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Executives

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

Jim Hensler - Chairman, President and CEO

Bob Scherich - VP and CFO

Analysts

Carter Driscoll - Capstone Investments

Scott Blumenthal - Emerald Advisers

Steve Riccio - Buyside Research

Paul Forward - Stifel Nicolaus

Eric Prouty - Canaccord Adams

Robert Howard - Prospector Partners

Horsehead Holding Corporation (ZINC) Q3 2009 Earnings Call November 6, 2009 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Horsehead Holding Corp. Third Quarter 2009 Earnings Call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for questions and instructions will be given at that time. (Operator instructions) And as a reminder, this conference is being recorded. I will now to turn the conference over to Ali Alavi for opening remarks.

Ali Alavi

Good morning, everyone, and thank you for joining us on our third 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 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 16, 2009 for a more a detailed description of the risk factors that may affect our results.

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

Jim Hensler

Thanks, Ali. I'd like to welcome you to this conference call to discuss the third quarter 2009 results. I will review the performance of our operations and markets, and then turn it over to Bob Scherich, our CFO, who will review the financial results.

The third quarter results demonstrated that our strategy are focusing on cost reduction and increasing our market share in the EAF dust recycling market during the recent downturn are having the expected benefit.

When you stripe away the effect of hedging and unusual charges in the two quarters, the third quarter of 2009 outperformed the prior years quarter, even though shipment volume was 23% lower in the current quarter.

And while reported domestic, steel production decline by 38% from the prior year’s quarter. Our EAF dust receipts decline by only 8%, reflecting our growth and market share. Our primary focus during the quarter was to restore capacity idled early in the year, while continuing the implement, cost reductions, and manage working capital.

Market demand for our products and services increased during the quarter. On a sequential quarter basis comparing the third quarter to the second quarter of this year, net sales increased by 27%, as the LME zinc price increased 19%. EAF dust receipts increased by 49% and zinc product shipments increased by 7%.

The increase in zinc price was not fully realized in the quarter due to the lag effect in some of our oxide contracts. During the third quarter, we restarted a fifth smelting furnace at the Monaca facility. And one of the Waelz kilns at our Rockwood, Tennessee facility.

EAF dust receipts outpaced our processing rate by 25,000 tons during the quarter. As a result we move forward to start the second kiln at Rockwood last week. And we are now operating all of our Waelz kilns at full capacity.

We are very pleased with our cost performance in the third quarter. The unit cost of production decreased approximately 18% on 21% lower volume. The cost reduction initiatives that we’ve been implementing for the past three quarters contributed to the strong cost performance in the current quarter.

Earnings for the quarter adjusted for hedging and other non-cash charges were a slight positive. In comparison to the prior year quarter, adjusted to remove favorable effect of hedges and similar non-cash charges was a loss of approximately $0.04 per share.

Cash flow from operations excluding hedging was approximately $12.5 million for the quarter compared to the use of cash of $7 million in the second quarter of this year.

Domestic steel production continued to increase during the quarter and has recently moved to an industry wide capacity utilization rate of slightly over 60%, compared to 49% at the end of the second quarter and 83% at the end of the third quarter of last year.

We received approximately 127,000 tons of EAF dust during the quarter. We expect dust receipt to remain flat or decrease slightly in the fourth quarter as some steel mills have announced outage plans. However, we expect our processing rate to increase with the restart of the second kiln in Rockwood. We expect that feed mix to our smelter for the fourth quarter to be 70% to 75% from EAF dust compared to 65% from the third quarter.

Construction of our new EAF dust processing facility in South Carolina continues to progress according to plan. The recent trend in steel production supports our decision to continue to move forward with this project. We continue to realize significant cost savings in the construction of this plant from our original estimates. Our current estimate is that we’ll be able to complete the project for approximately $65 million.

Through the end of the third quarter, we spend approximately $32 million, we expected to spend another $10 million this year, and the balance in 2010. Our current schedule is to have first kiln operational during the second quarter of 2010 and second kiln maybe later in the year depending upon market demand.

Market demand for zinc metal and zinc oxide increased from the second quarter, but were still well below at the prior year quarter. Zinc product shipment declined by about 23% compared with the third quarter of 2008 to about 30,500 tons. Shipments increased by about 7% compared to the second quarter of 2009.

The recent trend in shipments for zinc oxide and PW zinc metal has been positive as we have seen some strengthening among both tire producers and galvanizers. Shipments during the third quarter were constrained somewhat by production.

As noted earlier, we restarted a fifth smelter in Monaca during the quarter. Production was not fully ramped up until the end of the quarter, due to feed availability which came in the balance when we restarted one of the Rockwood kilns in September. As we entered the fourth quarter, this positive demand trend is continuing, however, the quarter may be affected by historically lower shipment months in December.

Moving on to discuss the pricing environment, the LME zinc price was even with the prior year quarter at $0.80 per pound, or was 19% higher on a sequential quarter basis. Our [Zink] prices averaged $0.94 and are currently trading (inaudible) per pound.

The realized premiums on metal averaged $0.02 during the quarter, lower than the premium for the prior year’s quarter, $0.05 and lower than the second quarter average of $0.03 reflecting competitive pressures in the market and a lag effect due to the rapid increase in zinc prices in the quarter.

Metal shipments increased 5% on a sequential quarter basis, but we’re 21% below the prior year quarter. Realized premiums for zinc oxide in the quarter were approximately minus $0.04, down from $0.14 in the prior year quarter and down from minus $0.01 in the second quarter.

The difference between the quarters is mostly explained by the LME price lag effects and the contractual premiums of the tire producers. LME prices increased steadily during the quarter in 2009 and decreased during the third quarter of the last year.

Zinc oxides shipments increased 10% on a sequential quarter basis while we are still 25% below the prior year quarter. We continue to focus on cost reductions in all of our facilities. These initiatives contributed to a 17.6% reduction in our cost per ton of production versus the prior year quarter on 21% lower production volume.

We’ve identified $43 million in cost reduction programs of which we’ve implemented $24 million through the third quarter. In addition we realized $19 million of inventory cost reductions since the start of the year, with the overall planned working capital reductions of $18 million for the year.

And keeping with our strategy of hedging the price of zinc to minimize downside risk, we’ve moved forward over the last six weeks while option prices were attractive as a result of run up in zinc prices to purchase put options on 1,000 zinc tons for 2010 at a strike price of $0.65 per pound for a cost of approximately $5.3 million. We believe this provides important protection to the liquidity of the business at a reasonable cost in the event of the price of zinc decline significantly from current levels.

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

Bob Scherich

Thanks Jim. For the third quarter loss per share was $0.10 or $0.37 lower than the prior year quarter. When looking at this $0.37 per share change, $0.34 was due to the effect of hedges on the prior year as hedges on the prior had a favorable $0.31 effect and the current quarter had an unfavorable $0.03 effect from hedges. I would like to provide some detail on this $0.04 change absent the effect of hedges.

Notable items for that quarter other than hedge effects include the following. A change in our effective tax rate for 2009 reduced the current quarter earnings per share by $0.03, an increase in EAF dust inventory reserves having an unfavorable $0.03 effect, and a write-down of idle assets having an unfavorable $0.02 effect.

After considering these items the current quarter performance was actually better than the prior year quarter and the consensus estimates. We believe that this is significant given the production and shipment volumes were off by over 20%. This points to the fact that cost reduction more than offset the lower volume or the effect of lower volume on fixed cost absorption.

Detail of the quarter’s performance reflects a decrease in sales revenue of $49 million or 45% compared to the prior year quarter. The decrease was a result of $10 million decrease in price realization, a sales volume decrease of 17 million, and a change in non-cash adjustments on hedges of approximately 19 million.

The average sales price realization for zinc products on a zinc contained basis was $0.87 per pound or $0.07 per pound above the average LME price for the quarter compared to $0.99 per pound or $0.19 above the average LME price for the prior year quarter. This difference in price realization versus the LME for the two quarters reflects the lag effect that Jim mentioned earlier.

Sales of zinc metal decreased $9 million or 25% to $27 million for the quarter. This decrease reflected primarily a $1.5 million decrease in price realization and a $7.4 million decrease in sales volume. Sales of zinc oxide decreased $14 million or 40% to $21 million for the quarter. This decrease reflected a $5 million decrease in price realization and a $9 million decrease in sales volume.

Sales from EAF dust recycling decreased $3.5 million or 27% to $9 million for the quarter, reflecting lower volume of shipments and reduced average price realization, due primarily to additional transportation cost associated with diverting dust shipments from the idled Rockwood plant to our other locations.

Cost of sales decreased 35% or $31 million. The decrease in cost reflected the lower volume of shipments, along with effective of cost reduction efforts, partially offset by lower fixed cost absorption and the non-cash charge related to the EAF dust inventory. The lower volume of shipments reduced cost of sales approximately $15 million with the remaining change coming from reduced cost.

For the prior year quarter, we estimated previously that cost were approximately $5 million higher due to the lag effect of higher price feed and inventory. That leaves approximately $10 million of additional cost reduction realized in the current quarter, of which approximately 25% was related to energy.

For production of finished products total feed cost was 31% lower on a per ton basis and conversion cost was 7% lower per ton compared to the prior year quarter. Recycling operations reflect the 32% decline in cost per zinc ton recovered for the quarter.

Cash provided by operating activities was $10 million for the quarter and included the use of $2.4 million for the purchase of 2010 put options. Capital spending was $4 million for the quarter and $27 million for the nine months. During the quarter, we moved $19 million of cash into a restricted classification to secure letters of credit requirements previously issued under our credit facility.

Speaking of the credit facility, Cit Business Credit is the agent on our facility. Most of you are probably aware that CIT Group voluntarily filed for bankruptcy on November 1st. Our understanding is that the operating subsidiary that serves as our agent was not part of this falling. Therefore, we do not anticipate any near-term effect on our credit facility.

During the quarter, we initiated the replacement of the existing letters of credit issued under the facility in order to reduce expense and to minimize potential concerns of the holders. We’re pursuing our options to cancel and replace the facility.

In closing, the profile of the third quarter reflected improved LME price levels and improved demand for our products and services. Our cost and working capital reduction efforts, combined with market share gains in the EAF dust market has resulted in adjusted earnings close to breakeven and positive cash flow from operations, even though volume was still off over 20% compared to the prior year.

As Jim mentioned, we’ve recently moved to full capacity utilization on the recycling side of the business and we expect to continue to operate a five furnace level at the smelting facility for the balance of the year.

Our capital spending plan has been revised to $38 million for this year, and the same for next year. This will include approximately $23 million for the completion of the Barnwell facility next year. Of which $6 million will be funded from the New Market Tax Credit financing completed earlier this year.

At current market conditions we expect to generate cash in the fourth quarter, but we’ll also begin to build working capital, given the current LME price for zinc.

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

Jim Hensler

Thanks Bob. In summary, before we open the call for questions, I would like to say that while the economic recovery still has a long way to go, we are encouraged by the positive trends we are seeing in our markets. We also believe that we’ve positioned the company for a more profitable growth as the recovery continues.

I am pleased that that acquisition of the EAF dust service business from Envirosafe that we announced last quarter has gone smoothly, and has been a significant contributor to bringing our dust recycling operations back to full capacity.

In September we completed a follow-on equity offering to raise capital for new strategic growth initiatives. Just as we’ve grown our EAF dust recycling business we believe we can leverage our expertise in environmental management and high temperature metals recovery processes to expand our capabilities into other metal bearing waste materials.

We are continuing to identify potential investment opportunities, but none of them are at a point of announcement at this time. We plan to make announcements as investments are launched. We believe this is the type of market in which strategic opportunities present themselves and with this equity raise we are now well positioned to take advantage of these opportunities.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Carter Driscoll with Capstone Investments.

Carter Driscoll - Capstone Investments

Congratulations on excellent job on the cost side. I wanted to start with one of the comments you made, James, to make sure I heard it correctly when you talked about the cost reductions that you’ve identified. I was under the impression that when we been discussing those numbers somewhere in the low-30 range, $30 million range. Did I hear you correctly say, it was closure to $43 million range?

James Hensler

The list keeps getting adjusted as we identify new initiatives and in the current list of initiatives, we’d value as 43. We will get all of that this year, but given where we are in the year, we would expect to certainly get some of that here before the end of the year.

Carter Driscoll - Capstone Investments

Could you break it? With Barnwell, obviously, you’ve had ongoing reduction, is still the weak construction market and other areas that you are still being bid out. Is there anything specific like, continued headcount, pairing, could you break it out just a little bit more for me?

Bob Scherich

A big portion of where the saving is coming from is continued savings on the purchased feed side, where we’ve been able to continue to maintain relatively low prices there. Another big portion is that, as we’ve been able to ramp our EAF dust processing, we are taking a greater and greater portion of that directly to our smelter rather than going through our Palmerton facility for calcining and there is some significant savings associated with that.

We’re also realizing the full benefits now of having the Bartlesville facility essentially sitting idle and that is just continuing to generate some significant benefits for us. And with some other process modifications we’ve made, we’ve been realizing significant maintenance savings and we’ve also made permanent labor reductions in some of our recycling facilities which we’re beginning to realize the benefits from.

Carter Driscoll - Capstone Investments

Next question. Incrementally you mentioned that you may be seeing some light in the tire market, do you think that was impacted by the cash for clunkers? Do you think there really was a bottoming out process in the automotive industry, could you shed a little light there on what you’re seeing?

Jim Hensler

One, I don’t what impact cash for clunkers has had on it, we hardly measure that. We are seeing that miles driven are starting to pick up again and we had a period there where year-over-year numbers were trending downward, but that seems to have changed direction here. So, that has a fairly significant impact on replacement tire sales.

We think that there was a significant destocking that was taking place in that market and to some extent that’s sort of bottomed out and there is some replenishment that’s going on. But we’ve seen some nice uptick in sales to the tire producers and that continues here in October and into November.

Carter Driscoll - Capstone Investments

Question for you, Bob. A little clarification on the tax side for this quarter, because it seems to be a one-time issue, if I did my math correctly, that you’ll be back at your statutory rate in the fourth quarter?

Bob Scherich

It’s kind of an upside on small numbers, but we ended up with an effective tax rate of 9.5%, which was really the result in the current quarter of adjusting our tax rate for the year as a whole. As we completed 2008 returns and based on the impact of what we estimate permanent differences to be on actually reduced losses for the year now. So it’s adjusting really the nine months in the quarter. It’s based on the things that happened in the quarter. I think it’s one-time because we have never seen that type of adjustment in the single quarter. It’s also because the numbers, the net earnings or net losses are small in the quarter and it has that type of impact.

Carter Driscoll - Capstone Investments

Did you guys see anything surprising in the quarter, I mean you guys seem to implement. You last hedge was so well, nothing seems to really be surprising. Did you see incrementally that might have been different ending the quarter as opposed to when you began the quarter?

Bob Scherich

We were a little surprised by how strong the EAF dust receipts were and we constantly had to adjust to that during the quarter. And in part, it related to our acquisition of the Envirosafe contracts, but the recovery we are seeing in the steel industry and the recovery was really, I think, disproportionately skewed to electric furnaces producers than the integrator producers. So just the increase you see in that capacity utilization numbers in the steel industry didn’t really tell the full story, because we felt that the mini-mills were getting a bigger share during this recovery period. We had to make a quite a few adjustments during the quarter in response to that.

Carter Driscoll - Capstone Investments

Given that you obviously saw your percent of feed stock from dust go up sequentially and obviously the fourth quarter is typically kind of a flattish quarter on the production side. You expect that percentage to remain flat, increase slightly to down a little bi?

Bob Scherich

Actually, we expect fourth quarter to be up, because we were not able to fully process and utilize the uptick in receipts during the third quarter, resulted in building an inventory as Jim had mentioned, which actually becomes a negative charge to us as we put our inventory reserve in place, and that had about a $0.03 negative impact on the quarter. So, even if, receipts are flat, they are down slightly, we are now operating with [all wills count] in operations. We expect that to move up between 70% and 75% of our feed to the smelter this quarter.

Operator

Next we have [Latis Zakar] with FBR Capital Market. [Mr. Zakar], your line is open.

Unidentified Analyst

Actually, I want to get a feel of how can your cost go lower further from this level and how much of this cost reduction is permanent?

Jim Hensler

I think that certainly as we are bringing higher proportion of EAF dust into our mix and taking more about direct to Monaca, that’s going to allow us to drive cost down, which has really been essentially the underpinning strategy in our zinc business is to increase that proportion over time. And then when we bring Barnwell on next year that will give us the capacity to change that ratio even further. So, I think that over the next six to 12 months will be the biggest driver of cost reduction that we can see.

And then obviously as we bring more dust in the system. We leveraged the fixed cost we have on the recycling side which brings us cost down and down even further. In terms of permanent cost savings, certainly some of the closures we’ve done, I think we’re not anticipating restarting those facilities. The re-manning we’ve done in a couple of our facilities we believe is permanent and we made a major step in really ratcheting down purchase feed prices.

We look at it in terms of percent of the LME price that we pay for those feeds and we don’t see ourselves getting back to the same levels that we were a year ago, because our dependence on purchase feed will go down as we bring the proportion of EAF dust up in the market. So we’re not going to be as aggressive buyer in that market that should allow us to keep those things down. Although, they’ll come up a little bit, but not to where they were.

Where some of the cost savings that we are seeing are not permanent is that there are lagging effects of inventory costs, so we are comparing one quarter versus another quarter. A portion of what we see is a fact that last we were bringing high class inventory through to the P&L as zinc prices were declining during the year and this year we are seeing the opposite effect there. So there is some inventory benefit that you look out when you look at either the quarter in isolation or comparing it to the prior year quarter. That’s a transitory effect that you want to see as zinc prices stabilize.

Unidentified Analyst

Just in terms of, if I want to basically understand what percentage of the cost savings you highlighted earlier I think about $43 million what percentage of that would be permanent? Is it possible to put a number on it?

Jim Hensler

We’ve implemented about 24 million of that through tree quarters. I can’t give you a hard number, but I am going to say it’s 60% to 70% of that we would think would be permanent.

Unidentified Analyst

My second question is, at what point would you consider running your smelter at full capacity, the Monaca smelter?

Jim Hensler

We are basically tracking what’s happening with market demand. And as market demand picks up we would increase output from smelter. We are sort of in a point here coming towards to the end of the year, where typically, December as I mentioned tends to be a weak shipping month, and rather than ramp up production and build inventory at the end of the year, which we don’t want to do.

We are going to stay on five furnaces into the first quarter, but our current view would be that that we probably move to six furnaces at some point, may be towards the end of the first quarter of next year. That assume that, what we are projecting is happening in the tire markets, I think the galvanizing markets is going to continue. Obviously, if it doesn’t, we’ll stay on five furnaces. We anticipate that the market demand would pick up to a point where we would be at that higher level sometime earlier part of next year.

Factoring this is feed availability, and as I said, we could have actually shipped more in the third quarter, but we didn’t have the feed to support it. In part, it depends upon what’s happening in the steel industry and if steel output increases, we have more EAF dust to bring the zinc units into our smelter then we’ll also have the feed to support a higher operating rate.

What we wouldn’t want to do is, run six furnaces and have to do that by going out and purchasing the equivalent of one furnace’s worth a feed material in the secondary market, because, all that would do is just drive out prices in that market. So we want to be smart in terms of how we bring the capacity online. It’s going to be sort of in-balance of what’s going on with the steel production as well as the demand in our end-markets.

Unidentified Analyst

Your Barnwell facility, when it comes online, will that help you on probably lowering your feed cost in terms of you’ll be able to process more dust so that will help on the smelter side as well?

Jim Hensler

Yes, definitely. Our expectation would be that that will help us now. To some extent it depends upon what’s happening with the steel industry is the output there to fully feed the capacity we bring on in Barnwell and our expectation is that steel capacity utilization is going to continue to increase in the steel industry next year and that we will need to have Barnwell up and running at least the first kiln next year and hopefully by the end of the year, the second kiln.

Operator

We will next go to Scott Blumenthal with Emerald Advisers.

Scott Blumenthal - Emerald Advisers

Jim, you mentioned, I think a couple of quarters ago or possibly last quarter that you were offering very, very modest prices or purchased zinc units somewhere in the order of maybe 50% of LME. And I was wondering how much you accumulated at that price and what the offering price is now currently for those?

Jim Hensler

Yes, we’re not accumulating raw materials because from a cash flow standpoint we’re trying to keep the inventories pretty thin. We’re continuing to pay for skimmings in or about that same price range. I think for the quarter we averaged pretty close to 50% and as we try to ramp up production and need to reach out to additional sources we may see that creep up a bit, but we wouldn’t expect to pay more than a few percentage points above that at least in the foreseeable future.

Scott Blumenthal - Emerald Advisers

Bob, can you give us an idea on a regular run rate, what do you hold in inventory that were just close to what you are getting from dust and is that pretty much the same as the production rates where Jim mentioned 75-25 or I guess in Q3 we were at the 65-35.

Bob Scherich

Actually we’ve had the objective of all year long to keep our inventories as thinner level as possible, managing cash flow. The purchased inventories were carrying less than one month supply on hand, so we are turning them very quickly. It does now avoid some of this lag effect that Jim had mentioned earlier. As we went into a decreasing demand market, we had more than one month supply on hand a year ago. So we are purposely trying to buy at the level that we need each one as opposed to carrying inventory.

Scott Blumenthal - Emerald Advisers

Jim, you mentioned that you expect dust proceeds to be flat quarter-over-quarter due to production curtailments and maintenance outages and so on and so forth. Are you assuming kind of the same thing for shipments or do you expect them to be maybe slightly up a little bit?

Jim Hensler

I think it depends upon how December plays out this year. If we have a typical December we would expect shipments to be relatively flat quarter-over-quarter. But October was fairly strong month, November looks like it’s going to be that way, it depends upon whether December behaves like a typical December or not. The only reason to think that might not is that we are seeing a pickup in the oxide market with the tire producers. And to the extent that they need to do some inventory restocking, we may see stronger December from them than we typically do, but at this important time, we don’t really have enough visibility on December to make an active forecast.

Scott Blumenthal - Emerald Advisers

I guess there is one thing we could learn about 2009 is not to expect anything typical?

Jim Hensler

That’s true.

Operator

Thank you. We’ll go Steve Riccio with Buyside Research.

Steve Riccio - Buyside Research

The $0.65 hedge you guys put on for next year, approximately how much of your production EBITDA will cover?

Bob Scherich

The way we look at it right now, as Jim described, we go into next year on a five furnace operation and at some point move to six furnaces. I think it probably puts it at 75% of the expected output.

Jim Hensler

Probably and we’re may be closer to 80. We are probably looking at 125,000 to 130,000 ton of zinc production next year. So, it would be whatever that ratio is. It’s 75 to 80.

Bob Scherich

But the 100,000 hedge, really is a more of a match against the zinc units coming in from our recycling side of our business is going to. And so, we try to hedge that portion of our zinc feed because that’s at a fixed cost. Whereas the other feeds we bring in, we’re purchasing them at some price which is tied to the LME price, so to some extent there is a natural hedge on that material. So, the 100,000 is really, we sort of look at it, how it lays out against what we think we’re going to bring on the EAF dust recycling side.

Steve Riccio - Buyside Research

And a related question to that, at $0.65 your cash flow from operations, it looks like now based on obviously the great jobs you guys have done in cutting costs, that would probably mean sort of a worst case sort of breakeven situation in terms of cash flow from operations for next year. Am I looking at that right?

Bob Scherich

We believe that at $0.65 it protects something close to a breakeven cash flow. These are put options. It’s really downside protection. All we’re really doing through our hedging is buying protection almost like insurance against the risk of loss there. So, we have full upside participation, we don’t necessarily think the price is going to be below $0.65, but if it is, we want to have that risk protected. And it wasn’t until recently that the cost of putting that level hedge and in place seemed reasonable.

Jim Hensler

Obviously, it’s somewhat volume dependant too, the question about breakeven. Based upon what we think volumes would be, we think $0.65 is in that range.

Steve Riccio - Buyside Research

And next question regarding, you alluded to obviously, you guys raised cash, you’ve got the balance sheet full of cash right now. You said you’re looking at perhaps making some acquisitions in terms of expanding the scope of your business. Could you maybe give us a little bit more clarity on possible other areas you’d be looking to expand into?

Jim Hensler

We covered it pretty well during the road show and the information was out at that point of time. When you start to look to back at our business today, the essential capabilities we have really relate to the handling of metal bearing hazardous waste, and high temperature metal recovery processes. And then today we apply that to the zinc industry, but we could apply that in other metal bearing waste that are not zinc related. And there are a number of different types of materials that fall in that category ranging from nickel bearing waste and molybdenum bearing waste and helium bearing waste, that are all on our radar screen and to different extents we’ve been pursuing those. And without going into any more detail in that, that’s the kind of areas we are looking at.

Steve Riccio - Buyside Research

And in the acquisition, again I apologies, I was in the meetings for the road shows, but in terms of the size of the acquisition it would be small incremental steps rather than one big sort of all-in type acquisition?

Jim Hensler

Well, we are looking at opportunities that would be platforms for growth in other markets. And so we’ve raised enough capital to necessary go around and we think that would be the right first initial step for us to move forward on a couple of these initiatives.

Bob Scherich

But we are looking at combinations of capital investment and acquisitions, so kind of different profiles to different look there.

Operator

Thank you. Our next question comes from Paul Forward with Stifel Nicolaus.

Paul Forward - Stifel Nicolaus

Now that you’ve got the Rockwood operating at full capacity, you mentioned that you received 127,000 tons of EAF dust in the third quarter, but your consumption levels, what was the number, was it around 102,000 or so?

Jim Hensler

Yeah. Right 102, 103

Bob Scherich

Yes, right.

Paul Forward - Stifel Nicolaus

But now that you are essentially operating your kilns at full capacity, what should we expect as far as your quarterly consumption rate of EAF dust that should before Barnwell ever comes on line?

Jim Hensler

With all of our Waelz kilns running and assuming we don’t have any extended outages in those kilns. They would operate at an annualized capacity rate of about 540,000 tons a year in that neighborhood, 520 to 540 would be a reasonable estimate with all of those kilns running.

Paul Forward - Stifel Nicolaus

When we think about your CapEx number in 2010 of 38 million, 23 of that is Barnwell, so is the remaining 15 that’s just maintenance?

Jim Hensler

Some maintenance there, some cost reduction CapEx in there too.

Bob Scherich

Predominately, maintenance.

Jim Hensler

Predominately, maintenance.

Paul Forward - Stifel Nicolaus

As far as, I guess, thinking about ones Barnwell is done, can you discuss any ideas you got as far as organic growth prospects that you have internally or deployment of capital deal on the Barnwell expansion and tied-in with that any ideas on the use of the Bartlesville or the Beaumont facilities?

Jim Hensler

Yes. As I mentioned to the previous caller, we have some ideas for growth of the business, but essentially it with the basis for the equity raise and we’re pursuing those options, some of which could result in alternate uses for facilities you mentioned and so we are pursuing some ideas that could use those facilities.

Paul Forward - Stifel Nicolaus

Maybe lastly, in the third quarter, you had mentioned that competitive pressures had some impact on the realized premiums that you had in the third quarter. I guess what’s your view on what needs to happen in the market, how long it’ll take to see some easing in those competitive pressures?

Jim Hensler

Most zinc producers are not operating at full capacity. We’re at about 80%, 85% capacity utilization and most of the North American producers are sort of in the same ballpark. As long as you’ve got a market where you’ve got untapped capacity utilization, there is going to be some price pressure. So, I think it really sort of falls in line with what’s going to happen on the steel side of the market, if steel production picks up, zinc demand picks up, capacity utilization on the zinc side will increase and then we’ll start to see premiums move with that.

Operator

We will go to Eric Prouty with Canaccord.

Eric Prouty - Canaccord Adams

Just a couple specific questions. I know you touched upon the cash build up going into inventory you had the idled capacity, may be you could just put a couple of numbers, more generalized numbers around what are short [expense] do that you think you incurred with kind of shifting the ash around that will not be incurred now that you have your capacity back online from a sequential kind of quarter-over-quarter basis what the impact there would be?

Jim Hensler

We were incurring on the order of $350,000 to $400,000 per month of additional freight expense related to diverting materials. A good portion of that should level out as we’re very rapid folding online.

Bob Scherich

Most of that was actually reflected as a reduction in revenue associated with the EAF dust where the customer bore additional transportation cost and we gave them credit for that. So the net average revenue per ton on EAF dust was again down similar to second quarter down a little bit more from that in the third quarter. So we’d expect to see that average revenue per ton pick up now, during the fourth quarter.

Eric Prouty - Canaccord Adams

And then the use of dust as the feedstock looks like you are expecting a five to 10 full percentage point movements, again, without needing to get into too many specifics. Do it ballpark, what is the impact of every five percentage points that you can shift from recycled feedstock to dust [aid] stock?

Jim Hensler

Well, I don’t. I guess, don’t think about it in there. The percentage standpoint, although we could, the absolute comparison simply comes back to each pound of zinc feed that we bring from EAF dust, we bring through that, $0.15 or $0.16 per pound is the cost. That’s going to displace and then all the things being equal. It’s going to displace feeds that we are buying at 50% of the LME. So in today’s market, we are displacing $0.50 feed with $0.15 feed and in rough numbers. Partly, that percentage is the factor of what level we are operating the smelter.

Eric Prouty - Canaccord Adams

That’s fair. And then the premium obviously impacted by the lag, by the competitiveness, et cetera. Would you expect kind of the premium feed LME to be flatting out, and may be starting to increase going forward here? If we bottomed out there or is it going to continue to feel the same effects going forward?

Jim Hensler

On the metal side we probably are not going to see much further erosion of the premiums. On the oxide side, it remained to be same. We are going into tire contract negotiations right now for next year. All of the zinc oxide producers are sitting with idle capacity and in a market like that generally the customer is the winner in that situation. So, I think we’ll probably see more pressure on oxide premiums and metal premiums. I think we’ll probably be kind of where they are and hopefully heading upward next year.

Bob Scherich

And the lag effect we’re going to continue to see that under current price conditions. Fourth quarter is going to continue most likely to experience some lag and realizing that change in the LME price.

Jim Hensler

Sure.

Eric Prouty - Canaccord Adams

That’s a good problem to have with zinc prices continuing to go up.

Jim Hensler

That’s right, that’s right.

Eric Prouty - Canaccord Adams

And then finally on the paths we’ve kicked around numbers where you’d be back to, A, full capacity with your existing facilities, obviously you’ve answered that question now that your back up full up. When looking out of the industry and I know the industry data is to me is the best, but where from a macro standpoint and you’re looking for kiln one and then two down at Barnwell. If we equate that to some of the industry capacity utilization numbers, where do you think you could have Barnwell up full and running?

Jim Hensler

Well, I think to need to run the first kiln at Barnwell, you probably need to have industry capacity utilization slightly above where it is now. If it’s in the low 60% right now, 62%, 63%, it gets to about 65% and we’re going to be tapped out in terms of our existing capacity, we need to have a first kiln running.

The other thing that’s been a little difficult to factor in there is that we think the electric furnace guys have increased their share of the market during this recovery period here. What was 65% before isn’t necessary the same as it is today when you are looking EAF dust generation. What we are looking at right now, 65% gets the first kiln starting to feed that and I haven’t really looked at what it takes to get to the second kiln at this point.

Operator

And we have Robert Howard with Prospector Partners.

Robert Howard - Prospector Partners

Just wanted ask with the puts. They said with the maturity date throughout the year is evenly spread I think you have done before?

Bob Scherich

Yes, monthly settlement, pro-rata for the year.

Robert Howard - Prospector Partners

Is there any update on the iron with that going potential opportunity?

Jim Hensler

We are continuing to work down that path, because of a slowdown in the steel industry has hampered our ability to bring this in with combination of lower scrap prices and lower steel demand, it’s hampered the rate at which we thought we would be able to move this material. We continue to work to upgrade the material to give it a broader market acceptance and we’ve just gone down going through some agglomeration studies on the material to see whether we remain acceptable feed to blast furnace and it looks like that’s interesting opportunity for us.

We’ve been meeting with companies who are in that blast furnace servicing business from a [brick heating] and material handling standpoint. We are trying to organize some trials with iron makers right now. We’ve also been talking with some integrated steel producers about other waste streams that they have that are iron barring that we may use in addition to EAF dust put in our kilns to essentially upgrade the iron content of the IRM to give us a broader market acceptance.

We continue to go down the development path and we see some promising opportunities there, but it’s like any kind of market development effort, you sort of take one step forward and one step back and you get a few successful trails in your belt and you have something you can use to leverage upon in and that’s where we are.

Robert Howard - Prospector Partners

In terms of the expenses of going through the different taxing, is it significant at all for O&M?

Jim Hensler

Not really. We’re spending a little bit money with some consultants that have been helping us to tailor the chemistry and understand what that means in steel and iron making applications. In terms of the actual operating costs of our kilns, the work we’ve been doing so far is at negligible impact on cost.

Robert Howard - Prospector Partners

With the Barnwell, I guess, once the construction is finished there, does that change the dispatch pack or I’m not sure what the right term would be, the first plant that would be idled in a downturn, I mean, it would Rockwood still be kind of the first one that you’d want to turn off or does it alter the geography and so now there would be shifting between which plants would be the one to idle, is there any change that sort of how that operations would happen if things pull down again?

Jim Hensler

Probably not. One of the two kilns we have in Rockwood is our smallest kiln and given the size of that plant, if you have some significant reduction in steel output taking Rockwood down allows you to shed the cost of running a full plant. And given the size of Palmerton, it’d be harder to do that at Palmerton. The Chicago operation just by virtue where it is is always full and so doesn’t really make sense to be idling that plant and incurring a lot of diversion costs. So, yes probably the thinking is Rockwood would be the swing plant.

Robert Howard - Prospector Partners

And once Barnwell starts operating, is there going an O&M? Would you say O&M expense goes up a couple of million dollars just because of that plant or what will be the impact on O&M run rate?

Jim Hensler

There will be some transition costs as we go through a startup process. Our expectation is that the operating cost will go up, but we will offset that with the additional EAF dust that we will be bringing in and the additional revenue that we’ll get from that EAF dust.

Operator

Thank you and we have no further questions.

Jim Hensler

Okay. We appreciate your questions and your interest and we will talk to you again after the fourth quarter. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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