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Horsehead Holding (NASDAQ:ZINC)

Q3 2013 Earnings Call

November 05, 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

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

Daniel Moore - CJS Securities, Inc.

Kirk Ludtke - CRT Capital Group LLC, Research Division

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

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

Operator

Welcome to the Horsehead Holding Corp. Third Quarter 2013 Earnings Release Conference Call. My name is Hilda, and I will be your operator for today. [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 third quarter 2013 earnings release conference call. My name is Gary Whitaker, and I'm 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'm pleased to introduce Jim Hensler, our President and CEO. Jim?

James M. Hensler

Thanks, Gary. I'd like to welcome you to this conference call to discuss the results of the third 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 loss for the quarter was $3.5 million, or an $0.08 loss per share. This compares to a loss of $9.1 million, or a $0.21 loss per share, for the third quarter of 2012. The consolidated net loss for the third quarter of 2013 was $2.7 million, excluding noncash charges associated with hedges. On a similar basis, we earned $600,000 during the third quarter of 2012. The LME zinc price was 1.4% lower in the current quarter versus the same quarter in 2012, while the nickel price was roughly 15% lower in the current quarter. While shipments of zinc products and EAF dust receipts strengthened compared with the second quarter of 2013, results during the third quarter were adversely affected by production disruptions at the Monaca facility, where we operated only 5 of 6 smelting furnaces for most of the quarter due to the temporary shutdown of 2 furnaces during the quarter. As a result, production cost per ton was negatively impacted by the additional rebuild costs and lower production volumes. Although disappointing, it's not surprising given the nature of operating conditions at the Monaca facility as we prepare for its closure in the next several weeks.

In conjunction with that timing, we issued the required 60-day warrant notice to affected employees on October 31, 2013. We did return to a 6-furnace operation in early October and expect to maintain reasonable productivity levels through the fourth quarter until we shut down the zinc metal and zinc oxide production facilities at Monaca.

I'd now like to discuss our operating results in more detail. Horsehead Corporation processed approximately 162,000 tons of EAF dust during the quarter, a quantity slightly more than our receipts. EAF dust receipts increased by 3% to 157,000 tons from the prior year's third quarter receipts. According to industry statistics, domestic steel industry capacity utilization averaged approximately 78% during the third quarter of 2013, which is essentially unchanged from the second quarter of 2013. Steel industry output remained steady as we entered the fourth quarter of 2013. However, if steel output does not increase, it's likely that we will idle at least 1 kiln before the end of the year to balance capacity with supply. Zinc product shipments decreased by 1.3% to 43,732 tons, compared with the prior year's third quarter, and were up 2.4% compared with the second quarter of 2013. Market conditions for our zinc products remain steady. Total zinc metal shipments increased by 7.8% when compared with the third quarter of 2012, and increased almost 20% when compared with the second quarter of 2013. Demand for zinc metal was solid. We also reduced metal inventory during the quarter. Total zinc oxide shipments decreased 17% compared with the third quarter of 2012 while Zochem's shipments increased by 20% compared to the same period. On a year-to-date annualized basis, our combined shipments in zinc oxide were about 84,300 tons. We expect to retain about 70,000 tons of zinc oxide business in 2014 once we consolidate all production of zinc oxide and Zochem after the closure of the Monaca refinery.

As noted earlier, during the third quarter, the Monaca facility operated at a 5-furnace level due to the temporary shutdown of 2 smelting furnaces. We returned to a 6-furnace operation in October and expect to remain at that level during the fourth quarter until we close the smelter. We may decide to operate a reduced number of smelting furnaces for a short period of time in 2014 to consume the remaining work in process inventory on-site, and to provide some overlap with the Mooresboro ramp up. We will make that decision as we approach the end of December. The Monaca facility continues to experience an increase in employee turnover as some employees have decided to take jobs elsewhere in anticipation of the closure of the facility. This trend may continue given the delivery of the recent warrant notice. However, we expect to be able to manage through this situation. In anticipation of ceasing operations at Monaca, we have significantly curtailed the purchase of secondary feed materials for the smelter as we begin consuming the inventory of zinc-bearing materials in the Monaca plant. This decision resulted in 99.2% of the feed to our smelter in the third quarter being sourced from internally generated feed materials, primarily from EAF dust, as compared to 86.7% in the second quarter of this year.

Moving on to discuss the zinc pricing environment. The LME zinc price averaged $0.84 per pound during the third quarter of 2013, which was about $0.02 lower than the third quarter of 2012 and $0.01 higher than the second quarter of 2013. 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 2012 -- as for first quarter 2013. However, we converted over half of our fourth quarter 2013 and first quarter 2014 hedge positions from pushput options to fixed-price swaps, the same period at an average price of $0.903 per pound. These swaps were transacted at no cost and the sale of the put options resulted in a $1.3 million cash benefit. Realized premiums on zinc metal averaged $0.066 during the third quarter, which was up about $0.005 from the third quarter of last year. Premiums for zinc metal remain steady. Realized premiums for zinc oxide in the third quarter were approximately $0.13 per pound, which is an increase of $0.08 per pound, compared with the prior year's third quarter, and a decrease of $0.03 compared with the second quarter of 2013. The increase compared with the prior year is primarily due to the price increase we implemented at the end of last year. The increase compare -- or the decrease compared with the second quarter this year is primarily due to the lag effect in pricing of oxide, which elevated premiums in the second quarter due to higher first quarter LME prices.

INMETCO's results for the quarter decreased compared with the prior year's quarter, primarily as a result of a 15% reduction in the price of nickel, and a decreased production in shipments resulting from a transformer failure in the submerged arc furnace in July that resulted in an unplanned 7 day outage. INMETCO also took its annual maintenance outage in October of this year, which lasted 12 days. Tolling receipts increased by 24% compared with the third quarter of 2012 as a result of new contracts that we entered into at the end of last year. We are in the planning stages for an additional 20% to 25% capacity increase in INMETCO, in anticipation of increased growth in industrial waste generation by stainless steel producers over the next 2 years. We are considering, along with other options, an investment to increase the size of a transformer to deliver more power to the melting unit.

Zochem made another positive contribution to earnings during the quarter, posting a 20% increase in shipments, and nearly doubling of net earnings compared with the third quarter of 2012. The expansion project remains on schedule to coincide with the closure of the zinc oxide refinery in Monaca near the end of this year. We continue to realize higher premiums on contract business as a result of the price increase we announced late last year, and in July of this year, we announced another price increase. In October, we also announced plans to expand our zinc oxide distribution and service center network in 2014 to serve Zochem's growing market in the southeastern United States. Lastly, we continue the commissioning process in parallel with completing the final stages of construction on our new zinc plant in Mooresboro, North Carolina. We continue to believe that first zinc production will occur near the end of the year, with a 6-month ramp up, with 155,000 ton per year production rate. The lead-silver recovery circuit is still expected start up late in the second quarter of 2014, with a 12-month ramp up to full capacity. We have hired and are in the process of training approximately 80% of the workforce for the zinc plant. As noted in our press release of September 27, 2013, and given that the plant is nearly complete, we have increased confidence in our expectations that project construction costs are expected to be approximately $490 million. I'll now turn it over to Bob Scherich to review the financial results. Bob?

Robert D. Scherich

Thanks, Jim. Detail of the quarter's performance versus the same quarter last year reflects an increase in revenue of $9.2 million, or 9.2%, to $109.6 million. Of the change, $7.6 million was due to changes in noncash hedge charges in the compared periods as net sales for this quarter were reduced $1.2 million from unrealized noncash charges related to hedging, compared to a reduction of $8.8 million in the third quarter of last year. The increase in sales was $1.2 million when excluding hedge charges, and reflected the effect of a 5.6% increase in price realization per pound for zinc products. This was partially offset by shipments of zinc products being 1.3% lower and a 16.6 decrease -- 16.6% decrease in nickel-based sales. We received $0.5 million in cash settlement for our $0.85 zinc put options as the LME zinc price averaged $0.843 for the quarter. The average sales price realized for zinc products, on a zinc contained basis, was $1.06 per pound, or $0.21 per pound above the average LME price for the quarter, compared to $1.02 per pound or $0.16 above the average LME price for the prior year's quarter. This realized premium to the LME was $0.05 per pound lower than for the second quarter of 2013, as that quarter benefited from the lag effect of the higher LME price during the first quarter. Sales of zinc metal increased $2.7 million or 6.9% to $40.9 million for the quarter, reflecting a $3 million increase in sales volume and a $0.3 million decrease in price realization, as a 1.4 decrease in the LME zinc price was partially offset by higher realized premiums. On a sequential quarter basis, third quarter metal sales were up 19.8%. Sales of zinc oxide decreased $4.4 million or 10.6% to $37.4 million for the quarter, reflecting a decrease in sales volume of $7.1 million, partially offset with a $2.7 million increase in price realization. This change was consistent with our strategy coming into the year, as we plan for the eventual shutdown of oxide production at Monaca. Sales of zinc and copper-based powders increased $5.1 million to $8.2 million for the quarter, reflecting an increase in sales volume of $5.3 million, reflecting primarily the addition of HZP. EAF dust revenue for the quarter increased $0.9 million, or 8.1%, to $11.4 million, as increased price realization contributed $0.6 million. Sales from nickel products and services decreased $2.4 million, or 16.6%, for the quarter to $12.2 million, compared to the prior year quarter as volume of shipments declined 13.7% and the average LME nickel price declined 14.7%.

Consolidated cost of sales increased $2.3 million when compared to the prior year's third quarter, or 2.2% to $102.8 million. The increase included a $1.1 million increase in LCM charges. Prior year quarter included $6.1 million in impairment charges. Reduced volume of zinc product shipments' effect on cost of sales was more than offset by the increase in production unit cost that Jim mentioned, as well as costs related to HZP, which were not included in the prior year's quarter. Depreciation increased $1.1 million and reduced earnings due primarily to acceleration of depreciation, associated with the expected shutdown of the smelting and refining assets at the Monaca facility later this year, along with depreciation expense associated with HZP. As Jim mentioned, we have zinc hedges in place for the fourth quarter of 2013 and the first quarter of 2014, with an $0.85 per pound strike price for 3,500 metric tons per month, and fixed-price swaps for 4,500 metric tons per month for the same period at an average price of $0.903 per pound. This change to a fixed price for a portion of our hedges near term has already resulted in benefit. The average LME zinc price for the month of October was $0.854. This resulted in no settlement for the $0.85 put options, but we will receive $0.5 million for the settlements of the swaps for the month of October. $27.6 million of cash was provided by operating activities during the quarter, as inventories decreased $4.6 million and accounts payable increased $19.8 million. Capital spending was $93.6 million for the quarter and $234 million for the 9 months. Cash interest paid was $2 million, and capitalized interest was $7.7 million during the quarter. We had $55 million outstanding on our revolving credit facilities at September 30, and the cash on hand was $120 million. On October 30, we closed on a follow-on offering of our common stock, receiving $72 million and increasing our share count to 50.4 million. We expect to file our 10-Q later today. Adjusted EBITDA was $3.5 million for the quarter, compared to $10.3 million for the same quarter last year. On an LTM basis, adjusted EBITDA was $33.4 million and the LME zinc price was $0.87 per pound for the 12 months ended September 30, 2013.

As we look forward to the next couple of quarters, we expect to record a charge of approximately $8 million for severance and other costs related to the announced shutdown of the Monaca smelting and refining operations. We estimate the remaining net book value of assets at the Monaca facility to be approximately $12 million at December 31, 2013, and will be subject to consideration of additional impairment charges. The start up of zinc production at Mooresboro is expected to result in some one-time start up costs and inefficiencies. We expect our capital spending to decline noticeably on a sequential quarter basis. These items, along with the annual outage at INMETCO will reduce expected earnings for the fourth quarter. 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 we grow more excited and confident by the day, that the transition of our zinc metal business to the new Mooresboro facility and the consolidation of zinc oxide production at Zochem will be completed near the end of this year. While we anticipate that our reported results will be affected by transitional issues over the next few quarters, we continue to believe that this investment will generate $90 million to $110 million of incremental EBITDA, plus additional cash benefits due to reduced hedging costs, maintenance capital spending and cash taxes once fully operational. In October, we completed a follow-on public offering which bolstered our liquidity to allow us to continue to pursue growth and diversification initiatives consistent with our past investments, while also providing a cushion during startup of the Mooresboro facility. While our primary focus at this stage is to manage the final construction, commissioning and startup of Mooresboro and Zochem, and the transition with the Monaca smelter shutdown, this offering allows us to continue to pursue other opportunities as they develop. Thank you, and we'll now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ian Zaffino from Oppenheimer.

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

I know you guys mentioned that the ramp you're talking about taking 12 months over at Rutherford, what is sort of the EBITDA improvement cadence throughout the year, if you could kind of maybe help us out a little bit more there, give us a little bit more granularity.

James M. Hensler

Yes, just to get clear on that ramp. There are really 2 different aspects of the ramp-up. The first is the ramp-up of zinc production, and assuming start up occurs near the end of the year, we would expect a 6 month ramp-up on zinc production to get to 155,000-ton per year run rate, so potentially [indiscernible] by the end of the second quarter. On the lead-silver recovery circuit, which we expect to start up late second quarter, say, early June next year, we expect that facility to take about 12 months to ramp up. As it relates to the overall value proposition, that -- we assign roughly 80% of the $90 million to $110 million value to the zinc part of that ramp up, and 20% to the lead-silver part of the ramp-up. As far as the zinc ramp-up is concerned, we also think that there's a further ramp-up opportunity once we get to the 155,000-ton per year rate. We believe the facility, as designed, could do as much as 175,000 tons of zinc, and assuming that we can acquire the zinc units to feed it and we don't have significant problems getting up to that higher rate, we believe over the subsequent 12 months, so from mid-2014 to mid-2015, we think we can take that facility up to the higher operating rate.

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

Okay, so if we look at like a third quarter of next year, we could attribute 100% of the 80% of the $90 million to $110 million. All of that should flow into the third quarter, correct?

Robert D. Scherich

That's right.

James M. Hensler

Yes, that would be a way of looking at it.

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

Okay. A lot of numbers there. And then, as far as the incremental capital you just raised, above and beyond the CapEx increase at Rutherford, give us an idea of what that's going to go for. Is that just truly for flexibility? Is there something you're looking at doing, if you could give us a little more color there, that would be great.

James M. Hensler

Yes, well, I mean just to put it in context, when we came into the year, this year, we set an objective to maintain $90 million to $100 million of liquidity through the start up and ramp-up of Mooresboro. And we wanted to target that level, primarily because we're not sure and we don't expect it, but if there are any issues during startup, we wanted to have enough liquidity to get through that issue, but we were also working on several initiatives that could use cash in early 2014 or late 2014 that we wanted to have the liquidity to be able to continue to pursue. And so, when we came to the conclusion that our capital investment at Mooresboro was an increase by $40 million, that reduced that liquidity picture down to $50 million to $60 million of liquidity available, and we felt that didn't give us enough of a cushion to also continue to pursue other initiatives. And so, some of those things that we're working on include completion of the expansion at Zochem. We are about halfway through from a spending standpoint on that project. There's another $7 million or $8 million left to spend there, and that's money we will spend between now and first quarter of next year. We also see an opportunity at INMETCO to increase the capacity of that facility. As we look at the stainless steel industry in the U.S., with the start up of the Outokumpu facility, and in our discussions with them and understanding what their ramp-up expectations are, yes, we think that we need potentially another 20% to 25% of the capacity to -- in a facility that's already running at full capacity, to be able to service the market by 2015. And so as we look at options to achieve that expansion, we're probably looking at an investment in the $10 million to $15 million range to expand that capacity. So that is something that we'll have to start doing the engineering work and spending money on some time next year. We're also looking at other opportunities. For instance, we are looking at a consolidated facility to process galvanizer skimmings to be able to feed the Mooresboro facility. The feed plan for Mooresboro is that roughly 125,000, 130,000 zinc tons of feed are going to come from our own EAF dust. But to get to the 155,000 ton rate, we need to bring in galvanizer skimmings, similar to what we do in Monaca. But this material is going to have be processed to remove any kind of contained metal, so that we can feed it directly to this process. We're in discussions right now, regarding a joint venture, to put in a facility to -- that will buy and process these materials, and we see it is as a very attractive, high ROI project that we're going to want to have in place by the second quarter of next year. So that's another use of cash. It's probably a $5 million to $7 million type of investment. And then in order to take the facility up to the 175,000-ton level, we need to find additional zinc units over and above that, and we've been looking at investment opportunities that will allow us to do more EAF dust recycling, either in the U.S. or in Asia, and we see some attractive opportunities, particularly, potentially a joint venture opportunity, to secure zinc units in the second half of next year at existing facilities in -- outside of the U.S. So those are the kinds of projects that we -- that we're looking at investing in and using the proceeds from this offer.

Operator

The next question comes from Daniel Moore from CJS Securities.

Daniel Moore - CJS Securities, Inc.

In addition to the $120 million of cash on hand in Q3, can you tell me what is remaining on all other facilities, what's the remaining untapped liquidity on all other facilities in place at -- as of the end of September?

Robert D. Scherich

Well, as indicated, we drew $55 million on our revolvers at September 30. So we believe, at least, it's a small amount, probably less than $5 million of availability at this time on the remaining facilities.

Daniel Moore - CJS Securities, Inc.

Got it. And are you projecting $8 million in severance costs for Q4? You alluded to some other, sort of one-time shutdown costs. Any additional clarity, in terms of one-time, either shutdown costs at Monaca and/or startups that we should be thinking about in terms of uses of cash over the next 1 to 2 quarters?

Robert D. Scherich

Yes. I think the severance probably is a little less than $8 million. The $8 million includes other items, like supplies and things like that, that are associated with those 2 operating units, if we shut them down before using all of that. That's really the cash impact, a little less than $8 million, if we write off some supply inventory. But we do expect for the start up of the Mooresboro zinc circuit, that there will be some kind of one-time start up costs. We expect to have extra resource in place and be inefficient in consumption of materials until we get ramped up. So we're allowing for some cost and inefficiencies during the first few months there.

Daniel Moore - CJS Securities, Inc.

Okay. And cash flow from ops, it was very strong at $28 million in the quarter. What were the biggest drivers and how should we think about working capital, either as a benefit or as a use of cash over the next couple of quarters, as you sell down inventory, kind of think about the moving parts there?

Robert D. Scherich

Well, of that cash flow from operations, about a little over $4.5 million came from inventory reduction, and a little over $19 million from increase in payables. The increase in payables is primarily related to these projects, both at Zochem and in North Carolina, as we've had the highest quarterly level of capital spending now on the project. We think the working capital continues to kind of be managed through the next couple of quarters, with inventory does reduce probably in the fourth quarter, and as we move into the first couple of quarters next year, although we're still spending on the project at a reduced rate, we'll be then starting to liquidate payables a little bit. So we kind of see a profile that still has positive cash flow from operations next year, but relatively breakeven in the first half of the year.

Daniel Moore - CJS Securities, Inc.

Perfect. It's very helpful. Lastly, just to clarify, you've spent $420 million of the projected $490 million, so that's $70 million left to go. Correct?

Robert D. Scherich

Yes, that's -- we recorded for roughly $420 million, before -- that's without capitalized interest, so -- and so we've got another $70 million to go, and a lot of that carries into next year, and carries through the management of working capital.

Daniel Moore - CJS Securities, Inc.

And I'll sneak one more in and then jump back in queue. If you close Monaca some time around year-end, any update with regards to Shell, and at this point, are you operating under the assumption that you'll maintain some level of operations and any indication of what kind of costs might incur in 2014 in order to do so?

James M. Hensler

Yes. I mean, there's just not really much of an update on Shell. Their option is in place until January 2, I believe, is the expiration. So we haven't really had much other news to report on that, although they continue to have an extremely active presence on the site. I'd say, probably about 70 people crawling all over the facility here in the last week. So they're still actively involved. And our plan next year is, we will be shutting down the smelter, but we have some other businesses that we run in that facility. Horsehead Zinc Powders, our specialty zinc oxide business, we've got a small zinc dust business there. They'll continue to operate, and depending upon where we are with Shell, we'll evaluate whether it makes sense for us to spend any effort to repurpose some of the other facilities. We'll have some initial costs in probably in January to maybe, a little bit into February, depending upon whether we decide to run our smelting furnaces for a few weeks into 2014. We'll make that call toward the end of the year. It really depends upon the extent we have zinc-bearing raw materials sitting on the ground in Monaca, and the most efficient way to process those might be just to run them through the smelter. So to the extent we have that, we may continue to run a few furnaces, probably not the full 6. We may run 3, 4 for a few weeks, and then we'll have some decommissioning costs associated with isolating natural gas and utility connections to buildings that are being shut down to keep them safe, so there's no risk -- explosion hazards. So we may end up having a workforce of 30 to 40 people that we may keep on site for several weeks, 6 weeks, 8 weeks to help with that decommissioning process and that wind down process.

Operator

Our next question comes from Kirk Ludtke from CRT Capital Group.

Kirk Ludtke - CRT Capital Group LLC, Research Division

I just wanted to double back to the questions regarding the capital spending plans, going forward, and I've got it so far, there's the Mooresboro, there's $69 million at Mooresboro. There's Zochem, $7 million to $8 million. Skimming is $5 million to $7 million, INMETCO, $10 million to $15 million. And I -- did you mention the cost of an EAF dust plant to take it up to -- to take the zinc production up to 175,000 tons?

Robert D. Scherich

No, we're looking at different options there. One might be investing in an existing facility, and the extent of that investment, we haven't determined. Could be in the $15 million to $25 million range, but we haven't really finalized that.

Kirk Ludtke - CRT Capital Group LLC, Research Division

And the timing of -- it sounds like Mooresboro's will be over the next quarter or 2. Zochem, by the end of the year. Skimming's probably first quarter, second quarter next year?

Robert D. Scherich

Yes, it would be the next couple of quarters, maybe a little bit into the second quarter.

Kirk Ludtke - CRT Capital Group LLC, Research Division

And then INMETCO and the EAF dust plant, when would you expect those to...

James M. Hensler

I think most of that spending probably occurs in early 2015, that we'd begin spending money, second half of next year.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Okay. And with respect to the cadence on Mooresboro, I -- is it linear or back-end loaded? Is there anything you can share with us, with respect to how that'll play out?

James M. Hensler

You mean in terms of the start up, ramp up?

Kirk Ludtke - CRT Capital Group LLC, Research Division

Yes, yes.

Robert D. Scherich

I think, if we don't run into any problems, I think it probably goes up fairly quickly. If you look at the other start ups that have occurred recently with this technology, they've been able to get to a 70% to 80% output rate fairly quickly, within 2 or 3 months, and then kind of more gradually getting up to full output from there. So if ours follows that pattern, it might be a reasonable expectation and the way we model it, more of a linear ramp up, but there's an expectation it might be able to do a little bit better than that.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Okay, that's helpful. And the 20% of the workforce that you haven't hired, are those people going to work in the coproduct cycle?

James M. Hensler

A portion of them are. And then, there are some that are in jobs that we can bring in late November, early December, and still get them trained in time for start up.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Okay. And then lastly, the $8 million of shutdown costs, there are costs and inefficiencies beyond the $8 million that you've -- you indicated earlier, or is that included in the $8 million?

Robert D. Scherich

The $8 million is just associated with the shutdown of Monaca major operations refinery and smelter. The inefficiencies during the start up period just kind of pointing to the fact that we do expect there to continue to be higher cost in the first quarter or so of that start up. And the other piece that we don't -- aren't certain about, as Jim said, there's a lot of alternatives around the remaining assets at Monaca, depending on what Shell does. We're going to have about $12 million of net book value there, that we'll be evaluating, depending on direction that some of those things go.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Excluding any charges, and I know you don't give guidance, but excluding any charges, do you think you can stay EBITDA-positive over the next couple of quarters?

Robert D. Scherich

Yes. I think so. I mean, it's nothing attractive, given where commodity prices are right now. We're really not going to get benefit out of the new plant over fourth quarter, first quarter, but once we get past first quarter, if we are achieving a successful startup, then we'd expect to start seeing some difference in second quarter, although not fully ramped up.

Operator

Our next question comes from Carter Driscoll from Ascendiant Capital.

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

Question about, maybe just shifting gears away from the new plant for a second, and I will inevitably return to it. INMETCO, obviously, you had a, kind of a series of production disturbances over the past several months. Can you put in the context of the expand expenditure -- planned expansion and maybe some potential re-architecting of the way INMETCO is set up to, maybe alleviate some of the things that have, kind of been recurring, nonrecurring issues?

James M. Hensler

Yes. We've had some unplanned equipment outages, and we think we can do better than that. Part of that is -- we're going to be strengthening the team there, with some folks that we think can help us address some of the liability issues that we see. I think that's part of the issue and we're -- we have made some changes which we think can address that. But also, we have the challenge that we're running that facility at full capacity, and we see the market opportunity increasing. So part of our investment decision would be to not only figure out how do we get more melting power into that plant, but also how do we make the facility more reliable at the same time, and that will be part of our investment planning.

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

Okay. The -- if I heard you correctly, Bob, you talked about estimating the book value of Monaca to be about $12 million at year-end. I'm assuming that at some point, by the end of the first quarter, that will be completely written off. Is that your current estimation?

Robert D. Scherich

Well, some of that, we believe, for instance, some of the mobile equipment, we'll be able to dispatch to other facilities. It really depends on the outcome of the Shell option agreement. If Shell moves forward, then we will work towards vacating that facility, and what we can't move off, we'd be writing off. If that doesn't go in that direction, as Jim said, we've got some other -- we've got some operating assets there, and we've got some ideas about repurposing some of that equipment. So it's a little bit up in the air at this point, and depends on kind of what plan we put in place going forward here. But we think some clarity will start to come around that during the first quarter.

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

But it is possible that if Shell does not exercise the option, that you might actually have to rehire some people, maybe not in the same capacity, but you might have to actually add staff to that, to continue the operations, is that correct?

James M. Hensler

Well, in terms of the operations, as I said, we'll continue to operate there. Those folks will remain on the site. But if we repurpose, for instance, the sinter plant, we would rehire folks. That's not something that would happen immediately, but with some investment in development there, we might do that someday.

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

All right. And then obviously, just -- I'd like to take a step back, Jim, if you don't mind, and just talk about the plant in a bigger picture context. Obviously, when you first announced the facility -- intention to build a facility back in 2011, I guess just over 3 years -- excuse me, 2 years ago, the -- you originally thought, the cost would be about $350 million, $375 million, obviously creeping closer to $500 million, with some of the additional investment you just outlined in terms of capacity expansion, and maybe building that partnership to get the skimmings up and running. How would you -- if you can kind of, not necessarily quantify, but talk about how that $90 million to $110 million forecast incremental EBITDA has still remained the same, despite a much higher price tag, if you could talk about maybe some of the process improvements, some of the expanded throughput, just kind of bracket it, not necessarily put a dollar number on it, but how you've been able to maintain your confidence in that, with obviously lower LME prices as well, if I recall correctly was a -- forecast $1 for that, at one time. So you clearly had some other improvements to give you confidence that, that range is still going to be potentially realized.

James M. Hensler

Well, I mean, just to explain that $90 million to $110 million, I mean there are really 4 components, major components to it. One piece, which is the smallest piece, is the difference in premium we expect between selling special high grade and selling PW, which that spread really hasn't changed much over a couple of years, and it's been in the $0.04 or $0.05 range, and that's kind of where it is right now, and so it's really more a question of volume, and we still expect the 155,000 ton per year rate to be the output from the facility. So that piece doesn't really change much. The next piece is the lead-silver recovery piece and that 155,000 ton per year rate would feed -- feeding roughly 130,000 tons of zinc from our EAF dust, we estimate that there's a certain amount of lead and silver in that, and assuming silver and lead prices, we get to a range that's roughly 20% of that $90 million to $110 million range, that really hasn't changed either. Because it's really tied to the volume of commodity we expect to be able to extract from our feed materials, which hasn't changed. The other significant components around the cost side and a big component of that is the elimination of certain steps in our recycling process. We go through a two-step process today, waelzing followed by calcining, and that calcining step will be eliminated with this new facility, and we know what that costs, and that really hasn't changed. So there's a significant savings there. And then the other benefit is just lower conversion costs in the smelting process itself, and our estimate of manpower differences stayed about the same. We still think that Mooresboro facility will run with about 250 people. We also see it being much less energy-intensive, which is really driven by the technology itself. Today, we spend about $25 million a year on coke in the Monaca process that we won't need to spend with this new facility. So when we look at the underlying reasons why that $90 million to $110 million is there, they're still here today as they were 2 years ago, when we looked at the project.

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

But have there been -- of the incremental expenditure from the initial estimate to, kind of today, and what you've outlined today, have there been specific improvements that you've made, versus your initial plan? And could you maybe talk to some of those, that either get you from 155,000 or 175,000, or maybe get you greater yield or increase the duration of the equipment, trying to...

James M. Hensler

Yes, I mean, if you look at the increase in the CapEx that we have experienced over the project, I'd say half of it, roughly, is just a recognition that our initial estimate was based upon incomplete information. And so, as we got through detail engineering, we recognize that our estimate was low. But the other half is due to improvements we've made, and they fall into 2 categories. We've invested in materials of construction that are going to be much more durable. And so that should reduce maintenance CapEx going forward, because we think that the service life, instead of being 2 to 5 years in some cases for some of the tanks that we were putting in, will be 20 to 30 years. So that will have a payback -- it's not building to the -- into that $90 million to $110 million we talked about, but if you look at the maintenance CapEx that we have today at our Monaca facility, it's...

Robert D. Scherich

It's $7 million or 8 million a year.

James M. Hensler

Yes, the figure's $7 million or $8 million a year, and we think this new facility, probably going to be closer to $3 million a year. And so there's a savings there that's not in that $90 million to $110 million. The other area that we've invested in, is in the lead-silver recovery circuit. Our initial lab work suggested that lead to silver recovery would be fairly high, in the mid-90% range. But as we began doing more test work, we realized that there were certain conditions where that recovery could be much lower, could be in the 70% to 80% range, and we were able to make a process improvement in the design which cost us about $20 million, but it gave us much higher confidence, we can get in the mid-90% recovery range. And so essentially, gives us more confidence in that $90 million to $110 million opportunity.

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

Great, that's what I was looking for. And as a last question, and I'll hop back in the queue. I think in the past, you had talked about one of the advantages of the infrastructure and where you have your recycling facilities was, the transportation cost advantage versus maybe some competitors based in Canada or Mexico. But if I'm hearing correctly, you're talking about -- and I realize that's more about pushing around significant volume. But if I hear you correctly, you're talking about maybe sourcing some of that additional dust to fill that higher potential capacity from abroad. If you could just maybe talk about what those transportation costs might do or impact or kind of think about what percentage you might be able to pull from abroad?

James M. Hensler

Yes, well, we're looking at a lot of different options there. But the transportation costs, when you look at it, ocean freighting it from Europe or Asia into the East Coast of the United States, when we look at it, it's probably on the order of $0.04 or $0.05 a pound, so it's not a huge impact, and it's really a question of what you can buy the raw material for, and on a net cost basis, we think we can bring materials in at fairly attractive prices that way.

Robert D. Scherich

So we wouldn't try to be bringing EAF dust in. We would be bringing processed material in, so it would be basically the waelz oxide, the same output of our recycling facilities.

Operator

Our next question comes from Paul Forward from Stifel Nicholas.

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

So on the new plant, you got 6 months ramp, really no change to your past guidance on that. I was just wondering, when do you -- when are you going to be able to communicate to us, kind of first read on the success of the process, relative to your expectations. Is that -- are we going to have to wait until mid, late February on the earnings release? Or is that something that you might be able to tell us a little bit about earlier on?

James M. Hensler

Well, it's a good question, haven't really thought about the answer to that. I mean, I think we'll probably communicate when we produce first zinc, and so, sometime through the end of the year, that would probably be our next communication on the subject. If something were to deviate materially from what we've communicated...

Robert D. Scherich

Plus or minus.

James M. Hensler

Plus or minus, as far the ramp-up, I guess we'd make a determination to say, is this something that's worth, that we should be communicating. And I'd say it'd be a judgment call as we get into the ramp-up.

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

And on the -- well, you talked a little bit about the zinc, the feed material to the new plant. I was just wondering if you could talk a little bit about the -- as you expand at Zochem, what's the sourcing and kind of makeup of the zinc feed material there? And is there anything you can kind of estimate for us, as far as, like the -- if you are purchasing it, and what kind of approximate percentage of the LME price is the feed material going into Zochem?

James M. Hensler

Well, recognize Zochem buys special high grade metal, and so that sells at a LME plus, plus a premium. In today's market, that premium's $0.09, plus or minus, and so that would be a reasonable expectation for metal prices for next year. We intend to source that from multiple sources. Currently, our sourcing is mostly coming from Canadian smelters, and just given the logistics, that would probably continue to be the case. But we would certainly have the option to supply it out of Mooresboro or supply it from offshore, if need be.

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

Okay. And the, this quarter, I think, you had reported a premium on average zinc product price as $0.21 over the LME for the quarter. When you see all the moving parts with the new plant and then Zochem's expansion, and then the, of course, the premiums that you would get, or the quality that you're producing, relative to now, goes up with the new plant. I was just wondering, putting it all together, at -- when you're hitting that kind of full rate of zinc production midyear 2014, what kind of a, average premium over the LME do you think you're going to be reporting as far as -- like you did this quarter with the $0.21 number? Is there going to be a comparable number that you kind of internally anticipate?

James M. Hensler

Well, there'll be 2 components to it and that composition's changing a little bit. The metal piece is, I think, relatively easy. We expect to get to the 155,000 tons of annual output initially, with -- as Jim just said, in today's market, it would be $0.08 or $0.09 premium to the LME on that 155,000. We expect Zochem to be operating at that full capacity once we complete this expansion at close to 70,000 tons of oxide output, it's 80% zinc. So that zinc-contained of roughly 55,000, is going to have its own component. I don't know that one off the top of my head, I don't know if you've got a number in mind, Jim, that you'd weight these against?

James M. Hensler

Well, I mean, the oxide premium in this -- in today's market's probably in the neighborhood of $0.10.

Robert D. Scherich

On an oxide.

James M. Hensler

On an oxide basis, yes.

Robert D. Scherich

On an oxide basis, which if you divided by 0.8, you would get the -- so that piece always -- traditionally has always been north of $0.20 per pound premium on a zinc contained basis. So it's now going to be a new weighted average between those 2 components.

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

Maybe I would just, lastly add, you talked about a number of internal growth projects over the next several quarters. Just wondered about, what your appetite might be for any kind of external diversification steps, and how active are you at looking outside the company for growth prospects or obviously, your plate's full with internal projects.

James M. Hensler

Well, our primary focus right now is Mooresboro and Zochem, and so that's got most of our attention. We evaluate opportunities all the time, and there are a couple of, I would describe them, more smaller diversification opportunities that look interesting right now, and if the price was right, we might consider them. But I'd say our appetite would be for something that is probably on the smaller side here, initially.

Operator

[Operator Instructions] We have no further questions at this time.

James M. Hensler

Okay. Well, that winds up the call, and thanks everybody. We'll talk to you next quarter.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.

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