Horsehead Holding Q4 2008 Earnings Call Transcript

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 |  About: Horsehead Holding Corp. (ZINCQ)
by: SA Transcripts

Horsehead Holding Corporation (ZINC) Q4 2008 Earnings Call March 2, 2009 11:00 AM ET

Executives

Ali Alavi - Vice President Corporate Administration, General Counsel, and Secretary

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

Robert Scherich - Vice President and Chief Financial Officer

Analysts

Eric Prouty - Canaccord Adams

Brian Grad - DLS Capital Management

Robert Howard - Prospector Partners

David Shapiro - BGB Securities

Amir Arif - Friedman, Billings, Ramsey & Co

Operator

Thank you for standing by and welcome to the Horsehead Holding Corporation 2008 Earnings Call. At this time, all participants are in listen-only. Following the presentation, there will be a question-and-answer session, the instructions given at that time. (Operator Instructions). As a reminder, we are recording the call.

I would now like to turn the call over to your host Mr. Ali Alavi. Please go ahead.

Ali Alavi

Good morning everyone and thank you for joining us on our fourth 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 or 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 U.S. Securities and Exchange Commission, including our most recent Annual Report on Form 10-K filed on March 31, 2008 and subsequent 10-Qs 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 III

Thanks Ali. I'd like to welcome you to this conference call to discuss the fourth 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.

The fourth quarter was unprecedented in the speed in which market conditions deteriorated. Our primary focus during the quarter was to reduce cost and cut operating capacity as the commodity price for zinc and demand for our products and services declined.

As a result, we operated the Monaca smelting facility at lower levels, suspended production of zinc oxide made from our higher cost Larvik operation, took an extended outage at all of our recycling plants during the holiday period and implemented a 20% reduction in our non-unionized, permanent and part-time workforce.

In anticipation of declining demand and in response to a significant decline in zinc prices, we took action as we entered the quarter to renegotiate purchase feed prices and reduce the number of zinc smelting furnaces we would operate from six to five.

The action had the desired affect of reducing the cost of purchase feeds and position to the company with significantly lower feed prices measured as a percentage of the LME price as we entered 2009.

The reduction in smelter output closely matched the reduction in market demand for zinc metal and zinc oxide.

We are very pleased to have a strong liquidity position in these difficult financial markets. With $122 million in cash on hand at year end, 41 million of availability on a revolver and essentially no debt. The company is well-positioned to cope with these difficult markets and to make strategic investments to position us well for the recovery.

The hedges that we purchased earlier in 2008 have generated cash to partially offset the declining price of zinc.

We received approximately 85,000 tons of EAF dust during the quarter, a 26% reduction from the prior year quarter and a 38% reduction from the third quarter.

Domestic steel production declined sharply during the fourth quarter, which resulted in a significant decline in EAF dust receipts and dust revenue. New dust sources secured during the fourth quarter partially offset decline from our current sources. We also reduced dust inventories during the quarter.

Domestic steel production which operated at 34% of capacity utilization at the end of December has recovered slightly to 45% in mid-February of this year, but still remains well below the utilization rate in August 2008 of 90% which the market experienced before this recent downturn.

In response to the sudden drop in steel production, we outlet our recycling plant in Beaumont, Texas and took an extended system wide outage in our recycling plants during the holiday period.

We are currently running our recycling plants in Calumet and Chicago and Rockwood, however our smallest kiln located in Rockwood is still in standby mode.

We are using this time period, while we have excess wells and capacity, to evaluate recovering zinc from residue fines generated at our zinc smelter.

Our smelting process generates approximately 75,000 tons per year residue fines which contain about 17% zinc similar to EAF dust.

We traditionally recycle these materials through our smelting process, which results in a lower overall zinc recovery and recycling them through our welding process. Initial indication appears to be favorable resulting in economic benefit.

Construction of our new EAF dust processing facility in South Carolina commenced during the quarter. The constructions schedule has been extended to better match future demand for capacity and to take advantage of a lower cost construction environment.

You can monitor the progress of our construction activity by checking out our website at www.horsehead.net.0

Recognizing that in the second and third quarters of 2008, we received dust in an annualized rate of 565,000 tons per year. The full capacity of our seven wells kilns plus the flame reactor in Beaumont. The current level of steel production has afforded us the opportunity to target new steel mills that are sending their dust to landfills. We are scheduled to receive dust from new sources during the first half of 2009 and will restart all of our kilns as dust volume increases.

The additional capacity under construction in the Barnwell, South Carolina will be essential when steel production recovers. Given the current construction environment, we now believe that we can complete this project for 15% to 20% less than our original investment estimates.

Market demand for zinc metal and zinc oxide declined during the quarter. This is the first time the tire producers are reporting a decline in demand of both original equipment and replacement tires.

Zinc product shipments declined by 21% compared with the fourth quarter of 2007 to about 30,000 tons.

Shipments declined by about 24% compared with the third quarter of 2008.

In response to the slower demand for tire grade oxide we seized higher cost production from our Larvik furnaces in November 2008.

In response to generally weaker markets across the board as we entered 2009, we cut back production at the Monaca smelter from five furnaces to four in February of this year.

We anticipate operating at this level for at least two to three months or until demand for finished products increases.

Demand in the general galvanizing market has been off about 15% to 20% from last year. Our conversation with galvanizers indicate that the market is spotty with some reporting steady business while others are off 30% to 40%.

The general galvanizing industry is most directly affected by infrastructure related projects. Most galvanizers are expecting an increase in activity as we enter the construction season. And most are hopeful that the new spending authorizations under the recent stimulus bill will increase activity even further in the second half of the year.

In zinc oxide, demand was off about 25% from the prior year and was impacted mostly by the tire and rubber sector. The outlook for demand in this sector is unclear. However, there is a growing sentiment that the decline in demand for replacement tires is a temporary situation brought on by a reduction in miles driven in response to a very high fuel prices through the first half of 2008.

The all new zinc prices declined 55% since the prior year quarter. Zinc prices have been trading in a fairly narrow band around $0.50 per ton for the past three or four months. The hedge position to the company held in 2008 were converted to cash in the fourth quarter.

In order to reduce the potential for counterparty risk surrounding our longer-term hedge positions, we sold our 2009 put options in October, receiving $64.5 million before taxes and purchased new hedges for 2009 having a strike price of $0.50 per pound at a cost of $10.5 million.

The 2008 puts which expired on 12/31/08 generated an additional $16.5 million before taxes. Given the low zinc price low demand environment that we are facing, the focus of the business is to reduce cost and conserve cash by effectively managing working capital and limiting investments until market conditions improve.

As a result of our cost reduction efforts, we've identified and are testing lower cost alternative outlets for the bi-product materials, we have in processing at our Bartlesville plant. This is resulted in a suspension of operations about location.

We believe that the full year cost savings from this move got approached $5 million. In addition, we have implemented several of the cost reduction initiatives I have discussed previously and we have identified and are implementing 18 million in new potential cost savings that we hoped to realize in 2009, and an additional 18 million in working capital reductions which target a wide range of opportunities throughout the business.

Moving on to discuss the pricing environment, the realized premiums on metal averaged about $0.07 during the quarter, lower than the premium for the prior years' quarter of $0.10 but up slightly from the third quarter, reflecting a slight lag effect due to declining LME prices.

Transactional premiums are in the $0.03 to $0.04 range, and are feeling some downward pressure from additional supply in the market.

Transactional premiums for zinc oxide remains steady, while realized premiums are up significantly reflecting the stronger lag effect as LME prices declined sharply from the third quarter. We held firm on transactional premiums as we negotiated new contracts for 2009. We were willing to accept lower volume for better pricing in this lower LME price environment, even that we planned to ideal the Larvik furnaces and we have other outlets for the zinc units.

Finally we continued to focus on revenue enhancement projects such as our initiative to market beyond rich core product of our EAF dust recycling process to the iron and steel industry.

We have completed the successful mill trial and hope to place our first order in the first half of this year. However given the lower production levels in the steel industry and an abundance of lower priced iron units available to iron and steel makers in the current environment. Our short-term expectation expectations from this initiative have been lowered somewhat.

In addition, we are working on several business development initiatives aimed at using some of our excess capacity in infrastructure, particularly at the Beaumont and Bartlesville facilities for alternate metals recycling and recovery. We are excited about these opportunities and their potential to generate new sources of revenue for the company, that are independent of the zinc market but still draw on our core competencies in the areas of hazardous waste management and high temperature metals recycling and recovery. We expect to have a clear understanding of the potential of these initiatives by the second half of the year.

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

Robert Scherich

Thanks, Jim. For the fourth quarter, earnings per share were $0.18 or $0.31 lower than the prior year quarter. I'd like to provide a summary bridge of these earnings to the prior year fourth quarter earnings per share of $0.49.

Lower LME zinc prices resulted in a reduction in gross margin of $0.54 per share. Reduced volume of shipments resulted in a decline of $0.18. This combination of volume and price effect on gross margin reduced earnings $0.72 and was mostly offset by the effect of our hedges which had a favorable $0.71 impact on the quarter versus the prior year quarter.

Write-down of inventory to net realizable value at the end of the quarter due to the dramatic decline in the zinc price resulted in a charge of $0.17 against earnings. Lower value of metals and co-products primarily led reduced earnings $0.07.

Depreciation expense was $0.02 higher and the combination of higher SG&A and lower investment income and a change in the effective tax rate combined for a $0.04 decline.

Detail of the quarter's performance reflects a decrease in sales revenue of 27 million or 23% compared to the prior year quarter. The decrease was a result of a 37 million decrease in price realization due primarily to the lower average LME zinc price and a sales volume decrease of 25 million.

Our hedging activities had a positive 37 million impact on sales during the quarter substantially offsetting the reduction in revenues caused by the change in zinc prices.

Hedges impacted reported sales of favorable 10 million from the settlement of the 2008 put options, a 30 million increase in revenues from the sale of the 2009 put options that we bought earlier in the year. And an unfavorable 3 million affect on sales relating to mark-to-market adjustments for open hedged positions at the end of the quarter.

The average sales price realization for zinc products on a zinc contained basis was $0.79 per pound or $0.25 per pound above the average LME price for the quarter, compared to $1.48 per pound or $0.29 over the average LME price for the prior year quarter.

Sales of zinc metal decreased 30 million or 62% to 19 million for the quarter compared to 49 million for the prior year quarter. The decrease was attributable primarily to a $21 million decrease in rice realization and a $9 million decrease in sales volume.

Sales of zinc oxide decreased 28 million or 54% to 24 million for the quarter compared to 51 million for the prior year. The decrease was attributable to a $16 million decrease in price realization and a 12 million decrease in sales volume.

Sales from EAF dust recycling decreased 3 million or 24% to 9 million for the quarter compared to 12 million for the prior year, reflecting lower volumes of receipts.

Cost of sales decreased 25% or 22 million before inclusion of the 9 million charge for the write-down of inventories. Recycled EAF zinc units made up 65% of our feed mix in the fourth quarter of 2008 compared to 56% for the fourth quarter of 2007.

Our costs were further reduced by lower purchase fee cost as a result of the decline in the average LME and our efforts to reduce the price as a percentage of LME and a lower volume of shipments.

For the quarter, purchase fee cost declined 25 million compared to the prior year quarter.

Lower volume of shipments decreased cost of sales 15 million. Energy costs for the quarter were 0.4 million below the prior quarter.

Selling, general and administrative expenses increased 0.9 million to 4.7 million for the quarter, consistent with the third quarter of 2008.

Our effective tax rates were 34.5% for the current quarter and 37.8% for the prior year quarter. The effective tax rate for the year was 36.5% compared to 36.1 for 2007.

Cash flow from operating activities was 65.5 million for the quarter including approximately 64 million from hedging activities.

Capital spending was 23.5 million for the quarter including 15 million for the Barnwell project and was 50 million for the year. Availability on a revolver is approximately 41 million. We believe that the combination of our cash, the borrowing availability on our revolver, our cost reduction initiatives and our hedging positions will be sufficient to satisfy our liquidity and capital requirements for the foreseeable future.

In closing, the profile of the fourth quarter reflected the decline in the LME and lower shipment volumes being substantially offset by the benefit of the hedges when compared to the prior year quarter.

Given the write-down of inventories during the quarter, the lag of cost flowing through inventory that we have been experiencing for the past few quarters, we'll not continue into 2009.

Given the current market conditions we expect to report a loss during the first half of 2009 but continue to believe that we can operate a cash flow breakeven before capital spending.

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

James M. Hensler III

Thanks Bob. In summary, before we open the call for questions. I'd like to say that while the current economic environment is very challenging, we believe that the longer-term outlook for our business model when the general economy recovers is still quite favorable. The significant closure rate of minors and smelters around the world should have a positive effect on zinc pricing when demand recovers.

However, given that nobody can accurately predict when such a turnaround might occur, we need to manage the business for the present reality we find ourselves in. We believe that through the combination of capacity reductions, plant closures, aggressive cost and working capital reductions and the lower energy price market that we are in the business will not consume cash at the at the operating level at current zinc prices. We are also protected from further erosion of the zinc price in 2009 by the put option we've purchased in the fourth quarter of last year.

In addition, we have a strong liquidity position that we can draw on if needed. We believe this is the type of market in which strategic opportunities will present themselves and we are well-positioned to take advantage of those opportunities.

We are also increasingly aware that the value of this business is directly linked to the LME price of zinc, a parameter which is determined by the market. Therefore, in order to maximize shareholder value, we believe it is important to explore opportunities which leverage our expertise in markets that are not as strong and linked with zinc prices.

We are excited about the business development initiatives we have underway, and we hope to be able to speak more about them in future quarters.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll go to Eric Prouty from Canaccord.

Eric Prouty - Canaccord Adams

Great, thanks guys. Good quarter considering what the marketing ended yet. One housekeeping questions, first up there, could you just give us a little update with this new reduction in your -- the expected to cost to Barnwell given the $15 million you've already spent. How much do you think is remaining to get that plant up and running?

James Hensler III

Yeah, our current estimate is we think we can get this project completed for under 70 million. Originally, we thought this project was going to be about 87, 88 million and we've taking control of the project rather than using it as general contractor and we've been able to -- from what we've seen so far bidding out pieces of it, taking advantage of this construction environment been able to get substantially lower prices than we expected.

We will have spent or committed roughly half of that amount by the end of this quarter. And so we will be sitting there and you can see from our website to take a look at it, we have actually both kilns up and erected right now.

And so the remaining work to be done is relatively -- it's about half the spending but it's work that is really sort of in common to both kilns, the unloading facilities, the Baghouse facilities and obviously the buildings and so on they go along there, and we're going to time the pace at which we do that work with how we see market conditions developing.

We are sitting in a situation right now, Eric, where if steel production got back to what we would like to call a normal level, we're probably a little over committed right now from a capacity standpoint. And we do need this Barnwell capacity to come online before the steel industry gets back to kind of a normal production level. So we're monitoring that very closely and we'll be sort of committing further releases of cash based upon how we see the market developing.

Eric Prouty - Canaccord Adams

Right. So is the 70 million the total amount? So would that being inclusive of the 15 or on top of the 15 you've already spent?

Robert Scherich

The 70 and actually the number is probably little closer to 68 is the total amount including what we've already spent.

Eric Prouty - Canaccord Adams

Okay, great. So it's closer to 50, low 50 million remaining to spend?

James Hensler III

Yes.

Eric Prouty - Canaccord Adams

Okay.

Robert Scherich

And probably even more alike 30 or 35 by the end of the first quarter.

Eric Prouty - Canaccord Adams

Sure. Then maybe just to follow-on to that. How much material are you seeing again in the more normalized market actually being land filled that with additional capacity. You think you're competitive and zinc quality assigned where you could get additional volumes and I don't know if you want to do it in tons or kind of it's a percent of production out there. But exactly what is the opportunity of material that's currently being landfill out there, do you think you can economically recycle it?

James Hensler III

Yeah, I mean its at current market its hard for me to give you exact numbers like talking in more in terms of what those numbers will be in a normal steel production market, and in a more normal steel production. We would still estimate that somewhere in the neighborhood of 300,000 tons of dust are still being in landfill. Given that everything is down about 50% then that numbers probably high by that amount right now.

Eric Prouty - Canaccord Adams

Sure. And then just one final housekeeping question, the old put options that rolled off was there any kind of residual cash to collect that was beyond the end of the year. And then the new put options, could you just tell us how many contracts you have and what is the exploration date on those contracts?

James Hensler III

Sure, Eric the remainder of the 2008 put options the last settlement for the month of December, that case actually didn't come in until the second working day of January. So we had a little over $7 million on the December settlement that although it's recorded in sales the case actually doesn't come in until early January but that was the end of the 2008 settlements.

The new 2009 that are in place its roughly 90,000 tons of zinc, 7500 tons per month with the strike price rate at about $0.50. So they are monthly contracts that'll settle monthly.

Month of January was above $0.50. So there was no settlement month of February were slightly above $0.50. So for the first two months no settlement against those, but it will remain with 7500 tons a month at $0.50 for each of the months of 2009.

Robert Scherich

You might want to comment on mark-to-market adjustments where we took on these?

James Hensler III

Yeah the current put options that we have, we paid about $10.5 million for and actually took a mark-to-market adjustment of about $3.5 million at the end of December. So the carrying value go in into 2009 on those are between $6 and $7 million.

Eric Prouty - Canaccord Adams

Great. Okay I'll get back in the queue. Thanks.

James Hensler III

Thanks Eric.

Operator

Next we have Brian Grad, DLS Capital Management. Go ahead.

Brian Grad - DLS Capital Management

Hi guys. Would you give me a quick explanation on the quarter ended '08? You think products contained at $0.79. Does that include the hedging prices or is that actual realized outside of hedging?

James Hensler III

That's outside of hedging, Eric -- Brian.

Brian Grad - DLS Capital Management

Okay. And what you're expectations for this year in terms of premium to spot?

Robert Scherich

Well, we think that on the metal side, current transaction premiums are in $0.03 to $0.04 range but we are seeing some pressure because of the export volumes in the market to kind of force that down, probably little closer to the lower side of that range.

Oxide premiums -- the transactional premiums are going to be about the same as they were in 2009. We did not try to cut our prices on oxide to try to go after volume and this low LME price environment.

So for the most part, most of our zinc oxide contracts either have the same premium as they have last year or are a slightly higher going in this year.

Brian Grad - DLS Capital Management

What was the premiums on those?

Robert Scherich

Well the premiums, when we you talked about premiums on oxide, its sort of adjust depending on the LME price that you're looking at. I think that LME prices down where we are is probably in the neighborhood about we say $0.06 and that...

Brian Grad - DLS Capital Management

But on the in zinc contained basis, say they stay in that $0.20 to $0.25.

Robert Scherich

Right.

James Hensler III

They keep in mind Brian its fourth quarter a lot of the oxide was pricing against third quarter LME. So, realized premiums were higher than transactional premiums. Here for the first quarter, we're now seeing LME price close to what it was for the fourth quarter so that we won't see that lag affect so much.

Brian Grad - DLS Capital Management

Okay. All right. Thank you. I'll get back in the queue.

Operator

Next we have Robert Howard for Prospector Partners. Go ahead.

Robert Howard - Prospector Partners

Thanks, so just I guess -- following up on the previous question there basically the way that contracts are. You're always going to sort of have that quarter lag affect. Is that?

Robert Scherich

Yeah for the zinc oxide at particularly for the zinc oxide contracts with the tire industry and the rubber industry, generally their price going up two to three month lag, and since that represents about two-thirds of our oxide business, generally when you look oxide it will be -- the pricing generally lags with LME price.

Robert Howard - Prospector Partners

And the metals are little bit closer?

James Hensler III

Metals are generally sold on the price of the time of order placement or order shipment and so if there is a sharp drop in the price during a month, you might actually see a slight lag effect but typically it sits very current.

Robert Howard - Prospector Partners

Okay. And you've been talking about looking for new customers for the dust recycling,

Robert Scherich

Right.

Robert Howard - Prospector Partners

If the customers start coming in, I guess the current market environments but you get some of this new accounts, would that be enough to meet reopen some of the facilities or would you sort of keep the capacity the way you have it right now?

Robert Scherich

Yeah, we would anticipate restarting the kiln we have done and also backing away from the recycling of these residue funds that I mentioned and opening up more capacity as the year goes on.

Robert Howard - Prospector Partners

And then with the new Obama administration coming in, just sort of wondering from environmental standpoint, is there been any talk about changes either stuff that would make customers more eager to use your recycling or maybe kind of a negative from your end risk for your cold point tightening standards there?

James Hensler III

It's a little early to tell. I guess I would say that one of the things which is a carryover from the Bush administration was a move to change the definition of solid waste in the rigs which would to some extend improve the situation for recyclers because it was essentially say if you are generator of a list of hazardous waste and its going to the recycler, it will be treated differently then if it is going to a landfill and with reduce essentially treated a the non-hazardous material. So, that -- if that continues to go down that path that could be a favorable thing.

Our view is that they depends on whether there is uniform treatment at the state level to the extent if there is any differential treatment by the states for instance they don't adopt this new ruling then that could be detrimental because we have facility to multiple states and so we would like them to be viewed as all the same. So that's rule making that still has to work its way through it's currently being challenged right now and so we're got show (ph) where that will end up coming out but that's only thing I am aware of right now but it would probably net-net have a positive impact on our business.

Robert Howard - Prospector Partners

And so from the power generation standpoint you really haven't seen anything?

James Hensler III

Well the only thing I'd say in power generation, I mean this -- it's still not clear to me yet what this carbon trade type of tax really means to us obviously we're coal burner and we're user of carbon in our process and so that could have an impact on us, the one thing I would say that has been a positive in this regard is that there was a pending mercury rule in the state of Pennsylvania which were to forced us to invest in mercury removal.

Technologies at our power plant and have those in place by 2010. That ruling has been overturned in Commonwealth court, Pennsylvania and so, it looks like that pending rule making is being pushed up. Now it's being appealed that it may get overturned and appeal but that -- we looked at that and it was going to probably cost us 1 million to $0.5 million but that equipment in our power plant. So for now, at least, that expenditure is been put in advance.

Robert Howard - Prospector Partners

Okay. I guess jumping back to the put, you said that you made the adjustments, put them down about 6, 7 million. Does that -- are they under other current assets? Is that where they fall on the balance sheet?

James Hensler III

Yes.

Robert Howard - Prospector Partners

Okay, great. And I think that's it. Great, thanks a lot.

James Hensler III

Thanks.

Robert Howard - Prospector Partners

Thanks Robert.

Operator

Next in the queue you have David Shapiro, BGB Securities.

David Shapiro - BGB Securities

Hi guys. Quick question, do you have the tax liability there sitting in current liabilities? Is there some sort of tax impact should be aware of?

Robert Scherich

The biggest thing setting in the current or you mean on the current liability?

David Shapiro - BGB Securities

Right.

Robert Scherich

I was thinking current asset. I don't have the classifications of taxes readily available. I mean we try to take a deeper look at it. I might have to follow back up with you.

David Shapiro - BGB Securities

What was the tax you had paid on that gain that large gain that you had?

Robert Scherich

Yeah, from a tax perspective, we were making estimated taxes during the year as the trend was reducing. Our last tax payment was estimated payment within the December and preliminary look is that we've been -- we've fully have paid 2008 taxes through our estimates.

David Shapiro - BGB Securities

Including the gains on the options?

James Hensler III

That's right

Robert Scherich

That's right.

David Shapiro - BGB Securities

Okay. That's helpful. And then I was hoping -- I guess the per pound to your cost for the zinc was extraordinarily high for this quarter. I guess partly, part of that is due to lower volumes, part of it due maybe to one-time inventory charges. I was hoping you could walk us through some of the big components, maybe what the conversion cost is, what the dust cost was per pound sort of the big blocks, sort of expenses coming out for the quarter?

Robert Scherich

Well, I mean there is a lot moving parts for the quarter and as you noted, first was the $9 million charge for the write-down of inventory which hit cost of sales. But volume of shipments and volume of production were off 20% to 25% from the year before and with the zinc price down 55%, the purchase feed prices were down significantly both from that pricing and the success we had in lowering the price that we were paying on a percent of LME. So it's kind of difficult to really layout in simple terms all of the pieces.

Our EAF dust zinc units were at about 65% for the quarter which was favorable versus the prior year quarter. So, even though zinc production or EAF receipts were down, we were producing less zinc products in given just our flow through of inventory of the recycling of EAF dust. We didn't feel the full impact of that reduction in receipts during the quarter.

David Shapiro - BGB Securities

Okay, what was the impact I guess from the lag, the inventory lag? Did you isolate that?

Robert Scherich

We didn't because in essence, when we got to the end of the quarter, we wrote all the inventories down to a market value or a net realizable value. So we ended up with a $9 million write-down of inventories which is predominantly this higher cost flowing through from prior periods and material that was purchased at higher LME zinc prices.

David Shapiro - BGB Securities

So that encompasses the lag then?

Robert Scherich

Yes, it will encompass any remaining lag that was in the inventory. We've been incurring the last two or three quarters $4 to $5 million a quarter of what we've described as cost flowing out of on a sequential quarter basis is lag effect. So it pretty much cleans that up as of 12/31.

David Shapiro - BGB Securities

Okay. What sort of the guidance for the dust processed and sort of the output, you were down pretty hard there in the fourth quarter. I suppose there is going to be some level of increase given higher steel activity now. What sort of the guidance there and also we've been seeing reports that you may have signed a deal with the new core Utah plant. How does that figure in maybe -- just a little bit more color?

Robert Scherich

First of all production and shipment standpoint as Jim mentioned in his remarks -- we have now moved down to a core furnace operations which we expect to be at given the lower market demand for product. So, when we were at six furnace operation, up through tailwind of third quarter that was about a 150,000 zinc tons of output at our Monaca facility.

The fourth quarter, we were kind of between four and five furnaces, didn't quite average five furnace operation. So that was just about 28,000 tons of zinc production. We expect the first couple quarters here to be probably slightly lower than that this four furnace operation.

First quarter is kind of half and half, five furnaces, four furnaces. So, our current expectation is that, production volumes and shipment volumes are going to stay relatively flat until we see uptick in the marketplace.

David Shapiro - BGB Securities

Okay.

James Hensler III

On the industry feed side, as we said we received about 85,000 tons in the fourth quarter. We are picking up -- we're not getting any specifics about new contracts where we have them. We are picking up dust from three new sources in the first half of the year.

And so we expect in the first quarter to be up about 10% from the fourth quarter and in the second quarter, we expect to see the full benefit of these additional sources and be up even further.

David Shapiro - BGB Securities

So what percentage is then, I guess of the feed will be dust at that point, are you projecting sort of from the first quarter and then beyond?

Robert Scherich

Well...

David Shapiro - BGB Securities

Assuming that you're running at this lower.

James Hensler III

Yes you're right, Around the four furnace operation, we're projecting that our percentage of feed from EAF dust is going to be in the 80% to 90% range.

David Shapiro - BGB Securities

Okay. And then how do you -- I mean just again even pulling out some of these effects or the inventory lag and some of these other sort of we call one-time issues. It just seems that we're still very far off from sort of this low 50s breakeven run rate that you guys are sort of shooting for a year. How do we bridge the gap I guess to get towards the end of the year to low $0.50 sort of run rate environment on the cost side, given this lower level of production. I mean it just seems like it can be an awful lot of fixed cost that have to be pulled down and we're quite far on a per pound basis at this point?

Robert Scherich

Well, the first clarification David is that the low 50s breakeven is the cash flow breakeven not an earnings breakeven.

David Shapiro - BGB Securities

Right.

Robert Scherich

So, even if you look at the fourth quarter, it averaged about $0.54 zinc price and we generated slightly positive cash flow from the operating side. And with the realization of kind of the cost reductions that Jim's talked about, and the working capital reductions, that's really the aim at current zinc prices to basically stay at cash flow breakeven, that's what we've done for the past quarter and that's what we're targeting over the next couple quarters, if conditions improve in the second half of the year, we're probably -- when they do improve, we'll have some working capital build at that point.

David Shapiro - BGB Securities

So, should these targets really including working capital draw downs?

Robert Scherich

Yeah absolutely, its cash flow from operations. We're focused on maintaining the liquidity that we have today and reducing cost and managing cash flow to, in essence hold that liquidity position during this current low zinc price and low market demand.

James Hensler III

And we've cut a lot cost in the last four five months and we've taken a numerous actions since late August of last year up through just recently. We haven't really seen the full year effects of those things and were beginning to realize it now. So, we think our breakeven point is lower as a result of that and that's all -- and as Bob points out. Our main focus right now is to run the business on a cash basis and get through this low period and position ourselves for the market recovers.

David Shapiro - BGB Securities

I'll get back in the queue. Thanks guys.

James Hensler III

Thanks.

Operator

Next in the queue is Amir Arif, FBR capital market.

Amir Arif - Friedman, Billings, Ramsey & Co

Hello, good afternoon guys. I joined a little late so I apologize if you have already touched on this. But just on the IRM side, what are the next ups involved Jim just to try to get this to a commercial revenue stream for yourself?

James Hensler III

Yes we have, we did complete a trial at one steel producer that went fairly well and we're negotiating with them now to get our first commercial order for the material. We expect to be able to do that some time here in the first half of the year.

But -- the steel industry, as we've been talking about has gone through a lot of significant changes during the last three months and there is a lot of material out there right now both for electric furnace shops to use and for blast furnaces used.

So the prices have dropped quite a bit for iron units and there is a lot of materials available. So in our expectations are little lower here in the short-term. We think that we are going to continue to try to due these trials and build some market forward but our pricing expectations are low and our volume expectations are low. And until we start to see steel production recover and we don't expect to get much out of that.

Amir Arif - Friedman, Billings, Ramsey & Co

Can you give us a sense on what you think the pricing was for the iron ore material?

Robert Howard - Prospector Partners

Well, we're sort of in negotiations right now. So I don't refer not to get a number out there in the outlook.

Amir Arif - Friedman, Billings, Ramsey & Co

Okay. And if you want to touch on this or not even, so you got one commercial place to concern this two. Is that enough for all your volume off take or do you need find some more customers.

James Hensler III

No we don't need to find some more let me think that this a kind of thing where you get one customer on your belt and now you've got something you can talk with other producers because they basically have very similar processes. And so, we're going at this very methodically try to do one at a time and hopefully develop the plant out for the material.

Amir Arif - Friedman, Billings, Ramsey & Co

Okay. And then, I know you were renegotiating the purchase feeds this quarter. Do you have a sense of what that's going to average as the percentage of LME for next year? Both for the portion that you do need to have?

James Hensler III

2009, Yeah. We set a target to get below 50% and I think we're going to need to beat that.

Amir Arif - Friedman, Billings, Ramsey & Co

Okay. And then, just update the CapEx that was Barnwell's being put on hold back. So much CapEx is or what's been on Barnwell in Q1 '09 and then, could I just assume 5 to 8 million maintenance CapEx or is there anything else that you're missing?

Robert Scherich

Yeah, you may have missed the conversation but we do think that Barnwell now will come in at closer to 68 million for the total project down from our original estimate of 87, 88 million. And through the first quarter, we will have spent probably in the neighborhood of 30 million for that project.

Amir Arif - Friedman, Billings, Ramsey & Co

That what I was trying to get it so just, I mean that's total-to-date before you start to put it on hold but how much incremental will be spend in Q1, or what's spend in Q1?

Robert Scherich

It was about 15 million in Q4 and we expect another about 15 million in Q1 roughly. And the remainder is what really gets paced with market conditions and how quickly we want to -- we choose to bring that capacity up.

Amir Arif - Friedman, Billings, Ramsey & Co

Okay so, for '09, the 15 million CapEx in Barnwell maintenance for all about 7 to 8 million?

James Hensler III

Yeah. I don't want to -- the first quarter it's going to be about 15 million the total for the year, for Barnwell will depend upon how quickly we want to move forward. We could spend as much as 40 million in this year on Barnwell if we continue to move down the in normal construction schedules, and we're going to decide on that actual spending rate based upon what we see happen in the steel industry.

But, the appointment (ph) terms no maintenance CapEx probably in the neighborhood of 5 to 10.

Robert Scherich

Yeah, our current look -- and its change based on market conditions is about 50 million of CapEx totaled for this year, including a portion of the Barnwell as we right now expect some of the Barnwell project to carry into 2010.

Amir Arif - Friedman, Billings, Ramsey & Co

Sounds great. Thanks guys.

James Hensler III

Thank you.

Operator

Next we have a quick follow-up from Brian Grad, DLS Capital Management.

Brian Grad - DLS Capital Management

I just want to confirm what you were saying earlier. So the $7 million in cash that's coming due in early January was booked against cost of good sold but the actual cash is not on the balance sheet as of year-end?

Robert Scherich

That 7 million actually was a benefit to the revenue line from the settlement of the hedges and our receivable was set up. So it's in the current assets as of 12/31 and it turned into cash early in January.

Brian Grad - DLS Capital Management

Okay. Okay, thanks. Great.

Operator

Next we have Robert Howard, Prospector Partners.

Robert Howard - Prospector Partners

Hi, just a quick follow-up on --we talked about the inventory, you talked about your write-down. How about just sort of tons in inventory, did that go up or down or how the inventory has been moving here in last couple months?

Robert Scherich

Well, I know over -- year-over-year, we reduced inventory. I'd say they stayed relatively flat during the fourth quarter because we were reducing production but the shipment demand -- we adjusted production basically for the change in shipments. So it's relatively flat.

I think we built some raw material inventory during the quarter, basically, coke and coal. But we'll have the opportunity now to reduce that during the first half of the year. But finished product inventories are still relatively low less than one month supply.

Robert Howard - Prospector Partners

Okay, great. And you've been talking about of the cost reductions. I guess -- how much of the cost -- for the cost reductions in there. I guess -- has there been a cost -- was there a significant cost you announced in the fourth quarter about trying to reduce some costs and I wonder if there is implementation cost for that and further implementation cost as your reduction is going forward? How much might that be?

Robert Scherich

Most of the cost reductions we're talking about are not involving much in the way of any capital investment. The only area, let's say, that do involve capital investment are that we have started up our washing circuit in Monaca and we think with that washing circuit -- and most of the capital on that was spent in 2008.

We got a little bit that carries over this year. But the advantage of that is that is going to allow us to use more wells oxide directly, air smelter bypassing the calcite, steps that we save in the cost of calcite and we save the cost of transportation to get it to Calumet.

The other piece that going to have some benefit, there was capital involved is we are starting up our palletizing circuit at Palmerton. And along with that we have a carbon trim system. So we should be able to reduce our total carbon usage at a Palmerton operation and we're going to have the benefit of having lower iron content wells oxide coming out of Palmerton coming into our smelter. So that's going to have some significant cost benefits to the smelter.

Robert Scherich

Again a little bit of capital spend on that this year; something a lot of been was spend last year. Those are two sort of capital related cost reduction projects that we've got. But most of the cost reduction that I've talked about have been process improvements or process changes, the renegotiations of materials that we send to Bartlesville and that's not involving any capital at all. We made a lot of headway in terms of improving recovery in our smelter and that really hasn't involved much additional capital. So, that's where we are.

Robert Howard - Prospector Partners

Okay. And that we're not going to see in terms of income statements type, a big -- just operating an expense for kind of implementing these changes isn't going to be that significant it sounds like?

James Hensler III

Yeah, it shouldn't be.

Robert Howard - Prospector Partners

Okay, great. Thank you very much.

James Hensler III

One thing I would point out and we didn't really highlighted on the call. But when we look at the fourth quarter we did incur some unusual expenses on the operating side, we had a unexpected outage in our power plant which resulted in a essentially a rebuild of one of our generating units which was an additional cost. We didn't expect of about $2 million. So we talked about cost reductions but we also had some unusual cost increases during the quarter.

Operator

And your last question is from Zack Sternberg, Dougherty.

Unidentified Analyst

Hi, just a quick question could you comment a little bit on thoughts on repurchasing stocks it would seem that it diffuse levels and given the replacement side of the assets and the balance sheet. And all that, even in modest amount of cash being used for share repurchase would be enormously valuable to current shareholders. And perhaps more valuable than, to some extents in new capacity because we get the purchase capacity on cheap. Could you just talk about that little bit?

James Hensler III

Well it's some that we constantly review with the Board and we will talk about it again, I am sure that our next Board meeting. And it becomes a balance of, what's the best use of the capital in the current environment. I think we've had three choices, one is to, two things like return it to share holders in the form of some sort of stock buyback, make investments in the business that could help to either lower our breakeven point or expand in the future or maintain liquidity in case conditions get worse in this market. And I think those are the things that the board will have to wrestle with and try to decide what's the best use of that cash here in the short-term.

Unidentified Analyst

If you agree that, it' not a choice between with necessarily one of the other sort of thing if there is enough cash there and that you can both invest in the business to bring down the breakeven and at the same time. And at the same time, we still delivered cash back to shareholders. Sure but the fact that we'd earned an increased interest in the cash flows going forward. It's hard to see how that's not an attractive thing to do here. So I don't have all standard answer but the board and it will be reviewed in all that. I don't know, I'm just curious little bit more about -- you could talk a little bit more freely.

James Hensler III

I guess I would feel more comfortable if we saw some signs of recovery in the general economy. It's hard to get a sense for when things are going to turn and whether we've seen a bottom yet. And so, when I get concerned about those kinds of issues, I think in the short-term, I'm more concerned about preserving cash and maintaining liquidity for the long-term of benefit of the company if the market cycle continues to go downward, and so that would be the concern not having a short-term but again this is something that the board needs to take up and decide what's the best use of the cash.

Unidentified Analyst

Okay, thanks.

Operator

We have no other questions in the queue. I'll turn it back to the speakers.

James Hensler III

Okay. Well we thank you very much for your attentiveness and we will talk to you again next quarter. Thank you.

Operator

And thank you for using the AT&T executive teleconference service. Please disconnect at this time.

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