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Horsehead Holding (NASDAQ:ZINC)

Q4 2012 Earnings Call

February 20, 2013 11:00 am ET

Executives

Gary R. Whitaker - Vice President, General Counsel and Secretary

James M. Hensler - Chairman, Chief Executive Officer and President

Robert D. Scherich - Chief Financial Officer, Principal Accounting Officer and Vice President

Analysts

Kuni M. Chen - CRT Capital Group LLC, Research Division

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

Daniel Moore - CJS Securities, Inc.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

Albert Sebastian

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Horsehead Holding Corp. 2012 Year-End Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded. With that being said, I'll turn the conference now to Mr. Gary Whitaker. Please go ahead, sir.

Gary R. Whitaker

Good morning, everyone, and thank you for joining us on our fourth quarter 2012 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 9, 2012, and our quarterly report on Form 10-Q for the quarter ended June 30, 2012, which was filed on August 9, 2012, 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?

James M. Hensler

Thanks, Gary. I'd like to welcome you to this conference call to discuss the results of the fourth quarter of 2012. I will review the performance of our operations and markets while Bob Scherich, our CFO, will review the financial results.

The consolidated net earnings for the quarter were a loss of $11.2 million or a $0.27 loss per share. This compares to a loss of $12.7 million or a $0.29 loss per share for the fourth quarter of 2011. Consolidated net earnings, excluding noncash charges related to hedges, impairment charges and bargain purchase gains for the fourth quarter of 2012 were $900,000 or $0.02 per share. For the same period in 2011, we realized a consolidated net loss on the same basis of $4.4 million or a $0.10 loss per share.

While lower zinc prices, the cost of the hedge protection related to our new zinc plant project and asset write-off charges related to the impending shutdown of our Monaca facility, continued to impact our reported earnings, the operating performance of our businesses showed strong improvement over the prior year's quarter.

Adjusted for these noncash charges, earnings increased by $5.3 million or $0.12 per share, compared with the fourth quarter of 2011.

Compared with the same quarter last year, our operating results improved in many significant areas. Zinc product shipments, which include a full quarter of Zochem, were up 10%. EAF dust receipts were up 12% and EAF dust volume process was up 23%, both notwithstanding lower steel industry output. Smelter output was up 5% versus the fourth quarter of 2011, an 11% versus the third quarter of 2012.

On a full year basis, the Monaca smelter produced 146,000 tons of zinc, the highest level in our company's history.

In addition to these improvements, we realized lower conversion cost per pound of zinc produced at both our recycling plants and our smelter, and increased the proportion of feed to our smelter recovered from EAF dust from 76.9% in the prior year's quarter to 77.7% in the current quarter.

We were also very pleased with the smooth integration of Mitsui Zinc Powders, which we acquired during the quarter, and we're pleased with the progress that has been made on our capital investment programs in North Carolina and in Brampton, which I will discuss in more detail later. We also extended the existing option period under our agreement with Shell Chemical by an additional 6 months.

I'd now like to discuss our operating results in more detail.

We processed 156,000 tons of EAF dust during the quarter, a 23% increase from the same quarter last year. Despite the tapering off of steel industry capacity utilization at the end of the quarter, EAF dust receipts increased from the prior year's fourth quarter from 127,000 tons to 143,000 tons, a 12% increase. New service contracts that started in 2012 continued to serve as the primary factor leading to this increase.

According to industry statistics, domestic steel industry capacity utilization averaged approximately 71% during the fourth quarter of 2012, which is down slightly from 74.5% during the fourth quarter of 2011. We indicated during our third quarter 2012 call that we believed dust receipt levels would be slightly lower during the fourth quarter of 2012 due to softening of steel production levels. In fact, dust receipts declined by 6% compared with the third quarter. In response to that softening and because of improvements in kiln uptime, we idled 1 of our 9 kilns in October of 2012, and a second kiln intermittently since December.

Dust receipt levels began to increase in January 2013, leading to a restart of both kilns in early February. We are monitoring dust inventory levels very closely and may need to idle 1 kiln before the end of the first quarter if steel industry output levels decline from current levels.

Zinc product shipments increased by 10% to 46,312 tons compared with the prior year's fourth quarter, and increased by 5% compared with the third quarter of 2012, due primarily to another excellent production quarter at Monaca, as noted previously, and due to steady demand for our zinc products. In addition, we restarted 2 SSHG zinc columns that were being rebuilt during the third quarter.

We expect to continue to operate our full complement of 6 smelting furnaces in the first quarter of 2013, and anticipate building some inventory of zinc metal during the first 3 quarters of 2013 to serve our customers as we transition to our new North Carolina plant during the fourth quarter. This strategy should also have the benefit of reducing shipments to lower margin export accounts in the early part of the year, while selling this inventory to higher-margin accounts during the ramp-up of the North Carolina plant.

Zinc oxide shipments increased by 11% compared with the fourth quarter of 2011, reflecting primarily a full quarter of Zochem in our operating results in 2012. As a result of our decision to close the Monaca zinc oxide refinery by the end of 2013, and shift the higher-margin portion of our current Monaca business to Zochem upon completing the expansion program at the Brampton facility, we anticipated that total zinc oxide shipments in 2013 would be about 15% lower than in 2012. However, thus far, demand has been stronger than anticipated, and we expect this trend to continue at least through the first quarter of 2013.

Total zinc metal shipments increased by 6.4% when compared with the fourth quarter of 2011 and 17% when compared with the third quarter of 2012 as demand remains strong in the general galvanizing sector. This increase in metal shipments is primarily related to the increase in zinc metal production in the fourth quarter of 2012, and resumption of SSHG production that I mentioned earlier. Metal shipments, on a full year basis, were 4.7% ahead of 2011 levels.

We are very pleased with the production performance from our zinc smelter in 2012 and hope to continue at this pace, recognizing that the task may be more challenging given the potential increase in employee turnover as we approach the wind down of the Monaca smelter toward the end of 2013.

Moving on to discuss the zinc pricing environment. The LME zinc price averaged $0.88 per pound during the fourth quarter of 2012, which was $0.02 higher than both the third quarter of 2012 and the fourth quarter of 2011 at $0.86 per pound. Zinc prices have recently rebounded and are currently trading between $0.95 to $0.99 per pound.

The realized premiums on zinc metal averaged $0.046 during the fourth quarter, which was up $0.014 from the fourth quarter of last year and was $0.016 lower than the realized premium for the third quarter of 2012. The change in realized premiums compared with the prior year's quarter is primarily due to an increase in transactional premiums. The decrease compared with the third quarter is primarily a result of the fact that since the acquisition of Mitsui Zinc Powders in November of 2012, we're now eliminating the intercompany sale of higher-premium SSHG metal to our powders business, which had the effect of lowering the calculated average premium on metal during the quarter. We now realize the higher premium on zinc powder, which is not reflected in this statistic.

Realized premiums for zinc oxide in the quarter were approximately $0.041 per pound, which is a decrease of $0.009 compared with the prior year's fourth quarter and a decrease of $0.006 compared with the third quarter of 2012. The decrease versus the prior year's quarter reflects the lag effect on zinc oxide prices, which increased the realized premium in the prior year's quarter. The change compared with the third quarter of 2012 is related primarily to customer mix.

INMETCO's results for the quarter were positive. However, they were impacted by their annual maintenance outage and by the fire we reported on previously. While the fire only extended our planned outage by 1 day, we were not able to operate at full capacity until mid-December because power was not fully restored to some ancillary operations.

Income before taxes was $3.1 million for the quarter compared with $1.2 million in the prior year's quarter. The current quarter includes $1.5 million from the partial settlement we received with our insurance carriers.

We are pleased to report that we entered into a tolling agreement with Outokumpu to begin processing EAF dust and other nickel-bearing waste from the new -- from their new Calvert, Alabama stainless steel production operation that started up during the fourth quarter of 2012. We also entered into a tolling agreement with North American Stainless, which formalized and expanded upon our existing relationship with them. As a result of these new agreements, and slightly stronger conditions at some stainless steel producers, we anticipate an increase in receipts of nickel-bearing waste materials in the first quarter of 2013.

Zochem continued its positive contribution to earnings during the quarter. Phase 1 of our capacity expansion plan is on schedule to be completed by the end of March 2013. Work has started on Phase 2, which includes the addition of a seventh muffle furnace, which we expect to be completed prior to the closure of the zinc oxide refinery in Monaca.

We also are in the final stages of qualifying the Zochem location to supply zinc oxide to customers presently being serviced from Monaca. And we expect generally to realize the previously announced zinc oxide price increase on oxide sales in 2013, as these price increases were negotiated during the fourth quarter of 2012.

Finally, we're in the final stages of construction on our new zinc plan project in north -- in Rutherford County, North Carolina. Project activity and the rate of capital expending have accelerated in the past quarter. Start-up of the new zinc plant continues to be on schedule to produce first zinc in the second half of this year. Our estimate of the total construction costs for the project is unchanged from our previous estimate of approximately $415 million.

Recruiting of the workforce for the facility has begun. Nearly all of the key management and technical positions have been hired for the site. We expect to begin hiring and training the first phase of supervisory and skilled trade positions before the end of the second quarter of 2013. The facility is expected to employ about 250 people.

I'll now turn it over to Bob Scherich to review the financial results. Bob?

Robert D. Scherich

Thanks, Jim. My discussion of the financial performance for the quarter includes -- excludes the noncash effects related to hedges, asset impairment charges and bargain purchase gains related to acquisitions. I will talk about these items separately a little later.

The adjusted net earnings for the quarter were $0.9 million or $0.02 per share, compared to an adjusted loss of $0.10 per share for the fourth quarter of 2011, and adjusted earnings of $0.01 for the third quarter of 2012. This noticeable improvement in the earnings versus the prior year's quarter is primarily attributable to the higher production and shipment levels and lower conversion costs. Detail of the quarter's adjusted performance versus the same quarter last year reflects an increase in revenue of $1.4 million, or 1.3%, to $110.6 million. The increase included the effect of higher shipments of zinc products, including Zochem, partially offset by a decrease in sales from nickel products.

The average sales price realized for zinc products on a zinc-contained basis was $1.03 per pound or $0.15 per pound above the average LME price for the quarter, compared to $1 per pound or $0.14 above the average LME price for the prior year's quarter. This reflects the increased proportion of zinc oxide with the addition of Zochem and the higher premium to the LME price for metal shipments.

Sales of zinc metal increased $4.5 million or 11% to $45.4 million for the quarter, reflecting a $2.8 million increase in sales volume and a $1.8 million increase in price realization. Sales of zinc oxide increased $4.3 million to $38.8 million for the quarter, reflecting an increase in sales volume of $3.7 million, primarily reflecting the inclusion of Zochem. Higher price realization increased sales by $0.6 million.

EAF dust revenue increased $0.5 million or 5.4% to $9.8 million for the quarter as volume of receipts increased 11.7% as compared to the fourth quarter of 2011.

Sales from nickel products and services, excluding the effect of hedges, decreased $4 million for the quarter to $11.4 million, reflecting a reduced volume of shipments and the effect of lower price realization reflecting the 7% decline in LME nickel price. The annual maintenance outage as well as the effect of the fire that Jim mentioned occurred during the quarter, reducing production, and, hence, shipments.

Consolidated cost of sales, excluding asset impairment charges, decreased $8.2 million to $95.5 million for the quarter. This decrease reflects a $3.8 million increase in Zochem cost of sales, as the current quarter included operations for 3 months in comparison to 2 months in the prior year quarter, and increased shipment levels of zinc metal, which was more than offset by the effect of an increase in EAF-based feed to the smelter, a 12% reduction in recycling cost per zinc pound, a 13% reduction in conversion costs at Monaca and a $2 million reduction in INMETCO cost of sales net of insurance recovery, reflecting the reduced shipments of remelt alloy.

The effective tax rate for the fourth quarter of 2012 was 34.3%, as the year-to-date rate was adjusted to 35.8%. Noncash hedged charges reduced sales $4.1 million in the current quarter, while the prior year quarter included $8.8 million.

We have zinc put options in place for all of 2013 with an $0.85 strike price for 8,000 metric tons per month. These options had a value of $4.4 million as of December 31, 2012. Our current plan is to extend these options through the first quarter of 2014.

Cost of sales for the current quarter included an asset impairment charge of $16 million to reflect plans to shut down the smelting and refinery operation in Monaca, which is anticipated as the North Carolina plant commences operation. Charges in the current quarter were the result of our increased expectation that operations at the Monaca facility will be shut down by the end of 2013.

Noncash impairment charges totaled $25.3 million for 2012, adding to $9.8 million recorded in 2011. The remaining net book value of assets at the Monaca site was $24 million as of December 31, 2012.

We recorded a $1.8 million bargain purchase gain related to the acquisition of Mitsui Zinc Powders during the quarter, compared to $4.9 million in the fourth quarter of 2011 related to the acquisition of Zochem. In both cases, the estimated fair value of net assets acquired exceeded the purchase price.

Cash flow from operating activities was approximately $26 million for the quarter, and $64 million for the 12 months ended December 31. Capital spending was $78 million for the quarter and $185 million for the year. Capitalized interest was $4.7 million for the quarter and $10.5 million for 2012. At the end of our quarter, our cash balance was $244.1 million.

2012 adjusted EBITDA was $40.7 million, and we had $51 million of availability on our revolvers. Our revolvers included a new $15 million facility at Zochem to be used to support our capacity expansion plan and to allow existing cash to be targeted for completion of the North Carolina plant construction.

During the quarter, we closed on $21 million of export credit financing, of which $10 million was funded at quarter end. We are working to add $15 million to $20 million of additional credit facility at INMETCO. Our current estimate is that approximately $18 million of interest will be capitalized in 2013 as we complete construction of the plant in North Carolina.

This time, I'd like to turn things back to Jim for some final comments. Jim?

James M. Hensler

In summary, before we open the call for questions, I'd like to say that I'm pleased with the improvement that we've made over the last year in our operational performance. However, I'm not satisfied with our bottom line financial results. It's this dissatisfaction which has driven us for the past few years to transform our zinc products business. I'm happy to report that our strategic capital investments in North Carolina and Brampton continue to be on track. We're entering the final stages of construction on our new zinc plant in North Carolina and we've started Phase 2 construction in Brampton. We're beginning to formulate start-up plans at both locations. Project activity and capital spending has accelerated. We believe we continue to be on schedule to complete this construction and start operations before the end of 2013.

As a result, 2013 promises to be an exciting and challenging year. It will be the culmination of several years of effort. By replacing our current zinc smelting and zinc oxide production technologies with a low-cost, environmentally-friendly approach, Horsehead will transform itself from being a high-cost niche producer into one of the lowest-cost producers in the zinc business capable of supplying the broader market for zinc products. Once fully operational, we continue to believe this investment should provide us with annual incremental EBITDA of approximately $90 million to $110 million per year.

Thank you, and we'll now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And first go to the line of Kuni Chen with CRT Capital Group.

Kuni M. Chen - CRT Capital Group LLC, Research Division

I guess just to start off on Rutherford, hoping you could give us a little bit more detail there. Just talk about any -- are all major pieces of equipment on-site already, or are there a few other important items that are due to arrive over the next couple of months, if you could just give us some more clarification on that. And also talk about whether or not, as you've gone through the construction so far, if anything has cropped up where you might consider any further modifications to the plant?

James M. Hensler

No, I think that we're -- as I said, we still believe the project's on schedule. There will be equipment deliveries right up until we get into the start-up period, and we don't really see any major issues right now on equipment deliveries. We're sort of through the period where we're doing a lot of the kind of the concrete-related type work and now we're getting into the mechanical and electrical side of installation. We're doing a lot of the piping, for instance, right now, kind of connecting the various unit operations of the plant together. As I've mentioned in the previous call, we still think that the lead recovery circuit for this plant may be delayed from a start-up standpoint from the zinc circuit by a couple of months. And we're looking at that pretty hard right now, see what we can do to pull that schedule in, but we think there will be a little bit of a lag there. We don't see that as a big issue, but -- and we have evaluated some different approaches on that lead recovery circuit to both expedite that part of the process, as well as maybe ring it in at a lower capital cost. And so that's still under evaluation and may, in fact, be a change we'll make to that process before we ultimately install it. But so far everything looks pretty good. I mean, the schedule is tight. We're looking at the, as I said, second half of the year start-up. Our target is really by the end of the third quarter. But at this point, I'd say that there's still some plus or minus several weeks around that. That's why we've been saying second half of the year, which gives a pretty wide runway to hit. But we think we're targeting the middle of that time period. And we've now begun to focus more of our attention on recruiting the workforce and getting them trained, and as I said, we've got the key management in place now and we're beginning to review folks that we're going to bring in for the workforce.

Kuni M. Chen - CRT Capital Group LLC, Research Division

Okay, great. And just as a follow-up, just on your conversion costs in the quarter, I think they were at the lowest levels in quite some time. Can you just talk about whether you see that as sustainable going forward, and maybe talk about any quarterly variations in the conversion costs as we go through the year?

James M. Hensler

Yes, I think that there are 2 or 3 factors that helped the quarter. Volume is always a good thing when you look at conversion costs. And certainly in the smelter, we had a strong volume quarter and that helped to bring unit conversion costs down. We also have seen some recovery in -- reduction, I guess, in coke prices and we're beginning to realize some lower costs from that and that helps the conversion cost. We're also beginning to see some real benefits to the focus we've had on safety for the last several years, but what we've really seen is a significant decline in some of our workers' compensation costs, which really came through in 2012 and particularly affected the quarter. So those are all positives. We also had a pretty good quarter from a recovery standpoint in the smelter. It was one of our strongest recovery quarters for the year. And so all those things go into helping to drive the conversion costs down.

Operator

Our next question is from Brett Levy with Jefferies.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

In terms of when the incremental $90 million to $100 million starts to roll in, I mean, I assume 1Q '14 is not when it happens, obviously, with the lead recovery plant and other sort of delayed pieces of it. In addition to sort of the start-up, what do you think is the ramp-up time to that full incremental $90 million to $100 million?

James M. Hensler

Yes, good question. I mean, what we've modeled to this day is that we look at the zinc production circuit and the lead recovery circuit as kind of 2 parts of this. And we think that the ramp-up on the zinc circuit is going to be about 6 months and -- before we get up to full production. Full production meaning at the 150,000, 155,000-ton per year rate. We actually think that the facility is capable of more than that if we can bring more zinc units in, but our first step is to get to that level. And then we think that the ramp-up on the lead circuit might be closer to 1 year and so that would suggest that we're probably looking at end of 2014 before you start to hit the full run rate of the $90 million to $110 million.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

And then is there any part of your customer or supplier base, rather, that has sort of yet to qualify? Or are there any qualification issues as it relates to either of these 2 new projects?

James M. Hensler

Well, in the case of the Zochem expansion, we -- over the past year, we've been gradually qualifying Zochem to produce zinc oxide for the customers that are currently being supplied by Monaca. And that's really down to relatively few sites, which, from a volume standpoint, aren't significant, that are left to go there. In the case of the new facility in North Carolina, we don't believe that there'll be any significant qualification issues there because we're going to be selling metal against the specification. And as long as we're producing metal with that specification, it should be acceptable to galvanizing customers. And we believe that technology will produce SHG quality zinc and that's the technology we're buying and if it can meet that standard, then we shouldn't have any qualification issues to deal with.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

And lastly, I know that we'll build our own models and the like, but as you guys look at your liquidity necessary to kind of get across the finish line here, do you see any need to take additional availability? Do you see yourself even drawing on the $51 million of availability that you have sort of at your trough point in liquidity?

Robert D. Scherich

Well, I think we see the trough being kind of into this year, maybe even first quarter of next year as we kind of make final payments on construction of the project. And just to kind of recap, as Jim mentioned earlier, we still see the project as $415 million and we've recorded through 12/31 about $205 million, so that leaves about $210 million remaining. I think we've crossed the halfway point here during January. And so with that, we've got $244 million of cash. We expect another $10 million of borrowing under the export credit financing as the remainder of that equipment comes in. And we've got about $51 million of availability currently under revolvers. So the revolvers are really targeted to support working capital changes and the expansion at Zochem. And as I mentioned earlier, we look to put small credit facility in at INMETCO just to balance that out, maybe $15 million to $20 million here in the first half of the year.

Operator

And next, we'll go to Daniel Moore with CJS Securities.

Daniel Moore - CJS Securities, Inc.

Jim, you gave a lot of detail regarding the upcoming transition from Monaca to Rutherford, but any additional granularity in terms of ramping up the number of workers? Should we be thinking about number of weeks or months where you'll have duplicate or redundant expenses that would have a meaningful impact, particularly as we get into sort of the Q3 time frame?

James M. Hensler

Yes, we'll be bringing the workforce on during the time period from June through late August, early September. And we'll bring them in, in ways rather than all at once and put them through various training depending upon the level of responsibility. So in part, our recruiting plan is really sort of driven by resourcing we need to different stages of the coal commissioning and getting ready for hot start-up. And also, we'll be balancing that against what it costs to have these redundant resources, as you point out. But we think that over roughly a 3-month period we'll go from the skeleton workforce we have of mostly management people of roughly 20 or so folks up to the -- close to 250 million -- 250 employees, rather. So during that period of time, there'll be some redundancy with the workforce we have in Monaca.

Daniel Moore - CJS Securities, Inc.

That's helpful. And switching gears a bit, looking out, as you transition from producing PW to mostly SHG metal, who are the top 2 or 3 competitors in SHG and what sense can you give us of your breakeven costs and how that stacks up against -- in the low to mid-40s and how that stacks up against your primary competitors in SHG?

James M. Hensler

Well, I mean, if you look at the main suppliers of SHG to U.S. market, you have -- the other domestic producer would be Nyrstar's plant in Clarksville, Tennessee. But then the other suppliers are really outside of the U.S., primarily in Canada. They have Teck Cominco sourcing out of their Trail, British Columbia plant, HudBay and also Xstrata, which is, I guess, soon to be part of Glencore, out of Montréal. This plant, we believe, will have conversion costs that are among the best in the world. We think our conversion costs will be in the low to mid-$0.20 per pound range. And that, coupled with the low-cost zinc units that we bring in from our recycling business, we think will position us at the low end of the cost curve. So we think, purely from a cost standpoint, we'll have an advantage. But zinc metal is not really sold on a cost basis per se. It's really sold on a -- sold at the LME price. Premiums are pretty much the same across the market, and it's much more kind of a transportation-driven kind of decision about where the source of supply is going to come from. And we think, being the largest U.S. producer with the location in North Carolina, we've got access to a pretty broad range of customers. There are several steel mills that are within a reasonable geographical radius of our plant that are operating continuous galvanizing lines. We've got access to the hot-dip galvanizers, general galvanizers that we currently do business with. Plus, there a number of alloyers that are in our region, which are mostly in the eastern part of the United States, the northeastern part of the United States. So we think we'll be well positioned there. We've got great relationships with steel mills, with our EAF dust business. We've got a long-standing relationships with the general galvanizing industry. So we think that we'll have a nice position.

Daniel Moore - CJS Securities, Inc.

And lastly for Bob. Just clarifying, how should we think about interest expense as well as D&A? You'd likely to continue to capitalize the vast majority or a significant portion of those until the first production of zinc, or will you be ramping up throughout the year?

Robert D. Scherich

Yes, I think we'll continue at the same profile of capitalized interest through the majority, at least first 3 quarters, most of the year. We think about $18 million of interest will be capitalized in 2013, so it's kind of a continuation of where we've been at here of late. We capitalized about, I think I said $4.7 million in the fourth quarter. So it's basically that rate continuing through most of 2013.

Daniel Moore - CJS Securities, Inc.

And the depreciation related won't kick in until you start -- till it's complete as well?

Robert D. Scherich

Yes, once we start up, and I mean, again, the zinc circuit probably starts up first, so we'll start depreciation on that once we've started up production and kind of accepted commissioning and then the lead recovery circuit will probably be commissioned slightly behind that. So not a huge effect, but it probably is a fourth quarter effect of higher depreciation, amortization. But we still have about $24 million in net book value at Monaca that the vast majority of that probably still gets either depreciated or written off by the time we get to the end of the year.

Daniel Moore - CJS Securities, Inc.

And lastly, any update that you can share at all with regard to the call options with Shell?

James M. Hensler

No new information other than the extension at this point. They're still evaluating the site and I guess that's really all we can say about it at this point.

Operator

And next, we'll go to Carter Driscoll with Ascendiant Capital Markets.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

I'm hoping to maybe just take a step back and look at the INMETCO business, and maybe we could talk about what you did or did not anticipate in terms of repairs being completed and how that does or doesn't affect first quarter production and then relative to the new contract kicking in? I guess I'm trying to get to a sense of what the uptick in production could be in the next quarter then throughout 2013, obviously price and volume dependent.

James M. Hensler

Yes, I think in terms of the fire and any of the impact of the fire, that's all behind us. It really shouldn't have an impact on the first quarter. I think that in terms of production, we would expect higher production in 2013 than 2012. We've been gradually implementing improvements in that facility to increase productivity and we're seeing benefits from those. We would expect about a 5% to 10% increase in production for the year in 2013 over 2012 and that should match up with what we were seeing as the increase in receipts of waste products in that facility as a result of some of these new contracts we've talked about.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

Okay. The next question is just kind of following up on the prior question of the Shell agreement. I realize there isn't a whole lot else you can say, but your prepared remarks seemed to indicate a bit more confidence that the agreement would be executed, obviously if they complete their due diligence to their satisfaction. But maybe if you could just talk about how the ramp in the new facility you talked, I guess, approximately maybe 6 months to get up to a full run rate for the zinc production. Could that have any type of impact on the drop dead date of April 30, 2014? If that production and the commission doesn't match that time frame of 6 months in terms of running Monaca a little bit longer, are you thinking about that at all or is that just still too far out to consider?

James M. Hensler

Well, one thing to understand is once we start to ramp up North Carolina, we will be in a position where it's going to make sense for us to idle Monaca as quickly as possible, because once we start to take feed away from the Monaca smelter, it's not -- it doesn't make sense to try to operate 2 or 3 or 4 furnaces there. From a cost standpoint, we just don't think that's really the way to go. So once we get a pretty clear indication that we're not having any significant problems in North Carolina during start-up, we will move to fairly quickly idle the Monaca facility in probably a period of 4, 5, 6 weeks, wind that operation down. So in our scenario, we think we'll begin to produce first zinc some time mid-second half of this year. But as I said, we don't see much in the way of a problem there. We would expect that late October, early November we will have idled the facilities in Monaca, at least the smelter and the oxide refinery. If, for some reason, our project is delayed in North Carolina, we might continue to -- we would continue to run the Monaca smelter. But it doesn't make sense to sort of split the waelz oxide between the 2 facilities. That doesn't seem, to me, to be a very practical way to run Monaca. We would be better off taking any excess waelz oxide that we might have and just selling it as waelz oxide rather than try to feed Monaca at a partial run rate.

Robert D. Scherich

One additional comment, Jim had mentioned earlier also. Our plan is to build some inventory ahead of that Monaca shutdown. So we would expect to be continuing to ship finished product out of Monaca for a couple of months after the shut down.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

Are there any -- I don't know if I want to call it significant, but in terms of severance payments to the workers that will be idled at Monaca, is there anything that's significant that you're anticipating in the second half of the year?

James M. Hensler

Contractually, we have some severance obligations and we also have a severance policy for our salaried workers. We estimate that cost to be somewhere in the $5 million to $6 million range.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

And then just lastly, on the different approaches you're looking at the -- from the lead recovery at Rutherford, is that -- any potential change? Is that built into the $450 million figure?

James M. Hensler

It's not completely reflected in there. In fact, it would be a slight reduction from where we think the costs would be. But yes, that's not reflected in the...

Robert D. Scherich

Not significant amount.

Operator

And we'll go to Paul Forward with Stifel.

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

I wanted to ask, I think, Jim, you had talked about the new zinc plant with the potential once it's up and running fully to go beyond the 150,000 to 155,000 tons per year rate. Just wondering is this going to present the opportunity to add more purchasing zinc scrap as feed in order to push beyond 155,000 ton rate, and how much additional capacity do you think you might have? And I guess on a related basis, when you consider how low the cost ought to be at the new plant, can you anticipate that this will be something that you'll want to do just when you think about the incremental revenue and earnings opportunity by fully utilizing the capacity at the new plant?

James M. Hensler

Yes. It's certainly part of our longer-term objective for the facility. And we believe that the as-built capacity of the facility will be closer to 175,000 -- 170,000 to 175,000 tons per year. We've targeted the 155,000 rate based upon the fact that when we look at the number of zinc units we currently have sort of under our control, either through our own [indiscernible] EAF dust recycling business or through the zinc secondaries that we buy today to feed the Monaca smelter that with the higher recovery we get with this new plant compared to Monaca, we should be able to produce about 155,000 tons of zinc. So to get to the 170,000, 175,000 rate, I guess, we need to acquire more zinc units. And those either would be in the form of skims that we buy from galvanizers or waelz oxide that we could buy from other EAF dust recyclers either in North America or outside North America. And we haven't really focused on that very much yet. It's in our long-term plan, but it's something that once we get through the initial ramp-up, we'll beginning -- begin focusing more attention on.

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

Great. And a couple of Bob questions. I was just wondering as you move to -- away from Monaca and toward North Carolina and Ontario, I was just wondering if you could talk a little bit about the tax rate 2014 and going forward. And then also 2014 and beyond, do you have any plans for further hedging, or is that going to be much more of -- something you're more dependent upon during the start-up phase, or the construction start-up phase of that new zinc plant?

Robert D. Scherich

Yes, let me comment on the hedging first. And we do see just continuing what we've been doing probably through that first quarter of 2014 as we kind of work through commissioning and start-up and working capital changes. Beyond that, we really don't see the need for it. And certainly, at elevated levels, we want to put low out of the money strike prices in just for disaster protection. I think it may be the case, but it would most likely not be very costly to do that. So I think that strategy starts to change after first quarter of 2014. From a tax standpoint, our effective rate in Canada is in the high 20% range. U.S. corporate rate, obviously, is 36%. And what we think will happen is we obviously are going to shift more of the business from Monaca to Zochem with the oxide business. But just as importantly, state taxes, which make up a sizable part of our total cash tax, we'll be shifting most of that into North Carolina and we believe we're going to be able to offset most of that with credits that are available in the State of North Carolina. So haven't quantified it entirely. Obviously, it's dependent upon how much income you're producing. But we do see a downward trend on the cash tax rate as we get up and running.

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And then just maybe lastly, on the possibility of the delay in the lead recovery, I just wanted to ask about -- a certain chunk of the economics of the new plant were driven by lead and silver recovery. I was just wondering if you could talk about silver and how that might change? And then when you think about the $90 million to $110 million EBITDA from the new plant, can you -- when you consider the commodity prices and everything, when we're at full capacity what percentage of that, do you think, is going to be driven by the recovery of lead and silver and has that changed at all based on either the redesign or commodity price moves?

James M. Hensler

Well, roughly $18 million of the $90 million to $110 million was based upon the lead-silver recovery circuit. And that $18 million was based on lead at $1 per pound and silver at $30 per ounce. We're at about that level right now, so it hasn't really changed our outlook on that. When I say lead recovery circuit, it really means, really it's lead and silver because they're coproducts, they're going to be in the same concentrate. So there'll be a ramp-up curve for that. And as I said, we see that right now being maybe 2 to 3 months later starting up in the zinc circuit. So that benefit that I mentioned would start -- at least initial start for about 2 to 3 months after the zinc circuit's up and running. And then we think the start-up curve for that lead-silver recovery circuit will be longer than the start-up curve for zinc, mostly because it's a newer technology and it won't necessarily work out that way. But we think looking at it conservatively, we think that might be more of a 12-month ramp-up versus 6 months on the zinc circuit, which is more straightforward, more conventional.

Operator

Our next question is from Albert Sebastian with Prospect Advisors.

Albert Sebastian

Just a quick question. On the $415 million that you estimate for of the total construction of Rutherford, how much of this -- of that, at this particular point in time, is sort of locked in and how much is not? So what's the potential for maybe a some sort of cost overrun on the $415 million.

James M. Hensler

Yes, I mean, I think our numbers are probably in the 70% to 75% is committed. So there's still some portion that's uncommitted. But the portion that's uncommitted, we've tested our estimates several times on those items and are growing in confidence that our estimates are pretty good, and in fact, seem to be a little bit on the conservative side. So there's always that risk that we might get surprised, but we think that, that's very manageable at this point.

Operator

And we'll go to Mitesh Thakkar with FBR.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Most of my questions have been answered, but there's one, which I want -- I hope you can give more color on. As you mentioned that the premiums will go up year-over-year, can you quantify that a little bit? Fourth quarter, you realized a $0.14 premium on the zinc content basis? How should we think about it going forward?

Robert D. Scherich

Well, that was based on the mix of oxide and metal. As we go forward, we're -- after this year, we're going to expect a little less volume of zinc oxide and more volume of metal. So I would say that the -- that average price realization above the LME is probably going to decline a little bit, but our cost is obviously going to decline substantially. We're going to be increasing the metal premium, but the oxide portion -- although premiums are increasing, the volume is going to decrease a little bit. So probably not a large noticeable impact.

James M. Hensler

Although we do have -- we did implement a price increase on oxide, so we'd expect those margins are up probably in the order of 10%. And so that's a factor. And since we've acquired the zinc powder business, the margins on zinc powder are quite a bit higher than on oxide or on metal. And that's going to be about 10,000 tons of shipments this year. So it will have the effect of raising that statistic as well. We didn't give you a very good answer to that, but I mean there's a lot of moving pieces to it.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Okay, great. And just to follow up, with the new nickel contracts, do you think there's going to be an impact up in the margins? You mentioned volume will go up 5% or 10% versus 12% on the sales side. Do you think -- how should we think about the margins on that business, INMETCO, I meant?

James M. Hensler

I mean, I think that we've seen some improvement in our tolling fees as a result of some of these contracts. So we should see it -- see some benefit there as well.

Operator

And we do have a follow-up from Brett Leavy.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

During 2013, where do you guys see maintenance CapEx? And then as you guys hit full speed, what do you think the maintenance CapEx on the new base of operating facilities is going to be?

Robert D. Scherich

I think it's probably in a $10 million to $12 million range once we get Monaca shut down and the new facility started up. That would be company-wide, including the other businesses. I'm not sure it's going to be much different than that. I'd have to look at our current year plan, but we're not going to -- we don't have any expensive projects on the board on the zinc side of the business. And we'll be minimizing in Monaca simply to keep the plant running through most of this year, but not beyond. So we'd probably see some reduction at Monaca.

Operator

And to the presenters, no further questions in queue.

James M. Hensler

Okay, great. Well, thanks, everybody, and we'll talk to you next quarter.

Robert D. Scherich

Okay. Thank you.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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