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Horsehead Holding (NASDAQ:ZINC)

Q1 2013 Earnings Call

May 06, 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

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

Daniel Moore - CJS Securities, Inc.

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

Kirk Ludtke - CRT Capital Group LLC, Research Division

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

Tom Van Buskirk - Sidoti & Company, LLC

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

Operator

Welcome to the Horsehead Holding Corp. First Quarter 2013 Earnings Release Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Gary Whitaker. Gary, you may begin.

Gary R. Whitaker

Good morning, everyone, and thank you for joining us on our first quarter 2013 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 18, 2013, for a more detailed description of the risk factors that may affect our results.

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

James M. Hensler

Thanks, Gary. I would like to welcome you to this conference call to discuss the results of the first quarter of 2013. I will review the performance of our operations and markets, while Bob Scherich, our CFO, will review the financial results.

The consolidated net income for the quarter was $2.8 million or $0.06 per share. This compares to a loss of $8.5 million or a $0.19 loss per share for the first quarter of 2012. Consolidated net earnings, excluding favorable noncash adjustments related to hedges, was $2.3 million for the first quarter of 2013 or $0.05 per share. For the same period in 2012, we realized consolidated net income, excluding noncash charges associated with hedges, and an accelerated write-off of a portion of the Monaca, PA, facility of $2.1 million or $0.05 per share. The LME zinc price was about the same for both quarters, while the nickel price was roughly 12% lower in the current quarter.

Our adjusted earnings improved compared with the prior year's quarter, as higher realized premiums to the LME zinc price more than offset reduced volume of shipments. The performance of the business was positive as we prepare for the transition to new production facilities later this year. Demand for our zinc products was solid, and our zinc smelting facility in Monaca, PA, operated at full capacity. We chose to reduce shipments of zinc products compared with the first quarter of 2012 to realize higher sales premiums and to build inventory to support customer demand during the time we transition metal production to Mooresboro, North Carolina, and oxide production to Zochem. Construction of our new facility in North Carolina remains on schedule for start-up in the second half of 2013. Equipment installation and the hiring process both are actively underway.

We're also very pleased with the smooth integration of Horsehead Zinc Powders, which we acquired in November 2012, and also pleased with the performance of INMETCO and Zochem, both of which generated solid earnings for the quarter. The expansion of Zochem is on schedule to accept the shifting of a portion of zinc oxide production from Monaca by the end of the year.

I would now like to discuss our operating results in more detail. We processed 155,000 tons of EAF dust during the quarter, a quantity approximately equal to our receipts. EAF dust receipts decreased by 5% to 156,600 tons from the prior year's first quarter receipts of 166,000 tons. According to industry statistics, domestic steel industry capacity utilization averaged approximately 76% during the first quarter of 2013, which is down slightly from 78% during the first quarter of 2012.

We idled the equivalent of 1 kiln for 2 months during the quarter and took maintenance outages on other kilns to balance capacity with supply. Steel industry output increased as we entered the second quarter of 2013. As such, we are presently operating all of our kilns.

Zinc product shipments decreased by 15% to 42,772 tons compared with the prior year's first quarter and decreased by 7.6% compared with the fourth quarter of 2012. Total zinc oxide shipments decreased 12% compared with the first quarter of 2012, while Zochem's shipments increased by 5%. Total zinc metal shipments decreased by 26.7% when compared to the first quarter of 2012 and 26.1% when compared with the fourth quarter of 2012.

We made the decision to increase premiums on contract business on zinc oxide beginning January 1, 2013, consistent with our price increase announcement in the third quarter of 2012. We did this, recognizing that we will be transitioning zinc oxide production to Zochem later this year and our capacity to produce zinc oxide at Zochem, even after our expansion project, will be lower than the combined shipment volume of oxide from Monaca and Zochem in 2012. However, we believe that with the market in balance, we would be able to focus on higher margin business, which appears to be the case based on the first quarter of 2013.

In addition, coming into 2013, we realized the need to build some inventory of both metal and oxide during the first 3 quarters of the year, in anticipation of supporting customer demand during the transition to Mooresboro and Zochem facilities. Market demand was strong enough that we could have sold additional product during the quarter although at a lower premium. By holding the product in inventory, we will realize higher premiums later this year.

We operated all of our full complement of 6 smelting furnaces in the first quarter of 2013. In April, however, we idled one of the smelting furnaces due to the unplanned shutdown of 2 SSHG columns and 1 oxide-refining column, which reduced downstream capacity to process smelter from the smelter -- metal from the smelter. We expect that these -- we expected that these rebuilds would come due later this year and be staggered. The columns are expected to be back online by the end of May. We anticipate returning to a 6-furnace operation in early May and continue to operate at that level until we shut down the smelter.

Moving on to discuss the zinc pricing environment, the LME zinc price averaged $0.92 per pound during the first quarter of 2013, which was the same as the first quarter of 2012 and $0.04 higher than the fourth quarter of 2012. Zinc prices have recently slid and currently are trading between $0.81 to $0.84 per pound. We continue to have downside protection on zinc prices in the form of put options with a strike price of $0.85 per pound through the first quarter of 2014.

The realized premiums on zinc metal averaged $0.058 during the first quarter, which was up $0.02 from the first quarter of last year and was $0.012 higher than the realized premium for the fourth quarter of 2012. The change in realized premiums compared with the prior year's quarter reflects less sales of -- to lower premium export accounts.

Realized premiums for zinc oxide in the quarter were approximately $0.12 per pound, which is an increase of $0.10 compared with the prior year's first quarter and an increase of $0.08 compared with the fourth quarter of 2012, due primarily to the price increase mentioned earlier.

INMETCO's results for the quarter continued to be positive although slightly lower than the prior year's first quarter, primarily due to a 12% reduction in the price of nickel. All of the repairs associated with the fire that occurred in the fourth quarter of 2012 were completed by the end of the first quarter 2013. We expect to submit an additional claim to our insurance carrier to cover the remaining repairs.

Tolling receipts increased by 32% compared with the fourth quarter of 2012 as a result of our new tolling agreements that we entered into at the end of last year and as Outokumpu ramped up production at their Alabama facility.

Zochem continued its positive contribution to earnings during the quarter. Business has been stronger than anticipated, with shipments up by 27% compared with the fourth quarter of 2012. The expansion project remains on schedule. We have completed the expansion of all but 1 of the existing 6 furnaces. Construction of a seventh muffle furnace is also underway. We have received the site plan approval needed to obtain the building permit for the warehouse expansion. And we are also in the final stages of qualifying the Zochem location to supply zinc oxide to customers presently being serviced from Monaca. We expect to be in position to shift production from Monaca to Zochem by the end of the year.

Lastly, we are in the final stages of construction on our new zinc plant project in Mooresboro, North Carolina. Startup of the new zinc plant continues to be on schedule to produce first zinc before the end of this year. The majority of the infrastructure work, detailed engineering and the equipment acquisition have been completed. Installation costs are running above our previous estimates. We have revised our estimate of the total construction costs to approximately $450 million, a portion of which is not expected to be paid out until 2014. Work at this point has either been paid for or firm quotes have been obtained for approximately 95% of the construction costs to complete the project. We believe that we have adequate liquidity to complete the project through start up of the facility. Workforce recruiting is actively underway, and we expect to begin hiring and training the first wave of supervisory and skilled positions in May of 2013.

I will 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 excludes the noncash effects related to hedges. The adjusted net earnings for the quarter were $2.3 million or $0.05 per share compared to adjusted earnings of $0.05 per share for the first quarter of 2012 and adjusted earnings of $0.02 for the fourth quarter of 2012. Detail of the quarter's adjusted performance versus the same quarter last year reflects a decrease in revenue of $9.3 million or 7% to $117.2 million. The decrease reflected the effect of lower shipments and lower nickel prices, partially offset by an increase in price realization above the LME price.

The average sales price realized for zinc products on a zinc-contained basis was $1.16 per pound or $0.24 per pound above the average LME price for the quarter compared to $1.06 per pound or $0.14 above the average LME price for the prior year's quarter. This reflects an increased proportion of zinc oxide, higher premiums to the LME price for zinc product shipments and the higher premiums for zinc powders related to HZP.

Sales of zinc metal decreased $11.7 million or 25% to $35.4 million for the quarter, reflecting a $12.6 million decrease in sales volume and a $0.9 million increase in price realization. Sales of zinc oxide decreased $1.2 million to $46.5 million for the quarter, reflecting a decrease in sales volume of $5.9 million and a $4.7 million increase in price realization.

EAF dust revenue decreased $0.5 million or 4.8% to $10.9 million for the quarter, as volume of receipts decreased compared to the first quarter of 2012. Sales from nickel products and services, excluding the effect of hedges, decreased $1.4 million for the quarter to $14.4 million, reflecting a $1.3 million effect of lower price realization and the 12% decline in the LME nickel price.

Consolidated cost of sales decreased $13.5 million to $100 million. An impairment charge of $3.3 million was included in cost of sales in the prior year quarter. The balance of the decrease reflects the effect of reduced shipments, partially offset by an increase in EAF dust transportation cost.

Depreciation increased $1.1 million and reduced earnings per diluted share by $0.015 when compared to the first quarter of 2012. This increase in expense was primarily related to the acceleration of depreciation due to the expected idling of the smelting and refining assets at the Monaca, Pennsylvania, facility later this year, along with the depreciation expense associated with the acquisition of HZP.

Noncash hedged charges increased sales by $1 million in the current quarter and reduced the prior year quarter sales by $15.2 million.

We have zinc put options in place for all of 2013, with an $0.85-per-pound strike price for 8,000 metric tons per month. During the first quarter, we added similar options with an $0.85 strike price for 4,000 metric tons per month for the first quarter of 2014 at a cost of $0.8 million.

Cash flow used by operating activities was approximately $1 million for the quarter. Capital spending was $65 million. Capitalized interest was $6.5 million and is expected to be $18.6 million for 2013. At quarter-end, our cash balance was $182 million. We plan to use the revolver at Zochem to fund the majority of the requirement for the expansion plant. The export credit facility that was put in place in 2012 was used to fund $4 million of the CapEx at the North Carolina facility during the first quarter, and an additional $7.4 million is expected to be funded during the remainder of this year. We had $65 million available on the credit facilities at March 31 and continue work to add a $15 million credit facility at INMETCO later this year.

Adjusted EBITDA was $12.4 million for the quarter compared to $11.2 million for the same quarter last year, reflecting primarily the effect of higher sales price premiums. Adjusted EBITDA was $41.9 million, and the LME zinc price was $0.88 a pound for the 12 months ended March 31, 2013, compared to $45.6 million and an LME zinc price of $0.95 per pound for the 12 months ended March 31, 2012.

We continue to believe that our cash on hand, credit facilities and expected cash flow from operations will provide sufficient liquidity for our needs for the next 12 months.

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

James M. Hensler

Thanks, Bob. In summary, before we open the call for questions, I'd like to say that I'm pleased with the improvement in our operating results and that the performance of our business was positive as we prepare the transition of the business from Monaca to Mooresboro, North Carolina, and Zochem. I'm happy to report that our strategic capital investments in both locations continue to be on schedule. We are in the final stages of construction on our new zinc plant in North Carolina and are in the midst of Phase 2 construction at Zochem. Startup planning is well underway at both locations, and we believe we continue to be on schedule to complete the construction and start operations before the end of 2013.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Brett Levy from Jefferies & Company.

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

I noticed that the project cost went from $375 million to $450 million overall. Can you guys talk a little bit about what the CapEx number is, if it's been revised at all, for the balance of the year or for the full year? Is it still something near $220 million? And also, talk about sort of the effect of the inventory build from 1Q to 3Q, sort of how much cash will that be tying up?

James M. Hensler

In terms of the inventory. We would expect to build about -- something on the order of about 8,000 to 10,000 tons of inventory, mostly metal, with a portion of that being oxide, between now and the end of the third quarter. With respect to the capital investments, Bob, I don't know if you have any comments on that.

Robert D. Scherich

Well, there's certainly some timing effects. We expect, when we look at just the North Carolina project, anywhere from 5% to 10% of that project to probably carry over into 2014 from an actual spend standpoint. The majority of the CapEx this year is directly related to the North Carolina project and the Zochem expansion project, which we'd probably spend about $15 million this year, I think. So maintenance CapEx, I think, is going to stay in that $10 million to $12 million range this year. So our view is that, and just to comment a little further on the inventory build that Jim was referring to, that build occurs through the first 3 quarters and then liquidates during the fourth quarter as we look to idle the Monaca facility. Some of that could then get tied up in receivables as we ship that out in the fourth quarter. But we've got options around that, and our current look is we would still have cash on hand at the end of this year as we move into 2014.

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

Can you sort of -- because you do have these put options in place, I'm guessing the numbers stay reasonably stable, and you don't have to comment on that. But I mean, do you have like a target cash will not drop below $50 million statement or anything like that you can set?

Robert D. Scherich

Well, first of all, on the put option, the value there to us is to avoid the risk that we end up negative cash flow from current operations, which we think the $0.85 put options do that. So from a targeted cash standpoint, it's -- the fact that we've got the $65 million of availability on the credit facilities, whether we're using revolver or having cash, we're not -- we're indifferent to the 2. So we think we'll be maintaining more than adequate liquidity during the startup. We don't really have a cash balance target.

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

Okay. And then is there a plan to sell the Monaca, PA, operation? Are there any environmental liabilities that you worry about? If you don't, sort of can you talk about sort of plans for this asset once it's idled?

James M. Hensler

Well, the option that we're considering right now is selling it to Shell Chemical to build their ethane cracking facility. And they have an option on the site. Their option expires at the end of June of this year. And depending upon the outcome of where Shell goes with that project, that will determine which path we go. If they exercise their option and decide to build, then we'll be evacuating the site, and they'll be demolishing and remediating it and building their facility on it. If they don't exercise the option, then we have -- we'll retain certain operations on that site. There are also some other business opportunities he would pursue for the site. And we don't see any immediate environmental-related costs that we'd have to deal with on the site if we continue to maintain our presence there.

Operator

Our next question comes from Daniel Moore from SJ Securities (sic) [CJS Securities].

Daniel Moore - CJS Securities, Inc.

The additional $20 million plus or so of cost creep for the North Carolina plant, can you just give us a little bit more details what's driving that and your confidence around that number coming in as a solid number when you get to the end of the day?

James M. Hensler

Yes. The main thing that's changed, Dan, is that we completed the detailed engineering for the project at the end of March. And when we got into the final detailed design, we saw that the number of electrical devices, motors, pumps -- that scope had increased quite a bit from the original estimate that we got from our technology provider that came out of the front-end engineering and design. And this isn't unusual because when you have initial design and then that gets reviewed in terms of the maintainability and operability of the site and safety considerations, quite often, there's change in that. But in this case, there was maybe 60% more electrical components than we have had in the original estimate, and so then that drove a higher estimate on both the electrical and mechanical installation cost. And so I mean, the good news is that that's done now, it's baked into the estimate. The design is finished, so we don't expect to see any changes there. And as we pointed out in our comments, we sit here today with essentially 95% of the project either paid for or subject to firm bids, which leaves about $25 million that's out there still to be quoted. But when we look at the scope of that work, it's very similar to other parts of the installation and equipment that we've already bid. So we've got a fairly high degree of confidence. That doesn't mean that there can't be some changes. Certainly, when you actually get into the details of installation, you may find that there are designs that, when you get to the field, you have to change, and you have to make adjustments for that, and you may find that there's damage to equipment and you have to deal with that. Some of that you can go back and recover, but there could still be some changes even in this last little bit. But we think we're pretty close. We think the number is pretty close and shouldn't change very much from where we are today.

Daniel Moore - CJS Securities, Inc.

Very helpful. And in terms of the timing, do you still think a sort of late Q3 or early Q4 start with production ramping through Q4 is reasonable? Or should we thinking more along the lines of kind of first zinc produced toward the back half of that Q4 time frame?

James M. Hensler

Our view hasn't changed much on that. We think we should -- we've been saying the second half of 2013 with the target first zinc somewhere in the middle of that range. It can change plus or minus a couple of weeks, but we think that that's the way it will play out. But the schedule is very tight. I mean, we're basically relying on some equipment deliveries coming on schedule and not being delayed because that's really what it comes down to is that when we look at the very detailed startup plan, we're assuming that motor -- all the motor control centers are going to be in, and we're assuming certain tanks yet to arrive are going to be in. And if those things came in a couple of weeks later, it could push our schedule a little bit, but we think we're going to be close to that. We think that the ramp-up on the zinc production side, our view on that hasn't changed, we think it's about a 6-month ramp-up, so it probably takes us through the first quarter of 2014. Our view on the lead recovery circuit hasn't changed a lot. We think that, that still looks like we can start that up before the end of the year. It will lag the zinc plant by a few months. We do think that's a longer ramp-up, that's about a 12-month ramp-up, so we will get the full benefit of that probably until the second half of 2014. But we'll start up here, hopefully, before the end of the year.

Daniel Moore - CJS Securities, Inc.

And lastly, the other availability in terms of liquidity of $65 million, does that include the Zochem facility, which is sort of earmarked for Zochem?

Robert D. Scherich

It does, Dan, because the total capital need also includes the expansion plans at Zochem.

Operator

Our next question comes from Carter Driscoll from Ascendiant Capital Management (sic) [Markets].

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

Markets. It's unclear, the revised total spend on the new facility doesn't include the build-up in inventory to support it, say, the one from $415 million to $450 million after the engineering study was revealing some additional equipment, correct?

Robert D. Scherich

Yes, the inventory has nothing to do with it.

James M. Hensler

It has nothing to do with the inventory.

Robert D. Scherich

That's just how we plan to operate the existing business for the balance of this year in preparation for the idling of the Monaca operations.

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

The price realization, obviously, you detailed the premiums you put into a fact, the changing mix with the Mitsui unfolded and Zochem. Is that type of premium above the LME or range somewhere, all else equal, what we should expect throughout the year if everything remains constant to this type of mix we had this quarter in the kind of mid-$0.20 range?

James M. Hensler

Yes. I mean, our view, oxide premiums are pretty well set for the year, subject to the contracts we've got in place. We don't see a lot of movement in metal premiums. Part of our decision to build inventory in metal was that it doesn't really make a lot of sense for us to sell in the export markets right now, where we might have to take a $0.05 discount off of the LME when we could -- when we'd like to have that metal later in the year for transition purposes, that we can sell it to a $0.04, $0.05 premium. So we're going to sit on that and sell it later in the year and use that to help us transition. And we think that the HZP powder business looks to be pretty predictable. We may see an impact of -- these column outages I've mentioned to you, the SSHG columns, that, basically, that's the metal that feeds our battery powder business. And while we have sufficient inventory to get through this outage, because of the timing of the outage and the length of it, we're not going to be able to build much inventory toward the end of the year, so we may see that business fall off a bit in the fourth quarter. But we still have some chance to recover there. So we're not ready to make that conclusion definitively yet.

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

Maybe given the precipitous decline in nickel, have you guys considered -- I saw the difference between reported non-hedging on that side of the business. Would you guys consider adding to this hedging positions on that side of the business?

James M. Hensler

Well, we have done some to a limited extent. We've taken some hedge positions there. The INMETCO business is not as susceptible to movements in the commodity price because a good portion of that business is tolling related, so it's not completely tied to the price of nickel. But we do have some hedge positions there already.

Robert D. Scherich

And their toll processing has actually been increasing as a proportion of their total mix.

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

As you get up and running, Bob, maybe a question for you, could help us understand maybe how the effective tax rate will change once the facility gets up and running?

Robert D. Scherich

Yes, I mean, we're still working through some alternatives on that, but obviously, when you transfer -- or not so much transfer, but when more of the income on the zinc products is in Canada, with a tax rate in the mid- to high-20s, and we believe that we'll be able to move away from the state piece in the U.S., a large portion of it today is in Pennsylvania, with a high tax rate, to North Carolina, with a low, if not, the possibility that we get credits to not have a state income tax for a while. So we think that number is going to move down to the low-30s probably or closer to 30. We haven't definitively concluded on that. We know we've got some NOLs here coming out of 2012. And at the point that we idle, and if Shell exercises and we write off the balance of the Monaca facility, we're going to have additional NOLs this year. So from a cash tax rate standpoint, it's going to be relatively low here for the next year or 2 simply because of the combination of the 2.

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

A couple last questions. SG&A started to tick up a bit. Is that a reflection at all of some of the hiring you've done?

Robert D. Scherich

No. I don't think that's from the -- I think that's, if anything, just timing as to how things fit. There is some noncash RSU expense there that it's really noncash that's caused it to increase. But there really hasn't been any underlying change to the SG&A base.

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

Last question is just there was no impairment charge in this particular quarter for Monaca. Is that correct? There was that I hear is that...

Robert D. Scherich

No, that's correct. There's been nothing that happened during the first quarter to change the view and assessment of when, the probability of timing on the shutdown of the Monaca smelter and refinery.

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

Has there been any real movement from Shell, or are they still conducting their due diligence? Is there anything you can elaborate upon for us?

James M. Hensler

They've been pretty active on the site. We've seen, if anything, probably, an increased presence of their folks here in the last month or so. So they're still doing their due diligence.

Operator

Next question comes from Kirk Ludtke from CRT Capital Group.

Kirk Ludtke - CRT Capital Group LLC, Research Division

It looks like you're -- it sounds like you're still waiting for the delivery of some equipment. Is there any way that you can quantify the amount of equipment that you're waiting to take delivery of?

James M. Hensler

I don't necessarily have a breakdown here in front of me. Most of the equipment that we're waiting for are small tanks, and most of what's left to do is mostly installation-related. But there is a fair amount of equipment, electrical components, lots of pumps, lots of electrical devices. Most of these are short delivery items. But we do have a few critical items that could push the schedule. We're concerned about a couple of larger tanks, and we're concerned about some motor control center units that they're scheduled to come in right when we need them. But if there are any delays there, that could push the schedule a little bit.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Okay, that's helpful. And you mentioned that you plan to staff, it was 250 employees. Is that -- do you need all 250 to launch the facility, or is that something you ramp up to over time?

James M. Hensler

Yes, we don't need 250 to launch the facility. We're going to be starting up the zinc plant first and then the lead recovery circuit later. The full staffing would be for all of that facility, but we could probably run the facility with 200 people and then kind of work our way up to the 250 level. But ultimately, it will be 250, plus or minus a few.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Great. And do you have a beat on the people you need to run the plant, the managers?

James M. Hensler

Yes, we've got the management team in place and that they've been in place here for some time. And now we've been actively recruiting the workforce, and we've obviously received a lot of interest in the site. We've been interviewing hundreds of people, and we're now -- we've made offers, and we more or less have the first wave identified. They'll be coming in here in a couple more weeks and start training. And we actually see this as 5 different hiring classes over the next 3 months that will be coming in, and we'll be starting that process here in a few days.

Kirk Ludtke - CRT Capital Group LLC, Research Division

That's great. It doesn't sound like that's going to be a gating factor.

James M. Hensler

It doesn't look that way at this point. We think that there are plenty of applications and plenty of qualified applicants, and we're going to work hard to get them in and get them trained.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Fantastic. And with respect to liquidity, you mentioned the inventory build. Are there any other onetime cash flow events that we should be modeling, like maybe insurance proceeds or asset sale proceeds, anything like that?

Robert D. Scherich

None that move the needle very, very much, Kirk. What we -- I think as Jim had mentioned in his remarks, we are looking to get the final claims submitted on the INMETCO insurance claim and then get that finalized this quarter or early next quarter. So that's between $1 million and $2 million of additional expected proceeds. So it's important but not a big number. I think when we get to the end of the year, as we idle the majority operations at Monaca, there we can be looking at a -- we have severance costs contractually that's in place, and I think we've described that as a $5 million to $7 million number in the past. So that still, I think, is how we see it. If we move assets, even if the Shell does exercise, we would not be expecting to get proceeds during the next 12 months. So it's kind of outside of our liquidity picture right now.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Okay. I appreciate that. And then lastly, on Monaca, you mentioned some operating inefficiencies, and you may have already mentioned this and I missed it, but is there a way to quantify the impact of that in the second quarter?

James M. Hensler

Well, production will be off a bit because we had to go from 6 furnaces to 5, and that was really triggered by unfortunate timing. We had 3 columns, which we expected to have to rebuild during the course of the next 3 quarters. All end up sort of failing at the same time, and we didn't have enough capacity, really, to process all the metal we were -- downstream capacity to process, and now we're increasing the smelters, so it's just more efficient for us to run on 5 furnaces than 6. So we'll be on 5 furnaces, probably, for about a month out of the...

Robert D. Scherich

Second quarter.

James M. Hensler

Second quarter, rather than being on 6 furnaces. So again, if you look at it from a cost standpoint, there's a certain amount of fixed cost absorption that would be a negative on the quarter because of that lower production level. From a shipment standpoint, we shouldn't see much impact. We had this inventory we mentioned, so we should be able to get through that from a shipment standpoint, but it would be more of a cost-related thing. And we'll absorb the cost for those rebuilds during the quarter -- this quarter. We expected to get them during the year, but they'll all hit us in the second quarter.

Operator

Our next question comes from Paul Forward from Stifel.

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

On the higher CapEx requirements for the new zinc plant, you talked about having something like 60% more electrical components, motors, pumps, et cetera. So I was just wondering, as you did the -- as you added those into the design, was it just all kind of remedial design? Or does it -- were you able to take advantage of all this additional equipment to boost your eventual capacity? Or is it more remedial in nature?

James M. Hensler

Well, it really -- this change gets driven out of a couple of different reviews that take place. First, we are doing a HAZOP review of the facility, and you're really looking at a safe operation facility. And out of that, you decide if you want to put more instruments in or more pumps or change electrical devices around. And so I think one of the benefits that comes out of that is there's a more reliable, safer facility that you end up with, that comes out of that review. The other view that happens is the design for maintainability, the design for operability, and an engineering company puts together a design of a plant, but they're not the ones that would have to operate it or maintain it. So when the operators and maintenance folks look at it, they say, "Now this needs to go a different way." So ultimately, that means that we should end up having a more efficient and more reliable facility. How that translates into cost is hard to say. It's just part of what comes out of that kind of review. It was surprising to us that the original package was underspecified by that amount, but it is what it is.

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

Okay. And just maybe for modeling purposes in the first quarter, can you give us the percentage of the zinc feedstock that came from the EAF dust compared to other sources, and then maybe also talk about stockpiles of EAF dust or are you at target levels here or where do you think those go going forward this year?

James M. Hensler

For the quarter, we were at -- we were down to about 72%, 73% of the feed mix. So it actually dropped a bit, and the reason for that is that we took these outages on kilns, some of which we did because of low dust receipts and some related to maintenance. And when we do that, we tend to move dust from one location to another, we divert it, and so we end up getting material hung up in inventory that doesn't end up working its way through the system. So we had kind of a momentary drop in zinc units coming into the smelter because of that. We should get a little bit recovery on that in the second quarter so that, that inventory will flush through and come through to Monaca. So we would expect the percentage to go up in the second quarter. In terms of overall dust inventories, we basically process what we received during the quarter, and we were starting at a fairly low inventory position. So we're -- I'd say we're kind of on the edge right now. If steel output dropped considerably, we'd probably have to shut one of our kilns. But if it goes up, I think we got plenty of capacity at least in terms of the storage capacity to be able to absorb it.

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

All right. And can I ask for your take on zinc metal markets here and the likelihood that you'll see cash from your $0.85 put options as the year goes along? What's your impression about the trends that you're seeing either in zinc metal or in zinc oxide that could change things going forward?

James M. Hensler

Yes, I think from -- at least in terms of our underlying business and the volume activity, we think that looks pretty solid coming into the second quarter, and we don't see much changing there. But I think your question is really more on the macro picture and supply-demand for zinc and how it affects the zinc price. And I think most commodities are down right now. We don't see that changing much here in the short term. We do see our $0.85 puts are in the money right, and we're collecting some income off of those. And we're glad we have them because we don't see a lot of pressure moving the zinc price up or down, really, from where it is between now and the end of the year.

Operator

Our next question comes from Thomas Van Buskirk from Sidoti & Company.

Tom Van Buskirk - Sidoti & Company, LLC

Just a couple of quick things. Getting back to the exit from Monaca by the end of the year, hopefully, any other costs or any other factors that we should consider in modeling that? And then secondly, given what you're seeing in steel production and operating rates picking up in the second quarter, what are your thoughts on dust receipts going forward?

James M. Hensler

We think dust receipts will be slightly higher in the second quarter than they were in the first quarter just from what we see coming out of April. If I look into what the steel industry CEOs have said coming out of their first quarter announcements, I'd take away that second quarter would be marginally stronger than the first quarter, but they see the third and fourth quarter picking up a bit. And so I'd say that if that's true, then that would reflect our outlook for EAF dust receipts.

Tom Van Buskirk - Sidoti & Company, LLC

Okay. And then the other piece on just anything else to consider in the Monaca backout, yes?

Robert D. Scherich

From a cash cost standpoint, I don't think so. It's just getting the timing right, which, we think, coincides with this ramp-up of production in North Carolina. Depending on where Shell ends up, we could end up with noncash charges, further impairment or further write-off of fixed assets at Monaca. But until we know of a change, and right now it's kind of wait and see, but there could be additional noncash charges.

James M. Hensler

Yes, when you get into 2014, if the facility is just sitting there idle and we don't have any activity going on, there could be a small cost to just secure and maintain certain aspects of the facility, but we don't look at that as being a huge sum. It may be in the order of $1 million to $2 million annual expense.

Operator

Our next question comes from Mitesh Thakkar from FBR Capital Markets.

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

Most of my questions have been answered, but just one real quick question on the realized premium plans. Is it possible -- given that you have a little bit lower volume as you are going after a higher utilization on the premium side, is it possible to sell some of that in the spot market and make up some of the volume? I know the premiums might not be great, but you will still make money by selling in spot and you don't have to lock in contracts. Is that a possibility?

James M. Hensler

Yes. I mean it's -- we always have that option. And we've -- as we said earlier, we are -- our plan would really be to build some inventory to help us in the fourth quarter rather than take advantage of spot market opportunities right now. But that's a decision that's always subject to evaluation. If there are some favorable opportunities, we may take advantage of it.

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

Okay. And just a follow-up, if I may, on the CapEx side. How should we think about 2014? How much of the CapEx is from maybe Zochem expansion or from the new facility will flow into 2014? And how should we think about a steady-state CapEx level assuming no growth projects take place going forward?

Robert D. Scherich

Well, I think most of the Zochem will be finished this year. You could have maybe 10% to 20% of it, actually, getting paid for in '14, but it will be recorded in the current year. On the North Carolina project, we think 5% to 10% of the spending could go out the door early in '14 as -- even as we're starting up, and some of that relates to the lead recovery and then just kind of the timing of things from there. I do think our view has changed. On a maintenance CapEx standpoint, we're probably still looking at $10 million to $12 million a year. The new plant, actually, shouldn't have as much in the first year once we've ramped up. But in our plan to -- it's a little different from the CapEx, but just our ramp-up of -- during the 6-month time period, we expect to have a slightly higher maintenance expense and slightly higher consumption rates of materials being a little bit inefficient during the ramp-up until we get there. So we've built that into our liquidity picture and are pretty comfortable with it.

Operator

Our next question comes from Daniel Moore from SJ Securities (sic) [CJS Securities].

Daniel Moore - CJS Securities, Inc.

Not to beat a dead horse, of the incremental expense, $30 million, $35 million, how much is equipment versus -- and how much is sort of engineering labor cost?

James M. Hensler

Well, it's -- I'd say about 60% of it is, what I would put in the general category of installation costs, and then a portion of it is engineering, and a relatively small portion is equipment.

Daniel Moore - CJS Securities, Inc.

Perfect. And lastly, just -- you've given pretty good detail, but do you expect zinc metal shipments to remain flat with Q1? Or should we think about continuing to decline sequentially in Q2 and Q3 as you build inventories in anticipation of the changeover?

James M. Hensler

I think it's relatively flat, maybe just up slightly, potentially, here in Q2 and Q3. Up even more in Q4 because we would not only be liquidating inventory from the Monaca side, we expect to begin shipment of SSHG zinc metal out of Mooresboro by the end of the year. So there's the potential that we have increased zinc shipments in the fourth quarter.

Robert D. Scherich

That's because we'll be liquidating the inventory we're building.

James M. Hensler

Yes, the combination of liquidating the inventory and starting up the new plant.

Operator

We have no further questions at this time.

Robert D. Scherich

Okay.

James M. Hensler

Okay. Well, thank you. That's the end of our call, and we'll talk to you again next quarter.

Robert D. Scherich

Thanks, everybody.

James M. Hensler

Bye.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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