But any difference relative to what you’ve seen from your existing or previous contracts. Any cost differential there?

Bob Scherich

No, no. I think the pricing on the contracts are going to be lower than our average but from a cost standpoint we don’t see much difference.

Unidentified Analyst

How much on the pricing side?

Bob Scherich

These are going to be probably in the $20 to $30 a ton lower.

Jim Hensler

That’s per EAF ton.

Bob Scherich

Per EAF ton.

Unidentified Analyst

Okay and then back to IRM, any sense for the timing for being able to get some results from these trials? It sounded like you wanted to get them either initiated by year end or well into them by year end?

Jim Hensler

Yeah, we’re hoping to get this the first trial before the end of the year with holidays coming up and uncertainty about shutdown schedules that this company might have. It's hard to predict exactly but that’s our hope at least at this point.

Unidentified Analyst

And once those trials are initiated, how long to see some results and get some feedback from the potential customers and maybe see the market of all?

Jim Hensler

We’re hoping we get some feedback fairly quickly and then hopefully that translates into in an order from that particular mill and then we end up using that experience to try to attract other mill. And we’re also looking at some applications in blast furnace application. This particular trial would be with electric furnace sharp.

But we’re also working on a trial trying to get trial organized to [brickat] IRM for the feed to blast furnaces and we’ve got some loud work going on right now at one company where they are sort of testing the material to see how it [brickates] and getting comfortable with the material and it's chemistry, and that’s all looking very positive right now. Hopeful that translates into a sort of a full scale trail on their [bricketing] operation and then eventually hopefully into an order.

Unidentified Analyst

Okay. And then I think you mentioned the best benchmarks of machine sharp turnings that…

Jim Hensler

For feed into a steel mill, steel making operation. We think that’s a reasonable benchmark. For the yard making application, its something that we would, it is little bit difficult to benchmark because you could try benchmark it against iron ore prices, this material has other value that iron ore doesn't have because part of its metallic and contains some carbon so still are more complicated evaluation analyses but we have access to a glass furnace simulation model which allows us to put a value on it, in those applications. And there's a lot of moving parts in the market right now with iron ore prices changing and depending on what happens with coke prices so it’s a kind of moving target.

Unidentified Analyst

The original estimation I thought the range was $50 to $100 per ton instead of $75. Was that related to the iron, the iron companies as oppose to you see electric furnaces that you are…?

Jim Hensler

It's really an arrangement to encompass both and I think the expectations are lower today given the fact that the scrap prices have moved down.

Unidentified Analyst

And then they moved down, I don’t have that those markets in front of me, but have they moved down, is it a fairly direct relationship, $20 to $25 about cut into half roughly or was…?

Jim Hensler

Yeah I mean it’s a very dynamic market. I am trying to get a good read on what the price of turnings is at any moment in time is difficult to do but in the last information that we’ve had would suggest that for steel making application this would be probably closer to $20 to $25 a ton.

Unidentified Analyst

Okay, I realize it. So, maybe a little premature and quite speculative at this point, but I appreciate the comments.

Jim Hensler

Yup.

Operator

All right, any further question sir?

Unidentified Analyst

No, that’s it from me. Thanks.

Operator

Okay, thanks. We are showing a question from the line of David Shapiro [BGB Securities]. Please go ahead.

Unidentified Analyst

Hi guys. Can you give me your 2009 sort of oxide and metal target for production and this is assuming of course we don’t see any large recovery in zinc demand or pricing sort of current world forecast?

Bob Scherich

I think at current commodity prices, we would continue operating at five furnace operation until such time that we can bring additional zinc units in from the South Carolina facility late in 2009.

So, our current look is total of zinc production in that 128 to 130,000 ton level next year with I think as we’ve mentioned earlier, the current outlook on oxide being about 75,000 product tons with the Larvik furnaces idle. So, 75,000, 80% zinc contained the balance would be metal from the total zinc production.

Unidentified Analyst

But there is 75,000 product tons for oxide, is that the contained basis or is that the gross basis.

Bob Scherich

That’s the gross basis. Product basis, you take 80% of that for zinc contained.

Unidentified Analyst

And then once you have the Carolina facility up and running, what would be the clean rate after that on an annualized basis?

Bob Scherich

We think, once we got the facility up and running, it will support probably bringing the six furnace back on line which will move us back to the roughly 150,000 zinc output tons at Monaca.

Unidentified Analyst

But you would only do that assuming that there is some improvement in the environment otherwise you'll just stay at the reduced production rates?

Jim Hensler

No, we think that the markets there to sell the additional zinc units. So we would go back to six furnaces once we get the zinc units out of South Carolina.

Unidentified Analyst

Okay. And then from…

Jim Hensler

But the decision to increase zinc oxide would depend upon recovery in the tire and rubber market.

Unidentified Analyst

Right. And then the tons, the EAF dust tons processed, you said you are sort of at the 550 level right now, is it?

Jim Hensler

Right

Unidentified Analyst

And you will be at 550 through the first three quarters of next quarter?

Jim Hensler

That's current expectation and then we would be adding 80,000 tons of capacity with the first kiln and another 80,000 tons after that and we will be attempting to fill that capacity up.

Unidentified Analyst

Okay. I'm just sort of curious as to if you are planning on upping the zinc production after even given $0.50 zinc price. To me, that must mean that you are really counting on that break-even point to be below that $0.50 level or whether I'm having trouble understanding why you would really kick the production back up and why not just sort of get virtually all your fleet percentages as dust once you have this Carolina facility on. I guess I'm just trying to understand the logic.

Bob Scherich

Our incremental conversion cost is relatively low in the smelter. So adding additional zinc and particularly from EAF dust sources is going to be accretive. So that's the reason why that makes sense.

Unidentified Analyst

Okay. And then what percentage would you be at as far as feeds versus having worked though the numbers? Would that put you up to like 90% or so as far as dust feed even at the increased rate?

Bob Scherich

I think right now, even with the partial year effect of zinc units coming from South Carolina, we're expecting to be roughly 70%, 75% EAF dust zinc units next year.

Unidentified Analyst

And then what's the kiln is once the two kilns come on?

Bob Scherich

Actually, I am working through that.

Jim Hensler

Yeah, that would really be full year effect when we get into 2010.

Unidentified Analyst

Right, okay. But obviously you would expect the percentage to rise.

Bob Scherich

Yeah, it will rise.

Unidentified Analyst

Okay. Very good.

Bob Scherich

Thanks.

Operator

Thanks. And we have a question from the line of Ron Silverton with Asgard. Please go ahead.

Ron Silverton - Asgard

Good morning, gentleman.

Jim Hensler

Hi.

Bob Scherich

Hi, Ron.

Ron Silverton - Asgard

A couple of little questions here. Actually just a final comment you made, the 70% to 75% EAF dust, that would be the mix of input at the end of '09 or '10 or that will be average of '09? I didn't quite understand that.

Jim Hensler

Yeah, it's the average for '09.

Ron Silverton - Asgard

Okay. And then exiting 2009, where would that be? Put differently, I mean obviously EAF dust is a low cost source. How high can we get that?

Jim Hensler

Well, I mean it can be a 100% if we choose to operate at lower level at Monaca.

Ron Silverton - Asgard

Right.

Jim Hensler

But I think when we get back to a six-furnace operation, it requires about 160,000 tons of zinc units for the 150,000 tons of output and close to 130, I'd say, 128 or 161 from EAF dust.

Ron Silverton - Asgard

The last number one more time, how much that would be?

Jim Hensler

128 or 161 sort of puts, just about 80% at that level.

Ron Silverton - Asgard

Got it. All right. That's helpful. And today, by the way what does the mix look like?

Jim Hensler

We are at about that 70% now, because we're operating at the five-furnace operations.

Ron Silverton - Asgard

Right. That makes sense. What your conversion costs look like right now anyway, the actual cash cost?

Jim Hensler

At the Monaco facility, I think with lower total output units, they are still over probably $0.40 a pound combined, smelter plus refinery.

Ron Silverton - Asgard

$0.40 a pound smelter plus refinery? Okay.

Jim Hensler

Yeah, total zinc units processed.

Ron Silverton - Asgard

All right. In the past, they have been running at those levels because of higher maintenance. Now, I assume that's just because of lower utilization. Is that right?

Jim Hensler

Yeah, but there is a certain fixed cost component there. As we bring volume down, that brings the unit conversion costs up.

Ron Silverton - Asgard

Okay. But that's still about the right level. Got it. And on the options you closed out, there was a $50 million pre-tax gain. I assume that you are paying 35% corporate taxes on that. Are you able to shield or reduce that somehow?

Bob Scherich

It's pretty much cash tax.

Ron Silverton - Asgard

Okay. So, 35% corporate tax on that or short-term gain tax on that?

Bob Scherich

Yes.

Ron Silverton - Asgard

Okay. The reason I am asking is, in responding to one of the questions here, your yearend cash balances looked like, if I understood it correctly, are you saying roughly be 80 or roughly where things are today? And I am trying to understand is that 80 plus 50 or is that 80 plus 0.35?

Bob Scherich

It's more like 80 plus 50.

Ron Silverton - Asgard

Okay. So that's a positive. To the point of one of your callers, obviously you guys remain bullish on the business and continuing the existing investment profile. But by the same token, your existing assets are being offered at fire shell prices. When is the Board going to consider potentially buying back some of the stock?

Jim Hensler

It sounds that we have been discussing, and we've got an upcoming meeting here shortly, and it will be a topic of conversation of that meeting.

Ron Silverton - Asgard

Got it. And when is management not restricted to combined stock?

Jim Hensler

Roughly middle of this month.

Ron Silverton - Asgard

All right. Great. Thanks a lot.

Operator

Great. Thank you. And we do have a question from the line of John Francis with Francis Capital Management. Please go ahead.

John Francis - Francis Capital Management

Yes. Can you tell us how much exactly do you expect to spend to get the South Carolina facility up and running?

Bob Scherich

Total capital investments are around $81 million. We have spent in [Bartlesville] about $5 million to $6 million, although I think the number actually might be a little higher than that.

John Francis - Francis Capital Management

Okay. And when will that be completed?

Bob Scherich

The first kiln should be completed in third quarter of next year. The second kiln will be completed by the end of next year.

John Francis - Francis Capital Management

Okay. Thank you.

Operator

Thank you. And at this time, we have no further questions in queue.

Jim Hensler

Okay. Well, thank you very much and we will talk to you at the end of next quarter.

Operator

Great and thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.

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