Horsehead Holding Corporation Q2 2009 Earnings Call Transcript

Aug. 7.09 | About: Horsehead Holding (ZINCQ)

Horsehead Holding Corporation (ZINC) Q2 2009 Earnings Call Transcript August 6, 2009 11:00 AM ET

Executives

Ali Alavi – VP, Corporate Administration, General Counsel and Secretary

Jim Hensler – Chairman, President and CEO

Bob Scherich – VP and CFO

Analysts

Karak Christel [ph] – Capstone Investments

Eric Prouty – Canaccord

Scott Blumenthal – Emerald Advisers

Paul Forward – Stifel Nicolaus

Latis Zakar [ph] – FBR Capital Markets

John Tumazos

Bill Jones – Singular Research

Robert Howard – Prospector Partners

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Horsehead Holding Corporation’s second quarter 2009 earnings release. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) And as a reminder, today’s call is being recorded. I would now like to turn the conference over to Mr. Ali Alavi. Please go ahead, sir.

Ali Alavi

Good morning, everyone, and thank you for joining us on our second quarter 2009 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 US Securities and Exchange Commission, including our most recent Annual Report on Form 10-K filed on March 16, 2009 for a more detailed description of the risk factors that may affect our results.

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

Jim Hensler

Thanks, Ali. I'd like to welcome you to this conference call to discuss the second quarter 2009 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 second quarter's performance was better than the first quarter, but continue to reflect very soft market conditions. Our primary focus during the quarter was to implement several actions to rationalize excess capacity and labor cost, reduce salaried headcount by 10%, and reduce working capital needs to preserve liquidity.

Market demand for our products and services increased slowly throughout the quarter. On a sequential quarter basis, net sales increased 20% and net loss per diluted share improved by 38%, as the LME price of zinc increased 26%. Shipments of zinc products increased by 3% and EAF dust receipts increased by 6%. The increase in zinc price was not fully realized in the quarter due to the lag effect in some of our contracts.

The improvement in demand for our zinc products that we experienced by the end of the quarter coupled with our own low inventory levels led to the decision to restart a fifth smelting furnace at the Monaca facility in mid-July. It is also significant to note that as a result of the actions taken along with the modest improvement in general market conditions, the company began generating cash from operations by the end of the quarter.

Domestic steel production has increased slowly, but steadily over the past several weeks. The industry-wide capacity utilization rate reported by industry sources, which had been in the low 40% range at the end of the first quarter, has increased to the low 50% range in recent weeks. As a result, EAF dust generation has been increasing but remains significantly below a year ago when the utilization rate hovered around 90%.

We received approximately 85,000 tons of EAF dust during the quarter, a 41% reduction from the prior year quarter, but a 6% increase from the first quarter of 2009. Our EAF dust receipts have increased due to the higher steel industry output and due to completing the acquisition of EAF dust contracts from Envirosafe Services of Ohio on June 1.

Envirosafe was an established provider of disposal services of EAF dust, handling over 130,000 tons in 2008 with associated revenue of approximately $10.4 million. June was a transition month, as mills under contract with ESOI began to take the necessary steps to begin shipping to our recycling plants. June receipts were approximately 34,000 tons.

We expect dust volumes to increase in the second half of this year. In addition, dust inventories were very low as we entered the quarter. We idled the Rockwood plant in early April and took extended outages at Palmerton to shed capacity and to perform maintenance work at our facilities in order to intentionally allow inventories to build up to efficient levels for blending and operating our Waelz kilns.

As a result, inventories grew by approximately 18,000 tons during the quarter, resulting in a non-cash charge to accrued expenses of $2.4 million. We are now operating our recycling plants in Palmerton and Calumet at close to full capacity, but continue to have our facilities in Rockwood, Tennessee; Beaumont, Texas; and Bartlesville, Oklahoma idled.

We are incurring additional cost to defer EAF dust that would normally go to Rockwood to our other plants. But the decision to keep Rockwood closed is the most cost-effective option at this point. We are monitoring the EAF dust market very closely and expect to resume operations in Rockwood when EAF dust generation is sustained at a higher level.

EAF dust inventories may grow slightly during the third quarter while we defer the decision to restart the Rockwood plant. Construction of our new EAF dust processing facility in South Carolina continues to progress according to plan. We continue to realize significant cost savings in the construction of this plant from our original estimates by taking advantage of the weaker construction market and lower cost construction materials.

Through the end of the second quarter, we have committed approximately $40 million of the expected $68 million capital investment required to complete this project. In addition, in June, we secured $5.9 million of New Market Tax Credit funds, which will reduce our total cash outlay for the project. The $5.9 million received is shown as restricted cash on the balance sheet, which can only be used for the Barnwell project.

Given the recent upward trend in steel production and the access to these additional funds, we plan to continue construction activity in Barnwell on the first of two kilns and will re-evaluate this decision should conditions in the steel industry change.

Now I would like to move on to discuss zinc product shipments and pricing. Zinc product shipments declined by about 34% compared with the second quarter of 2008 to about 29,000 tons. Shipments increased by about 3% compared with the first quarter of 2009. June shipments were about 10,500 tons, 11% increase over the first quarter rate and a positive indicator as we entered the third quarter.

We are beginning to see signs of some strengthening in the general galvanizing market and in the alkaline battery, both affecting metal shipments. But demand for zinc oxide in the tire and rubber market remains both relatively weak and unchanged from the first quarter. The LME zinc prices declined 30% since the prior year quarter.

Zinc prices averaged $0.67 per pound during the second quarter compared with $0.96 per pound in the prior year quarter and $0.53 per pound during the first quarter of 2009. A positive development in the beginning of the second quarter has been the modest increases in zinc prices, which averaged $0.62 per pound in April and has increased steadily to an average of $0.72 per pound in July and are currently trading over $0.80 per pound.

The realized premiums on metal averaged about $0.03 during the quarter, lower than the premium for the prior year’s quarter of $0.08 and lower than the first quarter average of $0.04 reflecting competitive pressures in the market. Realized premiums for zinc oxide in the quarter were approximately $0.01 negative, down from $0.12 in the prior year quarter and down from $0.08 in the first quarter. The difference from the first quarter is mostly explained by the LME price lag effects and the contractual premiums with tire producers, given that LME prices increased steadily during the quarter.

Spot premiums for zinc oxide are essentially zero, reflecting the weak demand of end users and low capacity utilization of producers. We averaged approximately 50% capacity utilization in our oxide production facilities during the quarter compared with operating at full capacity in the prior year quarter.

We are focusing on increasing market share in zinc oxide to more fully utilize our facilities, and we’ve seen a slight increase in sales as a result of these initiatives. We continue to focus on cost and inventory reductions in all of our facilities. These initiatives are beginning to reap benefits. In total, we have identified $33 million of cost reduction projects, of which $11.8 million were realized in the first half of this year. In addition, we realized $17 million of inventory cost reductions since the start of the year of an overall planned working capital reduction of $18 million for the year.

Our focus over the second half of the year will be to closely monitor market conditions and slowly add capacity as needed while controlling costs and minimizing working capital needs. In addition, we should begin to fully realize the cost-saving benefits of several projects we implemented in the first half, including the idling of the Bartlesville plant, full ramp-up of the CZO wash circuit in Monaca, optimization of the pelletizers in Calumet and Palmerton, and permanent manpower eliminations.

We are pleased to have a strong liquidity position in these difficult financial markets. With $84.7 million in cash on hand, including restricted cash at the end of the quarter, $28 million of availability on our revolver and essentially no debt, the company continues to be well positioned to cope with these difficult markets. In addition, we filed a universal shelf registration with the SEC on July 16th in order to provide the flexibility to access capital markets in the event that strategic opportunities or other capital needs develop.

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

Bob Scherich

Thanks, Jim. For the second quarter, loss per share was $0.26 or $0.66 lower than the prior year quarter. $0.26 loss per share included non-cash charges of $0.08 related to hedges and increases in EAF dust inventory.

A summary bridge of the change in earnings to the prior year second quarter reflects the following. Lower sales price realization and reduced feed costs primarily associated with the decrease in LME zinc price resulted in a reduction in gross margin of $0.17 per share. Reduced volume of EAF dust receipts on revenue resulted in a decline of $0.12. Unfavorable non-cash hedge costs compared to favorable hedge adjustments in the prior year resulted in a $0.34 decline. Non-cash charges related to an increase in EAF dust inventory reduced earnings $0.03. Higher fixed cost per pound due to reduced production levels were offset by cost reduction initiatives.

Detail of the quarter's performance reflects a decrease in sales revenue of $83 million or 64% compared to the prior year quarter. The decrease was the result of a $25 million decrease in price realization, due primarily to the lower LME zinc price and sales volume decrease of $37 million. Non-cash adjustments on hedges further reduced sales $19 million from the prior year quarter.

Average sales price realization for zinc products on a zinc contained basis was $0.75 per pound or $0.08 per pound above the average LME price for the quarter compared to $1.18 per pound or $0.22 above the average LME price for the prior year quarter.

Sales of zinc metal decreased $23 million or 51% to $22 million for the quarter. This decrease reflected primarily a $11 million decrease in price realization and a $12 million decrease in sales volume. Sales of zinc oxide decreased $29 million or 64% to $16 million for the quarter. This decrease reflected a $10 million decrease in price realization and a $19 million decrease in sales volume.

Sales from EAF dust recycling decreased $7 million or 52% to $7 million for the quarter, reflecting lower volume of receipts and reduced average price realization. Cost of sales decreased $46 million or 46% – yes, $46 million and 46%. The decrease in costs reflected the lower volume of shipments, along with reduced costs for purchase feeds, reduced conversion costs, and the effect of cost reduction efforts, partially offset by lower fixed cost absorption and the non-cash charge related to the EAF dust inventory.

For the quarter, purchased feed costs declined $21 million compared to the prior rear quarter. Lower volume of shipments decreased cost of sales $27 million, conversion costs were down $18 million with energy costs $7 million below the prior rear quarter, labor cost down $3 million, and maintenance and supplies expenses down $4 million.

Cash used by operating activities was $7 million for the quarter. Capital spending was $6 million, including $3 million for the Barnwell project. We also made a $3 million cash payment related to the acquisition of contracts from Envirosafe. Availability on our revolver is approximately $28 million.

As previously announced, during the quarter we closed on the New Market Tax Credit financing, bringing in approximately $6 million to the Barnwell project. This transaction will be reflected on the balance sheet as $5.9 million of restricted cash, $4.5 million of equity labeled as non-controlling interest, and $360,000 of long-term liability associated with a put option for us to buy the equity at the end of seven years. We expect to file Form 10-Q on Monday, August 10th.

In closing, the profile of the quarter reflected continued low although improved LME zinc price levels and demand for our products and services. Our cost and working capital reduction efforts combined with the improved market conditions resulted in positive cash flow from operations laid in the quarter, which was the target we were working towards. As Jim mentioned, production levels have picked up coming into the third quarter and a sustain should result in continued improvement in performance. At current LME levels, we would expect to generate cash, but we will also begin to build working capital.

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

Jim Hensler

Thanks, Bob. In summary, before we open the call for questions, I’d like to say that we are pleased with the trend we see in the market conditions. LME zinc prices are currently trading above $0.80 per pound, which will improve profitability of the business. Volume of EAF dust receipts and zinc products has increased in recent weeks. This higher volume has allowed us to restart idled capacity and will enhance operating efficiency.

We are also pleased with how smoothly the integration of new dust contracts acquired from Envirosafe has proceeded. We are excited about the new long-term relationships we have secured with steel producers, such as Steel Dynamics, as a result of this acquisition. We are also feeling more confident based on increased activity at our steel mill plants by moving forward with construction of the first kiln at the Barnwell plant with an expected completion date around April of next year.

The company has maintained strong liquidity during the difficult market conditions of the past few quarters and is well positioned going forward. We expect to reap the full benefit of our cost reduction efforts during the second half of the year, which will further enhance liquidity. Finally, we believe this market may present additional strategic opportunities and we have positioned the company to take advantage of those opportunities if they occur.

Thank you. And we would now like to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Karak Christel [ph] with Capstone Investments. Please go ahead, sir.

Karak Christel – Capstone Investments

Good morning, gentlemen. Thanks for taking my call. I wanted to just talk about the Barnwell project and maybe you could put a framework around what you expect your feedstock percentage from dust might reach one – one kiln completed, the second kiln. Could you just talk about the impact that could have on the financials as well?

Jim Hensler

Well, if we are operating Rockwood at full capacity, that would translate into about 540,000 tons a year of EAF dust. Each kiln at Barnwell will add about 90,000 tons of additional capacity.

Karak Christel – Capstone Investments

Okay. So it really is – I'm imagining though that even with both kilns up and running and Rockwood at full capacity, you’re unlikely to reach 100% utilization of dust in the feedstock. Is that correct?

Jim Hensler

Only if we are running the smelter at reduced capacity. The smelters that full six furnace operation and we are running at full capacity post Barnwell, I think our EAF dust percent of the mix would be between 75% and 80%.

Karak Christel – Capstone Investments

Next question is just taking a step back from some of the positive trends that you’ve seen on the domestic steel side and obviously the increase in LME prices. And maybe you could put a framework around where the LME price would exceed until you see some of your competitors bring down some incremental capacity, and you’re looking at $0.90, $1.00. Where do you – where is that sweet spot before you really start to see the incremental capacity come back online?

Jim Hensler

Well, that’s a difficult question for me to answer. I think we are seeing some indications in the market that capacity is slowly starting to come back in. Teck Cominco announced they are going to be increasing production here in the third quarter. And I think that you will see a gradual increase in supply as price goes up.

Karak Christel – Capstone Investments

Are you concerned at all with kind of the most recent change in inventory levels over the last couple weeks has had kind of a spike after kind of the leveling out over the past couple of months? Does that concern you at all or is it really just something you have to react to as you see it come down the pipe?

Jim Hensler

Yes, it’s always something that affects prices than that will affect our business. I think it’s interesting to note that there has been about 50,000 tons of zinc added [ph] in the warehouse. At the same time, prices went up, which seems to suggest to me although I don’t know this for certain that that doesn’t represent a net increase in inventories. My sense is that the good portion of that was producer stock that just moved in LME warehouses.

Karak Christel – Capstone Investments

Okay. And then just lastly, Bob, I realize you don’t – you can't talk about specific hedging activities. But could you help us understand what you’re thinking about for this current quarter, giving your expectations, where you think the price might be adding?

Bob Scherich

Well, as you may recall, the only hedges we have in place – we've put in place back in October $0.50 put options for this year, really for disaster protection. And we continue to monitor going forward that the price levels of zinc has been so far this year – you know, the cost of hedging really doesn’t seem justified for the benefit that we would get with it. I think it’s something we are very interested. We will continue to monitor and look for opportunities. I think at tire price – zinc price levels, we will find it more interesting to look at that locking in some prices kind of from a put option perspective for some downside protection going forward. But right now, that still doesn’t seem to be of much advantage.

Karak Christel – Capstone Investments

So basically you haven’t initiated anything since last year, correct?

Bob Scherich

That’s correct.

Karak Christel – Capstone Investments

Okay. Thanks. I’ll pass along. Appreciate your time.

Operator

And next we have the line of Eric Prouty with Canaccord. Please go ahead.

Eric Prouty – Canaccord

All right. Thanks a lot. Guys, some of the – again, I might have misheard this, but it sounds like some of your commentary on how you exited the previous quarter, I think you said 10,500 on the zinc product. I mean, I wouldn’t assume that’s the number you’re looking to continue at for the September quarter, tripling that for a September quarter number and (inaudible) with the 34,000-ton number that you gave on the dust. You know, it seemed like very high numbers.

Bob Scherich

Yes. I think that the dust receipts in June of 34,000, we do see that continuing. In fact, July exceeded that number. So we are somewhat optimistic that the steel market is going to be continuing to operate at that level always through the third quarter. Zinc product shipments, again, July was on par with that. June figure I gave you. And so we are hopeful that we can continue at those levels.

Eric Prouty – Canaccord

Great. And then just good news. On the cost side of things, a little bit of a tick-up this quarter in SG&A, and I know there has been a lot of moving pieces in the last couple quarters. I mean, with some of the cost cuts you’ve done, obviously a lot of that is in cost of goods sold, but what do you feel is a good run rate from an SG&A standpoint, especially given we are not cutting anymore and we’re actually starting to ramp back up with some capacity?

Bob Scherich

I think where we are at is a pretty good run rate for the – certainly for the balance of this year. A couple of the things that were in the current quarter, a little bit more bad debt expense reserve a couple of hundred thousand, but also just transaction costs related to the ESOI transaction. Under the current accounting rules, you expense those now. So that’s a little bit of one-time. So we don’t really see pressure here – balance of the year on the SG&A line from where we are at.

Eric Prouty – Canaccord

Again, then finally, you might have mentioned this, but back to the options contracts, how much is – let's just assume the (inaudible) hopefully they do, what you have locked [ph] on those to one (inaudible), is it $500,000 or $1 million?

Bob Scherich

Yes, it’s about $500,000 slightly under relative and mark-to-market as of June 30th.

Eric Prouty – Canaccord

Okay. Okay, fantastic. That’s all for me for now. I’ll hop back in the queue. Thanks.

Jim Hensler

Thanks, Eric.

Operator

And then next we have the line of Scott Blumenthal with Emerald Advisers. Please go ahead. One moment, Scott. You’re open now, sir.

Scott Blumenthal – Emerald Advisers

Okay, thank you. Good morning. Thanks for taking my questions.

Jim Hensler

Good morning.

Scott Blumenthal – Emerald Advisers

Jim, do you – can you give us an idea if and how much – how many, I guess, zinc units you are purchasing currently?

Jim Hensler

We are purchasing on the order of about 2,000 zinc tons a month.

Scott Blumenthal – Emerald Advisers

Okay. And can you give us maybe some idea as to the percentage of production that you would attribute that to?

Bob Scherich

I think it’s 35% to 38%. We think (inaudible) cyclical of the EAF base feeds, we expect to be 60% to 65% here.

Jim Hensler

Roughly [ph].

Bob Scherich

Yes.

Scott Blumenthal – Emerald Advisers

Okay. Okay, that’s really helpful. And looking back at the ESOI acquisition, we kind of break that down to about, I guess, at the normalized level of 10,000 tons a month or so, could we be pretty close if we said that we were in the 4,000, 5,000-ton level for June with the additional ESOI units?

Jim Hensler

Yes, that’s about the range of what we received in June. We would expect to do a little more than that going forward because we didn’t receive dust from all of the sources in June. As I mentioned earlier, there was some transition that had to take place, part of what’s required in our business is getting the paper work filed on the regulatory side. So you can begin shipping EAF dust into a different state. And so that took place during June and we’d expect slightly more than that going forward. Of course, if steel production goes up, we’d expect those going to be up proportionately.

Scott Blumenthal – Emerald Advisers

Sure. And if I recall, we get I guess a slightly lower rate for those than transaction rate for those than we do for the legacy Horsehead contracts. Correct?

Jim Hensler

Yes, it’s slightly lower.

Scott Blumenthal – Emerald Advisers

Okay. And I guess my last question is, Bob, for those of us who aren’t particularly very smart, could you go through the accounting, the need, the reasoning for the dust inventory write-down?

Bob Scherich

Actually it’s fairly straightforward. We reserve in essence the expense accrue the liability for EAF dust in inventory for the – or processing cost. We bring it in the door the hazardous weight. So we reserve on the balance sheet the cost to convert that to crude zinc oxide. And it’s basically from an accounting at first that if we – we are obligated to process it on behalf of our customers. So as inventory of EAF dust increases, we are increasing that reserve. It’s a non-cash effect, but in effect, we weren’t anticipating as we normally expect to process the same level of dusts we are receiving.

Scott Blumenthal – Emerald Advisers

Okay. And I get then as you process the dust [ph] and release that liability?

Bob Scherich

Yes, we just kind of adjust the reserve to the inventory level at each quarter-end.

Scott Blumenthal – Emerald Advisers

Okay. Great. Thanks for explaining the mechanics.

Bob Scherich

You’re welcome.

Operator

And next we have the line of Paul Forward with Stifel Nicolaus. Please go ahead.

Paul Forward – Stifel Nicolaus

Good morning. Just a couple of questions here. Is there a number that you keep in mind as far as steel mill capacity utilization that if we go beyond that – if we go above that level than you think about restarting Rockwood probably quickly? And secondly, I guess how quickly can you bring Rockwood back on line?

Jim Hensler

Yes, we are – we are pretty close to that point right now. Around 53%, 54% is sort of stretching the capacity of Calumet and Palmerton together. We are about – it would be about a three to four-week process for us to bring Rockwood up. And we’ve been at this point waiting to see if this new higher level of steel production, in fact, will be maintained. If July’s results would repeat itself here, we would be forced to restart Rockwood. And so we are monitoring that really closely and making plans accordingly.

Paul Forward – Stifel Nicolaus

All right. That sounds good. And you mentioned a couple times strategic opportunities you might consider. Can you elaborate on kind of your goals for any sort of strategic opportunity acquisition that you might make? And what are the important metrics that you use when evaluating an idea that – an acquisition idea or other sort of strategy opportunity?

Jim Hensler

Well, that’s a good question. And the thing that we look for are acquisitions that we think play against our core strengths, which are management of hazardous materials and high temperature metal recovery and recycling. And just as we do in the EAF dust business where we are focused primarily on recovering zinc and turning that into zinc products, we look for opportunities that leverage our expertise in the environmental arena and our high temperature metals recycling at technology capabilities, because we think that’s a market where the knowledge we bring on the environmental management side can be applied in a wide range of applications and our expertise in chemical engineering side or metallurgical engineering side of the business can be applied in other areas as well. So we look for acquisitions that fit that kind of mold. They may be zinc related, they may not be zinc related.

Paul Forward – Stifel Nicolaus

Okay. Thanks very much.

Operator

And next we have the line of, I believe, Latis Zakar [ph] with FBR Capital Markets.

Latis Zakar – FBR Capital Markets

Hi. A quick question on cost of sales. You mentioned a number like $46 million cost of sales. Can you walk me through how that compares with the $53.9 million reported on cost of sales excluding the depreciation [ph] on your financials?

Bob Scherich

I think that was the decline in the cost of sales that I was quoting. Let me refer back to it. Decreased $46 million from the prior year quarter.

Latis Zakar – FBR Capital Markets

All right. So – but this $53.9 million contains a charge of about $2.6 million if I’m not wrong?

Bob Scherich

$2.4 million related to the EAF dust inventory reserve, yes.

Latis Zakar – FBR Capital Markets

And is there anything –

Bob Scherich

That’s a combined cost of sales. If you recall, when we get to the 10-Q, which will be out Monday, we split out the cost of sales portion that’s related to bringing the EAF dust in, which isn’t associated with the actual conversation cost. It’s more of the freight components of that. And that piece of cost of sales on the quarter was about $6.7 million.

Latis Zakar – FBR Capital Markets

All right. And my second question was on the – just one second – was on the CapEx for the Barnwell, how much do you plan to spend in the second half of ’09 and maybe if anything in the first half of ’10?

Bob Scherich

Yes. Our plan is still at about $43 million, $44 million for the year. I think we are at about $23 million for the first half of the year. So, about $21 million, balance of the year, and we think probably about $15 million of that is on Barnwell. So the rest of the business would be at $6 million level. If we are on that pace to spend $15 million balance of this year, that will carry about $16 million of net spending in the next year for completion of the Barnwell project. That’s net of this restricted cash that we are setting aside.

Latis Zakar – FBR Capital Markets

That sounds good. Thank you very much.

Operator

And next we have the line of John Tumazos, self employed. Please go ahead.

John Tumazos

It’s John Tumazos. When you plan your business out three, five, seven years, do you plan for a smaller industry than 2006 peak in domestic steel shipments of 109.5 million tons because of the recession, or do you plan for a bigger market because electric arc furnaces are now 66.8% and at least by the company as [ph] you’re building more capacity?

Jim Hensler

Yes. I wanted to ask a question. Our view is that the share of electric furnace steel making will gradually increase every time. I think that we may see some shakeout of capacity in this market, which I think primarily will affect the integrated producers more so than the electric furnace producers. And so I think that share could go up over time. I think total steel production – there is a question there. “Will we get back to the peak 2006 levels in the current planning horizon?” that you mentioned. And I think that’s a subject of some debate. But I do think – I think we will see the share of electric furnace production go up.

John Tumazos

Is it right to sort of look back to 2006 that Horsehead share was about half of the electric arc dust market? And I guess electric furnace ratio was about 58% here or about 64 million tons worth of steel meg [ph]. So you processed about 32 million tons worth of dust meg. Is that the right way to look at it?

Jim Hensler

Yes, we think that we are in the low-50% market share. We sort of view that steel producers generate between 30 and 40 pounds of EAF dust per ton of steel produced. And so we use those figures to give us an estimate of dust market, which we thought was in the neighborhood – in the time frame you’re talking about, about 1 million or 1.1 million tons.

John Tumazos

How much bigger – in ’06, how much of your capacity did you utilize? And is your capacity the same today?

Jim Hensler

In ’06, we were operating at full capacity on the recycling side. And we did not have at that time our Rockwood second kiln in position and we also obviously didn’t have the Barnwell project up and running at that new capacity.

John Tumazos

So how much more – with Rockwood and Barnwell, how much more would your capacity be than in 2006?

Jim Hensler

The Rockwood kiln has a capacity of about 8,000 tons and the two kilns in Barnwell will each have capacity of about 90,000 tons.

John Tumazos

180 plus 80, 260 total. So your company will be about 50% bigger than it was in 2006 in terms of capacity?

Jim Hensler

That’s correct. The question remains what we do with Beaumont, which is about 25,000 tons of capacity, and we may end up deducting that in that total.

John Tumazos

Thank you.

Operator

And next we have the line of Bill Jones with Singular Research. Please go ahead.

Bill Jones – Singular Research

Yes, guys, thanks. I had a question on – I noticed the line on the balance sheet, other assets $18.3 million. I was trying to understand that and any implication on the cash flow statement.

Bob Scherich

The ESOI transaction that we completed and then booked here in June, we’ve recorded a purchase price just under $12 million for intangible assets. And related to that, we’ve got liabilities kind of at the net present value into the current and long-term liabilities, because we’re going to be making the payments. We paid $3 million upfront and then the balance of payments will be out over the next 17 years. So there is some kind of grossing up of assets and liabilities, but the only cash flow effect during the quarter basically was the $3 million upfront payment. You will see that broken out much more detailed on the 10-Q on Monday.

Bill Jones – Singular Research

Great. I think that makes sense, and I believe my other questions have been answered.

Bob Scherich

Thanks.

Operator

And next, we have the line of Robert Howard with Prospector Partners. Please go ahead.

Robert Howard – Prospector Partners

Hi, thanks. I wanted to ask about – you talked a little bit about the strategic opportunities that you might look at and (inaudible) and you also sort of I guess mentioned the shelf registration as maybe later you need to finance to help you go by doing those things. And I just kind of wondered how far would you go – what type of situation would you have to see that you’d have to, I guess, use the shelf in order to do this opportunities as opposed to following up some opportunities kind of with the existing balance sheet.

Jim Hensler

Well, if we saw any opportunity that required a significant amount of cash and we felt it had a very good return and will be accretive to shareholder value, that would be an incidence where we might use the shelf. But it’s really just an alternative out there and something that provides flexibility, because as you look back, we just completed the strategic acquisition of the ESOI contracts and didn’t need to raise any capital for it.

Robert Howard – Prospector Partners

How long does the shelf sort of have an expiration date or is it good for indefinite amount of time?

Jim Hensler

I don’t know. The technical answer to that, I think it stays out there. Once it’s effective for a couple of years maybe, I don’t know. But it’s not effective yet. We filed it – it goes under SEC review and we are just getting it out there kind of to have the flexibility.

Robert Howard – Prospector Partners

And in terms of the decision that if you were to use it – the decision to use equity versus debt, when would one be more desirable than the other, or can you foresee a situation why you’d want one more than the other?

Jim Hensler

Well, again, I think it depends on what that need is and what the level of the need is, and kind of the conditions of the marketplace. I mean, the credit market is – I don’t find very attractive today by itself, but we don’t have the immediate need to – the decision we have to make at that point if the need comes up.

Robert Howard – Prospector Partners

Okay. Thank you.

Operator

(Operator instructions) And we have a follow-up from Eric Prouty with Canaccord.

Eric Prouty – Canaccord

Guys, just a little update on what you’re doing in the IN [ph] side, any progress there? What are you seeing from a pricing standpoint? Is that getting any more attractive?

Jim Hensler

We are still pushing forward with that. We’ve completed the trial at that one mill. And the current demand situation isn’t working on our favor given low capacity utilization. So I think that’s slow in progress. But we are beginning to see some lift in scrap prices, which we think could make this material more attractive going forward.

Eric Prouty – Canaccord

Great. And then on the lead side, I know during the downturn you kind of shifted your strategy with what you are doing with lead. I mean, with prices starting to head back up again, will that be a positive influence or is that whether really not part of your mix anymore?

Jim Hensler

It’s not going to be part of our revenue stream going forward, because even when it was part of our revenue stream, it was a net negative when we look at the operating cost, except when it got to very, very high lead prices. But it is helping us from the standpoint of the way we are handling that material, because as lead prices go up, our net cost goes down for handling that material.

Eric Prouty – Canaccord

Right. Okay. Thanks a lot, guys.

Operator

And next we have the line of Karak Christel with Capstone Investments, follow up. Please go ahead.

Karak Christel – Capstone Investments

Yes, yes. Thanks, gentlemen. Bob, did you mention a dust process figure for the quarter? I know that you had a receipt number and obviously a revenue number, but –

Bob Scherich

Yes. Jim mentioned that the inventory increased about 18,000 tons. The actual process number was just over 71,000 tons.

Karak Christel – Capstone Investments

Okay. So you experienced a little pricing pressure than during the quarter, or is that the rolling in of some of the ESOI contracts?

Bob Scherich

Well, the biggest factor – and Jim mentioned in his comments that with our Rockwood facility idled, we are diverting dust that would have otherwise gone to Rockwood. We pay in essence the incremental freight cost. In many cases, that’s a credit back to the customer because they are arranging freight. So it makes the average revenue temporarily go down. But it still is a unmet positive for us, the cost advantage of moving that dust a little ways further, but having the capacity idled is a net positive for us. It’s a condition that kind of persists why you have some capacity idle.

Karak Christel – Capstone Investments

Right. So, as you get back to better balance of that, that should kind of walk away?

Bob Scherich

You’re right.

Karak Christel – Capstone Investments

Okay. All right. That’s it. Thank you.

Operator

And we have one more follow-up, Scott Blumenthal, Emerald Advisers. You’re open, please go ahead.

Scott Blumenthal – Emerald Advisers

Yes. Just one last one, if I may. Jim, have you ever given us or can you take a crack at what you think the cost would be since we are pretty close to bringing Rockwood back on? What do you think would be the startup cost (inaudible)?

Jim Hensler

Well, the startup costs are not terribly significant, because basically it’s the matter of recalling the workforce, all the equipment and everything is in place. There is a little bit of the lead-time. We’ve got to get dust starting to move in the direction of the plan. So getting railcars staged at mills that can now begin bringing dust into Rockwood takes a few weeks. But that cost is cost that would be incurred anyway to feed the plant.

Karak Christel – Capstone Investments

Okay. Fair enough. Thank you.

Operator

And speakers, no one else is in queue. Please go ahead with any closing remarks.

Jim Hensler

Okay. Well, we thank you very much and we will talk again next quarter. Thank you.

Operator

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and thank you for using the AT&T Executive Teleconference service, and have a good weekend.

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