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Horsehead Holding (NASDAQ:ZINC)

Q4 2009 Earnings Call

February 26, 2010 11:00 am ET

Executives

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

Jim Hensler - President and CEO

Bob Scherich - VP and CFO

Analysts

Carter Driscoll - Capstone Investments

Mitesh Thakkar - FBR Capital Markets

Paul Forward - Stifel Nicolaus

Eric Prouty - Canaccord Capital

Robert Howard - Prospector Partners

David Shapiro - Aegis Financial

Operator

Thank you for standing by and welcome to the Horsehead Holding Corp. fourth quarter 2009 conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Ali Alavi. Please go ahead.

Ali Alavi

Good morning, everyone, and thank you for joining us on our fourth quarter 2009 earnings release conference call. My name is Ali Alavi and I am 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, our market and our prospects that are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.

These risks and uncertainties include a variety of factors, some of which are beyond our control. These forward-looking statements speak as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after this communication. You should refer to our filings with the US Securities and Exchange Commission, including our most recent annual report on Form 10-K filed on March 16, 2009 for a more detailed description of the risk factors that may affect our results. With that, I am pleased to introduce Jim Hensler, our President and CEO. Jim?

Jim Hensler

Thanks, Ali. I would like to welcome you to this conference call to discuss the fourth 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 fourth quarter's results reflected an improvement over the third quarter of 2009 as our cost reduction initiatives and the improvement in commodity prices continue to be realized. Product shipments improved modestly and we began to operate our recycling facilities at full capacity once again. Net income was positive for the first time this year even though it was negatively impacted by $5.5 million charge before taxes related to hedging and the INMETCO acquisition. This compares very favorably to the prior year quarter in which we had a net loss of $17.2 million after adjusting for favorable hedge effects.

While reported domestic steel production increased by 8% from the prior year's quarter, our EAF dust receipts increased by 36%, reflecting the growth in our business. Our primary focus during the quarter was to restart idle capacity at our Rockwood, Tennessee recycling facility to match growing steel output and completing the acquisition of INMETCO. INMETCO is a leading recycler of EAF dust and other nickel bearing waste generated by stainless steel and specialty steel producers and a leading processor of nickel containing batteries. We closed on the INMETCO transaction on December 31st and we expect this acquisition to be accretive in 2010. We're very exited about the additional growth platforms that this acquisition brings to the company.

Market demand for our products increased during the quarter. On a sequential quarter basis, comparing the fourth quarter to the third quarter of 2009, sales revenue before the effective hedges increased 19% as the LME zinc price increased 26%. The increase in zinc price was not fully realized in the quarter due to the lag effect in some of our oxide contracts and in part due to the rapid increase in metals prices not being fully realized in the quarter. Product shipments increased by 3% compared with the third quarter even though December's shipments, which are typically low due to our customers controlling year, end inventories, were the lowest of the year. EAF dust receipts decreased by 8.5% reflecting outages taken by mini mills at the end of last year and the restart of production at many integrated steel producers, which reduced the share of steel produced by electric furnace steel makers during the quarter.

During the fourth quarter, we restarted the second kiln in our Rockwood, Tennessee facility and began operating all of our dust recycling facilities at full capacity. The 133,000 tons of EAF dust processed during the quarter outpaced our level of receipts by about 16,000 tons. Steel capacity utilization has increased steadily since the beginning of 2010 and is currently operating at a rate of about 67% according to AISI statistics compared to an average rate of 63% during the fourth quarter of 2009. As a result, dust receipts are expected to increase in the current quarter compared with the fourth quarter of last year.

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 expect to start the first kiln in the second quarter in this year. We continue to realize cost savings in the construction of this plant from our original estimates. Our current estimate is that we will be able to complete the project for approximately $65 million, and we expect to spend about 25 million to complete the project in 2010, $6 million of which will come from the new market tax credit financing we reported on last year. The starting date of the second kiln will be dictated by market conditions.

We are also very pleased with our cost performance in the fourth quarter. The conversion cost per ton of zinc declined by 18% between the current quarter and the prior year quarter on 8% higher production volume. We had identified $44 million in cost reduction programs for 2009 of which we had implemented $37 million through the fourth quarter. These cost reduction initiatives have contributed to the strong cost performance in the current quarter.

Market demand for zinc oxide increased from the third quarter, and demand for zinc metal was about the same as the prior quarter. Shipments of both products exceeded shipments in the prior year’s fourth quarter. Zinc product shipments increased by about 5% compared with the fourth quarter of 2008 to about 31,500 tons. Shipments increased by about 3% compared with the third quarter of 2009. The recent trend in shipments of both zinc oxide and PW zinc metal has been positive, as we have seen some strengthening among both tire producers and general galvanizers. As a result of the increased demand for zinc products in recent weeks and in anticipation of higher demands as we enter the construction season, we plan to restart a sixth furnace before the end of the first quarter taking the Monaca operation back to full capacity. This will be the first time we have operated the smelter at full capacity since September 2008. It is expected that we may alternate between a six and a five-furnace operation over the next several months as we attempt to maintain a balance between supply and demand.

Moving on to discuss the pricing environment. The LME zinc price was 87% higher than the prior year quarter at $1 per pound and 26% higher on a sequential quarter basis. Zinc price are currently trading at near to $1 level. As you will recall, we purchased put options last year on 100,000 zinc tons of shipments in 2010 at a strike price of $0.65. 86% of the expense of these options has been charged against 2009 revenue as of the end of the year.

The realized premiums on metal averaged about zero during the quarter, lower than the premium for the prior year's quarter of $0.07 and lower than the third quarter average of $0.02 reflecting competitive pressures in the market and a lag effect due to the rapid increase in zinc prices in the quarter. Transactional premiums remain in the $0.02 to $0.03 range. Realized premiums for zinc oxide in the quarter were approximately minus $0.10 down from $0.28 in the prior year quarter and down from minus $0.04 in the third quarter. Difference between the quarters is mostly explained by LME price lag effects in the contractual premiums with tire producers, given that LME prices increased steadily during the fourth quarter in 2009 and decreased during the fourth quarter of last year.

Transactional premiums on zinc oxide are down slightly due to the competitive pressure resulting from producers who are not operating at full capacity. I will now turn it over to Bob Scherich, Horsehead's CFO to review the financial results.

Bob Scherich

Thanks, Jim. For the fourth quarter earnings before taxes were $2.8 million after adjusting for hedge charges of $4.5 million and acquisition transaction charges of $1 million or $0.04 per share using the year's effective tax rate. In comparison, the prior year quarter had a loss of $26.3 million before taxes after adjusting for hedge benefits of $35.9 million or a negative $0.47 per share using the prior year's effective tax rate. This improvement in adjusted earnings reflects the higher commodity price, increased production and shipment levels and cost reductions that Jim mentioned.

Detail of the quarter's performance reflects a decrease in revenue of $23 million or 25% compared to the prior year quarter. The decrease was a result of a $40.4 million decrease due to the effect of hedges, a significant portion of which was offset by an increase in price realization of $12.9 million and a higher volume of shipments effect of $5.8 million. The average sales price realization for zinc products on a zinc contained basis was a $1.6 per pound or $0.06 per pound above the above the average LME price for the quarter compared to $0.79 per pound or $0.25 above the average LME price for the prior year quarter.

This difference in price realization versus the LME for the two quarters reflect the negative and positive lag effect that Jim mentioned earlier. Sales of zinc metal increased $14 million or 77% to $33 million for the quarter. This increase reflected primarily a $12.9 million increase in price realization and a $1.4 million increase in sales volume. Sales of zinc oxide increased $3 million or 13% to $27 million for the quarter. This increase reflected a $2.5 million increase in price realization and a $0.6 million increase in sales volume.

Sales from EAF dust recycling were flat at $9 million for the quarter reflecting higher volume of receipts and reduced average price realizations due primarily to additional transportation costs associated with diverting dust shipments and contracts acquired during the year. Cost of sales decreased 17% or $12.6 million. The decrease in cost reflected the effect of cost reduction efforts and the LTM adjustment recorded in the prior year, partially offset by higher shipment levels.

For production of finished products, purchase fee costs were $6.3 million higher than the prior year given the higher LME price that averaged 53% of LME versus 85% for the prior year. Conversion costs were 18% lower per ton compared to the prior year quarter. Recycling operations reflected a 41% decline and costs per zinc ton recovered for the quarter.

SG&A expenses were $1 million higher for the quarter as transaction expenses associated with the INMETCO acquisition were incurred. The effective tax rate for the quarter was 108% reflecting a change in the 12-month rate to 37.8% versus a rate of 33.3% for the nine months ended September 30th 2009. This change for the year's effective tax rate was absorbed in the current quarter, resulting in a non-typical effective rate for the quarter. This was really a play against small numbers.

Part of the reason for the change was due to recently enacted tax law changes that will allow us to carry 2009 losses back three years. This will provide significant cash benefit in 2010 as taxes paid in prior years are expected to be refunded as we filed the 2009 tax returns. Additional changes in the effective rate were the result of changes and estimates and corrections to certain deferred tax items.

The effective tax rate for the quarter and year ended December 31st 2008 was 34.5% and 36.5% respectively. Cash provided by operating activities was about breakeven for the quarter as higher commodity prices resulted in increased working capital. Capital spending was $10.4 million for the quarter and $37 million for the 12 months. The acquisition of INMETCO used approximately $33 million of cash during the quarter.

We cancelled our credit facility during the quarter given the current cost of credit and our lack of need for additional liquidity at this time. We expect to put a replacement facility in place as capital needs develop around strategic investment opportunities. We ended the year with $127 million of cash of which $31.5 million is restricted. Total debt was $0.3 million at the end of the year.

In closing, the profile for the fourth quarter reflected improved LME price levels and improved demand for our products and services. Our cost reduction efforts combined with improved productivity and increased EAF dust receipts resulted in significant improvement in cost performance.

As Jim mentioned, we recently moved to full capacity utilization on the recycling side of the business and we expect to move to a six-furnace level at the smelting facility by the end of this quarter. We are pleased with the cash flow performance for the year, given the challenging start. At this time I'd like to turn things back to Jim for some final comments. Jim?

Jim Hensler

Thanks Bob. In summary, before we open the call for questions. I'd like to say that 2009 was an extremely challenging year, but at the same time provided excellent opportunity for Horsehead. The year began with weak commodity prices, depressed demand for our products and services and low domestic steel production. Heavy cost cutting combined with improving market conditions contributed to positive cash flow from operations by the end of the first half of the year. With our strong liquidity positions, we grew our EAF dust recycling business through the acquisition of contracts from Envirosafe services of Ohio. We continue construction of additional EAF dust processing capacity in Barnwell, South Carolina. And we completed the acquisition of INMETCO at the close of the year.

We ended the year with improved market conditions and a strong liquidity position. INMETCO fits well with our strategy of expanding our capabilities as an environmental services provider and a diversified metals recycling business. We see opportunities to expand INMETCO by investing in new capacity at the Ellwood City site by entering into strategic alliances or acquiring other businesses that offer synergies with INMETCO's batteries recycling and metals recovery business and by greenfield expansion particularly outside the US in regions with a large concentration of stainless steel production.

We continue to believe that this is a type of market in which strategic opportunities will present themselves and we are well positioned to take advantage of these opportunities. Thank you very much and we would now like to open the call for your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question today is from Carter Driscoll with Capstone Investments. Please go ahead.

Carter Driscoll - Capstone Investments

I realized you guys don't tend to give specific guidance, let alone on line item, but maybe incremental contribution to SG&A from INMETCO or maybe frame it a little bit in terms of some type of operating profit we could expect from the year, just maybe a little bit of color on that?

Bob Scherich

Well, INMETCO in a sense is similar to Horsehead that their results will be highly dependent on commodity pricing, in this case nickel and also volume of activity in the stainless and specialty steel industry. With that said, their business profile is one that operates profitably at even lower kind of at the trough of what we've seen in nickel prices. So you are correct, we don't give specific guidance but kind of from a qualitative standpoint, stainless production as you track it, has been picking up steadily and is relatively strong, they are operating at full capacity. So the market conditions are good for them and nickel prices are good.

At current market conditions, we would expect them to be operating in kind of the high single digit EBITDA type level, their SG&A is not overly significant when it comes down to it, less than $1 million dollars a quarter, no impact in our 2009 since we acquired them on 12/31, but we expect them to add to earnings here and cash flow starting with the first quarter.

Carter Driscoll - Capstone Investments

Jim, you mentioned in your prepared remarks, in the fourth quarter that a lot of the increase in domestic steel production was non-EAF dust related, can you just expand up on that a little bit, it's a bit curious to me as to why you put that in the prepared remarks?

Jim Hensler

Well, if you looked at the capacity utilization statistics that AISI publishes, you would see that there is essentially a fairly steady increase in those numbers, but we didn't really see that coming through in electric furnace steel production and what we did see is a restart of blast furnace operations and integrated steel production which we think came back into the market and took back a little bit of the share that electric furnace guys have picked up in the third quarter when we actually got a higher percentage of production from electric furnace steel makers than we normally would have expected to see.

We have seen that tend to sort of work its way out here now in the fourth quarter and things seem to be more in balance what we normally would expect.

Carter Driscoll - Capstone Investments

So it's more of a trend line to begin 2010, would that be fair?

Jim Hensler

Yes, typically we think about electric furnace share of steel production being around 60% to 61% and we think it was a little lower than that in the fourth quarter last year and we think it is sort of back to normal, as far as we can tell. There's always a lag in those statistics, seems to be back to normal here in the first quarter of this year.

Carter Driscoll - Capstone Investments

Just a clarification, Bob, the percent feedstock you purchased outside of the dust, just the split roughly?

Bob Scherich

Yes, our feed mix for the fourth quarter as it came through the smelter was right about two-thirds EAF-based feeds and one third purchased feeds. I think I mentioned on the call that our purchased feeds come through at about 53% of the LME.

Carter Driscoll - Capstone Investments

And given the surge in receipts and the fact that you didn't have the capacity at least to entering the fourth quarter, is it fair to expect that percentage to trend higher towards the dust side?

Bob Scherich

Yes, I will tell you while we are on the five furnace operation, certainly since we brought the Rockwood kiln online, mid quarter, fourth quarter, we are going to have more EAF dust processing here coming through the first quarter. As we bring the sixth furnace on, if we are successful in doing that, that's going to require additional feed, so there's I think the opportunity of higher mix of EAF based feed as we move to the sixth furnace, it probably moderates a little bit, but generally we think that 65% to 70% is kind of the target here going through the year.

Jim Hensler

And of course once we get to the first kiln in Barnwell restarted, which we hope to begin that process in April, but probably won't get fully through the start-up curve for several weeks, but once that's up and running and we get that full, then the ratio will go back to a higher percentage of EAF dust in the feed.

Carter Driscoll - Capstone Investments

So would it be fair to say if I just kept my finished, your production estimate fixed at the beginning of the year and you get to full capacity on that first kiln by the end of the second quarter, that percentage should be north of 70% at least?

Bob Scherich

I think 70% is kind of the number we've been looking at. We think we can, if we can get to that get to that 70% level.

Carter Driscoll - Capstone Investments

And then just my last question for now before I turn over is just, obviously the tax loss carry forward could have at least nominally a big impact on the reported number. Do you have any potential directional guidance in terms of what your effective tax rate might be for 2010?

Bob Scherich

I think the ranges we've seen now for the past couple of years, although the 2009 kind of ramped up here at the end of the year but that 37% to 38% range I think is pretty good. We don't expect based on current market outlooks to be generating losses in 2010. So 2009 is a little unique because you are really looking at the benefit of the taxes on the carryback side.

So we're carrying all the way back to 2006 for a recovery. I think the real impact is going to be cash refund in 2010, but the effective rate against earnings, I think we're using about 38 %.

Carter Driscoll - Capstone Investments

I was looking more towards the cash refund and I guess the impact it could have for 2010 assuming you are profitable every quarter?

Bob Scherich

That's really just going to be a cash flow item since we've already recognized that benefit here in the effective rate in 2009. So, as we get the returns completed and filed, we will know what that number is, but it should be a $10 million or $12 million number as we get things completed here mid-year, could be a little bit higher.

Carter Driscoll - Capstone Investments

Okay. And then actually just one last one. There was the annual negotiation with the tire manufacturers done in the fourth quarter, can you just talk about which side had more leverage for lack of a better phrase?

Bob Scherich

The premiums came down a little bit from where they have been reflecting the competitive nature in the market, but not significantly, but slightly lower.

Operator

Next we will go to the line of Mitesh Thakkar with FBR Capital Markets.

Mitesh Thakkar - FBR Capital Markets

Quick question on the capacity improvement, you mentioned that you're kind of hoping the capacity for EAF facility to come back to more of a normalized level, what are you assuming for 2010, total US capacity utilization and I assume that 60% to 61% of that would be EAF based on your expectation?

Jim Hensler

Coming into the year, we built our plan around 65% capacity utilization and we're currently running above that level.

Mitesh Thakkar - FBR Capital Markets

That's pretty conservative. And on the second question, are there any costs associated with bringing on the sixth furnace online?

Jim Hensler

Well, most of the costs are variable costs, the raw material cost and the energy cost to run the furnace. We have to recall a few people, actually hire few people, but incrementally I think we have got 14 people that we bring back to run that furnace, so it's not a significant addition.

Mitesh Thakkar - FBR Capital Markets

Yes, I am not asking it from a variable cost perspective, I was asking it just from the start-up cost perspective?

Bob Scherich

In terms of the start-up cost, the furnaces has been sitting there, it's the typical sort of cost involved in realigning the furnace are the same kind of cost we incurred with the other furnaces. There is no significant start-up cost per se, when we put a new lining in a furnace, it typically is about a $150,000 charge but that's sort of what we do in the normal course for the other furnaces there are operating.

Mitesh Thakkar - FBR Capital Markets

It sounds good and what kind of order book outlook do you have in terms of your furnace and does that flow back into your decision for the second kiln at South Carolina?

Jim Hensler

In terms of the zinc product side, our forecast is that we will be able to support the six-furnace operation, at least through the second quarter and into the third quarter. And as I said, if our estimates are high, we may end up oscillating between sort of five-furnace operation and six-furnace operation, because we don't want to build lot of inventory. But we do think order book has picked up and will be picking up as we go into the construction season.

As it relates to Barnwell, the second kiln in Barnwell, we think we need to get steel capacity utilization up in the low 70% range before it would make sense to restart or to start up that second kiln. In terms of the second kiln, it's there. It's ready to go, it's just going to be a matter of hiring the additional people to start it up when the market conditions are favorable.

Operator

Next we will go to the line of Paul Forward with Stifel Nicolaus

Paul Forward - Stifel Nicolaus

Just on this fourth quarter, 133,000 tons of the EAF dust that you processed, do you anticipate once you open up Barnwell, the first kiln, that you will be operating that at full capacity? And if so, then where does the quarterly EAF dust processing capacity go to, let's say, beginning in the third quarter 2010 once Barnwell is up and operating?

Jim Hensler

Our feeling is we probably don't get the one kiln to full capacity right away and we think it's going to be a ramp up, doing sort of two ramp ups, there is going to be a learning curve ramp up of getting the work force upto speed in terms of running the kiln and we think that will takes us most of the second quarter and then there will be the commercial ramp up, depending upon where the market is. But if steel capacity utilization is in the high 60% area, we are going to be pretty close to running that at close to full capacity as we go into the third quarter.

Bob Scherich

I think that first kiln coming up at Rockwood will put our processing capacity to right around 600,000 annual tons.

Paul Forward - Stifel Nicolaus

So about -- so right about 150,000 a quarter then.

Jim Hensler

About 150 a quarter.

Bob Scherich

Yeah.

Paul Forward - Stifel Nicolaus

Just switching over to the fees you collected for EAF dust in the fourth quarter, I believe you said it's around $9 million. Is that right?

Bob Scherich

Yeah, they ended up averaging about $75 a ton.

Paul Forward - Stifel Nicolaus

On the kind of mid-$70 per ton, where directionally can we expect that number to go going forward as you bring on new contracts at Barnwell and everything, and we have also got something of a recovery in steel taking place? Can we expect that to trend upward over time or is that mid-$70s something that we can expect for a while?

Bob Scherich

We've had a couple of factors here during 2009 that have trended that downward. One is as we've had some of our facilities idled at times, we have to divert dust from the producers to other of our locations and you end up with a transportation cost that we end up in essence bearing with -- against the customer. So that diversion cost has reduced that average fee and you know as we brought on longer-term contracts in particular with the ESOI acquisition, those longer-term contracts had a lower average.

With that said, as we brought Rockwood back to full operation and then more importantly as we bring the first kiln online in Barnwell, we're going to be reducing that diversion cost. So near term we expect, as those things play out that the average tipping fee as reported will pick back up a little bit, not a lot. The market has been more competitive. I don't think it's going to be back to the same level it was a couple of years ago in the strong market.

Jim Hensler

I think longer term the question really hinges on whether any additional new capacity comes into the market for recycling EAF dust. If things sort of remain about where they are and the plans that we've got, I would think that those fees will be relatively stable and probably would trend up long term if new entrants come in and more capacity comes in, then that would put some pressure on it. So I think it really depends upon what goes on in external factors in the market.

Operator

Thank you. Next we'll go to the line of Eric Prouty with Canaccord Capital.

Eric Prouty - Canaccord Capital

Quick question on just a follow up from the previous one. So each kiln is rated, what, around 70 tons a year down at the new facility?

Jim Hensler

At the Barnwell? Each kiln is really going to be about 90,000 tones.

Eric Prouty - Canaccord Capital

As the new plant gets up and running, what can we expect for 2010? Will that have, I would assume, a real impact on the depreciation number, what can we expect that to ramp up to?

Bob Scherich

Yes, it certainly does pickup with the higher level of spending trying to get a sense. I think I have something for reference real quick. Got to keep from looking at things on the wrong years, but we think based on the completion of that project and our capital spending this year on the business without the INMETCO, which has a different level to it. Depreciation, we expect it to be in the $18 million level for 2010.

Eric Prouty - Canaccord Capital

With the incremental depreciation from the INMETCO on top of that?

Bob Scherich

That's right.

Eric Prouty - Canaccord Capital

And then just a similar question on the SG&A number, if we ex out the $1 million from the INMETCO acquisition we're running around a 46, 47 in the December quarter here. Were there any kind of catch up accruals or so is that at a good kind of run rate going forward again with also the addition of the INMETCO on top of that?

Bob Scherich

I think for the Horsehead only, that four to 4.5 per quarter is kind of what our plans are reflecting in the current year.

Eric Prouty - Canaccord Capital

And then actually that's it for now. Thanks a lot guys.

Operator

(Operator instructions) Our next question is from the line of Robert Howard with Prospector Partners. Please go ahead.

Robert Howard - Prospector Partners

You mentioned I guess international opportunities or potentially examined them, Greenfield opportunities for INMETCO, and I was wondering what is currently done right now? Are people just disposing in landfills or are there different recycling options that are used internationally? Or are these guys the only guys in the world that kind of do their recycling this way?

Jim Hensler

Well, there are some options that are being used but we don't believe that we look at the Asia market we think that there is a lot of material that is being recycled internally and landfill that could be more beneficially recovered if recycled our process to recover nickel and so we think that there is a lot more waste product being generated than is currently being cost effectively recycled. So we look at the market in China, Korea, Taiwan and even Japan is being target areas that we could be moving into and INMETCO has had some ongoing discussions with producers in that region that we think that we have basis for further discussions.

Robert Howard - Prospector Partners

And you guys feel that their method or process is sort of the best available technology for doing that?

Jim Hensler

It really is, it’s really the only process out there that can take the broad combination of waste streams that INMETCO is servicing and when you look at a stainless steel producer or especially steel producer and not only do they generate EAF dust but they generate grinding swarf and mill scale and pickled lime sludge and pickled liquor from their pickling limes and these are all wastes that contain nickel and to some extent they are hazardous and this process can recycle all of those and so we think it’s got a pretty good application for that market.

Robert Howard - Prospector Partners

And then just also wanted to check about the CapEx for 2010. I think you said you were talking about $25 million or so for Barnwell. Could you guys talk about the sort of maintenance level or additional CapEx for the rest of the year?

Bob Scherich

We think right now our CapEx plan is about net $35 million that's net of the $6 million new market tax credit financing it comes through, and I think our characterization of maintenance CapEx is kind of consistent with what we have said before. It’s probably in that $10 to $12 million range. So we've got completion of the Barnwell project, which is going to use net of about $20 million, additional $15 million, most of that is maintenance, there are a few cost reduction projects but probably $12 million of the maintenance.

Jim Hensler

We may spend a little bit more than that as we are now looking at INMETCO, we see some opportunities at the Ellwood City site and we're pulling that plan together which may increase the spending for expansion at that location.

Bob Scherich

Yes, my number had only the completion of Barnwell as an expansion project.

Operator

Next we'll go to the line of David Shapiro with Aegis Financial. Please go ahead.

David Shapiro - Aegis Financial

A few quick questions, what was the conversion cost in the quarter approximately on a per contained pound basis?

Bob Scherich

The combination smelter, refinery operation at Monaca was slightly under the $0.45 target, I think prior guidance at a five furnace operation is about $0.45, I think we ended up slightly under that.

David Shapiro - Aegis Financial

Okay, and that includes the upgrades for the oxide?

Bob Scherich

Yes, that's all zinc units.

David Shapiro - Aegis Financial

Okay. And then I think I missed it, what was contained exactly in that restricted cash bucket? I am trying to understand what's in that $31 million bucket there.

Bob Scherich

Yes, there's kind of three different elements there. We had about $15 million of letters of credit that we've temporarily moved those out from under a credit facility and are simply collateralizing with cash until we've got a good use to put that cash to. We added about $6 million of letters of credit with the INMETCO acquisition, so 21 of 31 roughly is our letters of credit. We had a financial assurance obligation under the ESOI acquisition where we put money in escrow to against future payments that we have to make over the next 15 or 16 years. That was about $4 million and then this $6 million of new market tax credit money that we raised during 2009 is cash that we have that is restricted for use on that project in completing the Barnwell project.

David Shapiro - Aegis Financial

Okay. All right. And then after you get the Barnwell facility up the first kiln I guess, what is the annualized production rate that you guys are anticipating for the smelter on a zinc-contained basis overall for the company? Sort of what's the run rate given the current economic environment and I guess before you start adding on that second Barnwell kiln?

Jim Hensler

Yes, the expected output from the smelter in Monaca?

David Shapiro - Aegis Financial

Right, on a zinc contained basis.

Jim Hensler

For the full year, our plan would be on a zinc basis somewhere in the 125,000 to 130,000 ton range.

David Shapiro - Aegis Financial

And that would sort of be under current market conditions or would that take into account a slower first quarter or…

Jim Hensler

Yes, that was taking into account the first quarter. So at full capacity it was six furnaces. We normally think of the capacity being 150,000 tones a year, but since we started in the first quarter on five furnaces and we're uncertain about where the end of the year would be and we think that if conditions continue to improve, they may stay at six furnaces thorough the rest of the year but our current outlook would be that we may go back to a five furnace operation by the end of the year. We're hoping that's not the case but that's just the current outlook. So for the total year, we think it's in 125,000 to 130,000 range.

Bob Scherich

And David, that's somewhat independent of Barnwell. That's driven really by the market for the finished products. Barnwell, bringing it online as we expect to see higher levels of EAF dust receipts simply affects that feed coming into this smelter; if we don't have it from EAF dust then we'd be looking to buy it economically.

David Shapiro - Aegis Financial

Has the market for the finished products been sort of tracking well with the capacity utilization of the steel industry and hence your EAF dust? Has it generally been moving in a pretty high correlation manner?

Jim Hensler

Well, on the zinc products side of things, we really have two major areas, the zinc metal and the zinc oxide. The zinc metal tends to track what's going on with the steel industry a bit and it's not a perfect correlation, but they both tended to go up kind of at the same time. The zinc oxide really doesn't follow that market. Its more related to what's going on with tire and rubber production and as people have been driving more as metal driven is increased replacement tire production is increased and so we're starting to see that pickup and plus it looks like inventories have been pretty low in that market and so there's been some inventory replenishment going on and that's caused the entire production to go up.

Operator

Now there is a follow-up from the line of Carter Driscoll with Capstone Investments. Please go ahead.

Carter Driscoll - Capstone Investments

Just getting back to the CapEx question for a second, you outlined potentially additional opportunities in INMETCO for this year. Can you talk about maybe a timeframe in understanding that there is potentially a significant expansion in INMETCO? I realize you haven't made a decision but that could be a big use of cash in terms of…

Jim Hensler

Yes, when we are doing the due diligence on INMETCO, they had an expansion plan, which would involve about $40 million investment to put in a new melting furnace and expand the capacity by about 50%. As we've vetted that plan and looked at the flow sheet in little more detail, we think that there is a different approach that we take a more incremental approach that could probably get us 30% expansion for much less money more in the order of $10 to $15 million. And so we are working toward that plan right now and putting the elements of those pieces together and we will expect to be in a position by our May Board meeting to present something to the Board regarding that expansion plan.

Carter Driscoll - Capstone Investments

Thank you. And then, Bob, since you didn't put out a balance sheet yet, what was the year ending net PP&E?

Bob Scherich

Well, that the reason we haven't put a balance sheet out yet is because we've got to consolidate the INMETCO balance sheet into our balance sheet and the INMETCO balance sheet is going to be subject to fair value accounting and purchase price allocation which we have not completed yet. So we really don't have a number but we will by the time we put the 10-Q out here at the mid month in March, but I don't have kind of the non INMETCO number in front of me. I will have to get back to you on that Carter, but it's not going to be the reported number because again we have got to consolidate in the INMETCO with it. But I can get back to you.

Operator

Thank you. And at this time speakers, there are no further questions.

Jim Hensler

Thank very much everybody and we will talk to you again next quarter.

Bob Scherich

Thank you.

Operator

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