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Horsehead Holding Corp. (NASDAQ:ZINC)

Q2 2010 Earnings Conference Call

August 9, 2010 11:00 AM ET

Executives

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

Jim Hensler – Chairman, President and CEO

Bob Scherich – VP and CFO

Analysts

Carter Driscoll – CapStone Investments

Mitesh Thakkar – FBR Capital Markets

Robert Howard – Prospector Partners

Paul Massaud – Stifel Nicolaus

Albert Sebastian – Prospect Advisors

Scott Blumenthal – Emerald Advisers

Eric Prouty – Canaccord Genuity

Operator

Welcome to the second quarter 2010 earnings conference call. (Operator instructions) As a reminder today’s conference call is being recorded.

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

Ali Alavi

Thank you. Good morning everyone, and thank you for joining us on our second quarter 2010 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 U.S. Securities and Exchange Commission, including our most recent Annual Report on Form 10-K filed on March 16, 2010, 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 second quarter 2010 results. I’ll spend a portion of my time reviewing the performance of our operations in markets during the quarter and then discuss the recent incident at our Monaca plant and its impact on the business going forward. Following my comments Bob Scherich, our CFO will review the financial results.

The second quarter’s results reflected a continued increase in demand for our products and services. Net income for the quarter was $5.7 million or $0.13 per share versus a net loss of $9.3 million or negative $0.26 per share in the second quarter of 2009. Bob will provide a detailed analysis of the quarter but the primary factors affecting the comparison of the two quarters are higher shipment volumes and higher LME zinc prices in this quarter versus the prior year quarter. We also realized the added benefit of owning INMETCO this year, which we did not owned last year.

Earnings in this quarter were off slightly versus the first quarter of this year primarily due to lower LME zinc prices and due to the fact that INMETCO took their annual outage in the second quarter which we reported on last quarter. We also incurred startup related cost at Barnwell during the quarter.

We operated our recycling facilities at full capacity during the quarter and we started the first of two kilns at the Barnwell plant in April. Our zinc smelting operation returned to full production in March and remained at six furnace operating level throughout the quarter. EAF dust receipts increased 63% compared to the prior year quarter to 139,000 tons. Domestic steel production averaged 73.2% of capacity utilization during the quarter which is up substantially from 44.6% during the prior year quarter and up slightly from 67.6% compared to the first quarter of this year.

In response to the stronger output levels from the steel industry and with the help our new kiln in Barnwell, South Carolina, we processed a record 138,000 tons of EAF dust during the quarter. Operations at Barnwell gradually ramped up during the quarter as training of crews and debugging of equipment progressed. We are completing the final work on the second kiln which we expect to startup within the next few weeks.

We spent approximately $59 million on the Barnwell project through the end of the second quarter. We continued to estimate that we’ll be able to complete the project for approximately $65 million of which $5.9 million will come from the new market tax credit financing reported on earlier. Market demand for our zinc products continued to improve this quarter. Zinc product shipments increased 29% compared with the prior year’s second quarter.

On a sequential quarter basis, comparing the second quarter of this year to the first quarter, zinc products shipments increased 10.3% to 36,860 tons. Zinc oxide shipments were up 47% from the prior year’s quarters and 11% from the first quarter of this year. While zinc metal shipments increased 16% compared to the prior year’s second quarter and 9% since the first quarter of this year.

Demand for PW zinc metals strengthened during the quarter as we entered into more active construction season and as general economic conditions improved slightly and zinc oxide demand strengthened primarily of tire producers as we entered the quarter.

Moving on to discuss the zinc pricing environment, the all new zinc price average $0.92 per pound during the quarter which was 37% higher than the prior year quarter at $0.67 per pound but 12% lower than the first quarter of 2010 average of a $1.04. Zinc prices moved lower as we exited the second quarter but have recently rebounded and are trading in the mid $0.90 per pound range. As reported earlier, we purchased put options for 2011 at a strike price of $0.65 per pound on about 25% of our requirements during the second quarter. With the recent rebound in the zinc prices, we’ve restarted buying put options to complete our requirements for the first half of next year.

The realized premiums on zinc metal averaged about $0.03 during the quarter which is about a penny higher than the first quarter of 2010. Transactional premiums are increasingly slightly reflecting a slight tightening of supply in the market. Realized premiums for zinc oxide in the quarter were approximately $0.07 which is up significantly from the first quarter average of minus $0.03. The second quarter realized premium was helped by the lag effect in the contractual premiums with tire producers due to the decline in the LME price during the quarter.

Spot premiums on zinc oxide increased during the quarter and Horsehead announced increase in spot prices in July. We are pleased with the performance in INMETCO during the second quarter. INMETCO’S shipments of 6,000 tons of nickel-bearing remelt alloy were expected to be down from the first quarter level of 7,000 tons due to the planned annual maintenance outage. INMETCO took a 13 day outage on their submerged arc furnace and a 19 day outage on their rotary hearth furnace in May, spending a downtime during the outage were in line with expectations.

Other than the downtime taken for the outage INMETCO operated at full capacity. Tolling receipts in the second quarter were up very slightly compared with the first quarter reflecting steady output by stainless steel producers. Nickel prices averaged $10.15 a pound during the second quarter, which is up 12% from the first quarter of this year. Work on phase I of the expansion program at INMETCO is underway. In May the Board approved a $2 million expenditure for the first of a multiphase expansion program. This first phase is expected to increase capacity at the Elwood City operation by 15%.

We are waiting approvals from the environmental authorities before we can proceed with some aspects of this project. We expect to start realizing benefits from this project beginning early next year. I’d now like to move onto to discuss the recent incident at the Monaca plant and its impact on the business going forward.

First, let me say that our thoughts and prayers continue to go out to the family and friends of Jim Taylor and Corey Keller, who were fatally injured in this incident. As we previously announced an accident occurred at the company’s Monaca, PA facility on July 22 which resulted in two fatalities in the plants zinc oxide refining facility. The zinc refinery remained shutdown pending completion of an investigation and assessment of the damage. Teams from OSHA and the Chemical Safety Board are investigating the cause and the circumstances that may have contributed to the occurrence of this incident.

Horsehead is cooperating fully with these investigations. In addition the company’s insurance underwriters and the company are conducting our own investigations with the assistance of independent experts into the cause and the circumstances that contributed to the incident. The United Steel Workers union is also participating in these investigations. The explosion not only severely damaged one of the 10 operating columns in the refinery and its surrounding infrastructure, it also cut power, train access and process control capability for the remaining columns in the refining facility.

As a result each of the 10 columns used to produce zinc oxide and refine zinc metal in the refining facility must be rebuild before production can be safely restarted using these columns. The lead time for critical components needed to rebuild these columns, the columns have been expedited and materials will begin arriving in September through December of this year.

The accident investigation is ongoing and may take several weeks to complete. Some redesign of the process to implement preventive and protective measures is anticipated which will determine when the rebuilding process can actually begin. In September, we will be in a position to begin restarting two of our four Larvik furnaces which have been idled for the past several months to begin producing some zinc oxide for our customers.

We should have all four operating in October. The total capacity of the Larvik furnaces is about 1,000 tons per month. Prior to this incident we would have expected to ship approximately 6,000 tons per month of zinc oxide and 1,000 tons per month of refined zinc metal furnace facility during the third and fourth quarters. We’re also getting assistance from a limited number of competitors who are supplying us with a small amount of oxide to help us support our customers.

Restoration of production capabilities in our refining facility will take place in stages as we rebuild and restart columns located farthest from the site of the explosion first, followed by the other columns as soon as the column rebuilds and safety measures can be completed. It is estimated that production capabilities will not be fully restored until early next year. In the mean time until the full extent and timing of the repairs is known, we’ve decided that all, to keep all employees at the Monaca facility on the payroll and continue to receive benefits.

We will reevaluate this position when we have a clear timeline for the recovery plan in the refining facility. While the smelting facility and other operations, the Monaca plant remain active, they are operating at a reduced rate. The zinc smelter produces zinc metal for both our PW zinc product line and our refining facility and with the refining facilities shutdown we were forced to reduce production at the smelter. The smelting facility is currently operating five of its six furnaces at slightly reduced output per furnace.

We expect to offset a portion of the lost revenue from zinc oxide with additional PW metal sales. The operating level of the smelter will be adjusted based on market conditions and as operations at the zinc refining facility are restarted. We are pursuing recovery of the cost of repairs and the lost profit from our zinc oxide and refined zinc metal business as a result of this incident under the company’s business interruption and property insurance.

And while the full financial impact of this incident is not known at this time, absent insurance recoveries earnings will be impaired for the remainder of the year. We remain committed to protecting the health and safety of our employees as well as any contractors or visitors entering our facilities. Horsehead and the facilities prior owners have operated the Monaca plant for over 80 years and operate the world’s largest refining facility for the production of zinc oxide.

Our commitment to safety is extensive including regular safety training and safety communications for all of our employees, increased investment in safety related resources and equipment and rigorous investigation of all safety incidents with prompt follow-up. The result has been a steady reduction in the number of accidents in our facilities since Horsehead took over.

This incident is a start of reminder that we must continue our focus on workplace safety as a core value of the business.

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

Bob Scherich

Thanks, Jim. For the second quarter, net earnings were $5.7 million or $0.13 per share, INMETCO was about $0.03 per share for the second quarter versus $0.06 for the first quarter. The difference is primarily due to their annual maintenance outage as Jim discussed. Horsehead’s zinc business had flat earnings of $0.10 per share for both the first and second quarters.

Detailed quarter’s performance reflects an increase in revenue of $51 million or a 107% compared to the prior year quarter. The increase was a result of an increase in the price realization of $22 million and $15.5 million affect of higher shipments. Current quarter’s revenues included a $1.2 million non-cash gain due to hedges compared to a $1.9 million charge in the prior year quarter.

INMETCO added a $11.3 million towards sales in the second quarter. The average sales price realization for zinc products on a zinc contained basis was $1.08 per pound or $0.16 per pound above the average LME price for the quarter compared to $0.75 per pound or $0.08 above the average LME price for the prior year quarter. on a sequential quarter basis, the average sales price realized for zinc products decreased $0.76 per pound on a zinc contained basis, as the LME zinc price decreased $0.12, reflecting primarily the lag effect associated with our zinc oxide products.

Sales of zinc metal increased versus the prior year quarter, $12.6 million or 56% to $35 million for the quarter. This increase reflected primarily a $9 million increase in price realization and a $3.6 million increase in sales volume. On a sequential quarter basis, sales of zinc metal decreased $1 million due to the lower LME price.

Sales of zinc oxide increased $19 million versus the prior year quarter, or a 119% to $36 million. This increase reflected $11.9 million increase in price and a $7.6 million increase in volume. On a sequential quarter basis, sales of zinc oxide increased $3 million.

Revenues from EAF’s dust recycling increased $3.5 million for the quarter, or 53%, to $10.1 million, reflecting higher volume of receipts and reduced average price realization, due primarily to additional transportation costs associated with diverting dust shipments and contracts acquired during the past 12 months. On a sequential quarter basis, revenue from EAF dust increased approximately $0.7 million.

INMETCO’s sales of $11.3 million for the second quarter compared to $14.4 million for the first quarter reflected higher commodity prices offset by lower production and shipment levels versus the first quarter. Cost of sales increased 48%, or $26 million. The increase included $7.6 million related to INMETCO. The balance of the increase was primarily attributable to the higher volume of shipments of finished products. A higher proportion of purchase feeds, and an increase in transportation cost associated with the higher volume of the EAF dust receipts.

EAF dust based feeds made up 61% of our feed mix in the quarter versus 66% for the prior year quarter and 65% for the first quarter of 2010. This lower percentage reflects the move to a six furnace operation at the smelter in March, of the increased level of the EAF dust processed occurred later in the quarter with the startup of Barnwell.

As a result, increased smelter production was supported with purchase feeds. Purchase feeds consumed for the quarter had an average cost of 64% of the LME zinc price for the quarter reflecting the lag effect of the LME price decline during the quarter. smelter and refinery conversion cost per ton were 14% lower than the prior year quarter, while recycling conversion costs per ton was 7% lower. These improvements in conversion cost were due primarily to improved productivity and the effect of cost reduction initiatives implemented over the past 12 months.

SG&A expenses were $1 million higher for the quarter with INMETCO adding $0.07 million. Our effective tax rate was $39.5% for the quarter as we increased our estimated rate to $37.6 for the year reflecting primarily the effect of lower earnings projections related to the reduced outlook for the zinc price taken at the end of the quarter. This rate change had about a $0.01 negative effect on the quarter’s earnings.

Cash provided by operating activities was $2.5 million for the quarter as working capital requirements increased with the higher level of production. We used $13 million of cash for investing activities, primarily capital spending related to Barnwell. We ended the quarter with a $114 million of cash of which $31 million was restricted. Total debt was $0.3 million at the end of the quarter.

In closing, the profile of the second quarter reflected a decline in LME zinc price levels and higher production and shipments on the zinc side of the business. When compared to the first quarter, this increase in volume was substantially offset by the reduced LME price and the higher proportion of purchase fees. Transportation costs surrounding EAF dust continued to be at higher than normal as receipts continued at a level higher than anticipated coming into the year.

Earnings for the zinc business were essentially flat on a sequential quarter basis, while INMETCO was down about $0.03 due to their planned outage. From an outlook perspective, reduced production levels will negatively affect earnings for the balance of the year. While we have business interruption coverage, there is no certainty to the timing of insurance reimbursement.

Generally expected recoveries are not recorded until some range of agreement has been reached with the insurers. In theory we should recover what we have lost net of deductibles but the timing may not match directly with the period of loss. With insurance in place and considering the steps we are taking, we do not expect that this recovery will have a major affect on our liquidity. Given the uncertainty of timing of the reconstruction plan, at this point we are not in a position to give sound guidance for the outlook for Q3 and Q4.

We should be in a position to provide some guidance before the end of the quarter as the reconstruction schedule becomes more clear.

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 our primary focus at this time is to understand the cause of the incident at our Monaca facility which took the lives of two of our fellow workers. Furthermore we’re working on a recovery plan for our zinc oxide and refined metal business that assures the safety of our workers and meets the needs of our customers. We’re also pursuing financial recovery for the property damage and lost profit with our insurers with our insurance providers from this incident.

In addition to our focus on the Monaca incident, we are not losing sight of other opportunities in the business. We’re excited about the plant startup of the second kiln in Barnwell in a few weeks and the completion of what has been a very significant project for our EAF dust recycling business. Steel industry output continues to be good and we believe the additional capacity we will have in the Southeastern part of the US will allows us to serve additional customers in that region.

We’re also pleased with the progress being made on the expansion projects in INMETCO. In addition we continue to pursue acquisition opportunities that leverage our capabilities in INMETCO, expand our environmental services business and widen our global reach.

Thank you and we’ll now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will begin with line of Carter Driscoll with Capstone Investments. Please go ahead.

Carter Driscoll – CapStone Investments

Good morning Jim, good morning, Bob.

Bob Scherich

Good morning.

Carter Driscoll – CapStone Investments

I wanted just to drill down a little bit. Obviously you don’t have a lot of information at this time regarding financial impact from the tragic accident, but maybe you could help us understand the mechanics of how you believe it’s going to play out. So no necessarily monetary estimation, but as the way I understood it there is potential for some type of receivable to be put on the balance sheet once you come to an understanding with the insurance group and maybe your first estimation of the timing of how that might be pulled through the financial statements.

Jim Hensler

Yes well let me speak to some of the mechanics of how the reconstruction might take place. We have 10 of these columns we have to rebuild and typically we only keep on hand supplies to rebuild two or three a time, because we typically don’t have to rebuild all 10. And so we’ve expedited the delivery of those components. We expect to have, we expect to receive those over a period of time, so we would have materials that will allow us to begin rebuilding some columns as early as September, but we wouldn’t have all the materials until sometime in December. So theoretically, we could have everything rebuilt by the end of this year. However we’re not going to be rebuilding these in the normal way that we have rebuilt them in the past as this accident investigation proceeds, we can contemplate some changes to the design of that facility and until we get those engineering changes completed and implemented, we won’t be a position to really rebuilt or restart the columns, so that could push out the starting point of this process that I described.

To try to mitigate that, we will restart the Larvik furnaces that we had which we have had idled for several quarters, that will give us a small portion of our production capability back. We’re also going to get some oxide form our competitors. So it will have enough oxide in the short term to meet about a third of our customer demand, but won’t be able to really get back to 100% until we get this rebuilding process under way. We’re going to run our smelter in such a that we produce excess PW metal and we expect to be able to make five furnaces full of PW metal by the time we get the casting line up and running in the refinery which will give us enough casting capacity that we can produce about 300 tons to 350 tons a day of PW metal.

We won’t be in acquisition until about early September. So that’s the mechanics of what we’re going to do operationally and Bob can comment on the financial recovery.

Bob Scherich

Yes, from an insurance perspective, really the business interruption insurance should major the difference between what would reasonably have been expected to be the results, the actual results versus what we now end up with as results on a monthly basis. So that’s kind of lead us down the path of working with the insurers, develop that measurement really after each month end and arrive at a approach towards that potential recovery. And once we do that and get into some level of indication agreement with the insurance companies, if we’ve got something from their end, we would be able to at that point start to record the receivable, whether we received the funds or not.

But absent working through that process and I think the first month or two of it will take a little bit of extra time to develop the methodology with the insurers. We may in fact have the actual losses and not be able to report the recoveries until we kind of reached that preliminary conclusion with the insurers. So no certainty here as we look at third quarter for instance, that we’ll be in that position by the end of the quarter, although that’s what we’re going to attempt to do.

Carter Driscoll – CapStone Investments

Jim, you mentioned that potentially just with the engineering plans changing around the way or at least perhaps the construction of the rebuild for the columns. Is that in response to perhaps you figuring out what actually caused the explosion or is this just – is that separate from what you believe may have caused it?

Jim Hensler

Well in fact we’re looking at some things that we think would be additional preventive measures to prevent this from happening in the future and also protective measures as well, so that if something were to happen in the future, it would protect our employees. So they’re kind of a combination of those things. were the accident investigation is still underway and we’re still working to determine the cause, but we have come to some conclusions about things we can do to make the operations safe and we’ll begin to implement.

Carter Driscoll – CapStone Investments

Just shifting gears a little bit the first phase of the INMETCO expansion when do you, first quarter of ‘011 have it completed? Just give us a little bit more color on how that process is going to unfold.

Jim Hensler

There are two major projects that fall under the first phase. The one part of it is the bulk addition system that we would expect to have in place by the end of the year. So we expect to see some benefits from that beginning of next year. The other piece of it is we call a post combustion lance that we’re going to be putting into the submerged arc furnace which will improve the productivity of the furnace. We’re awaiting environmental approval on that.

Once we get that environmental approval, the installation time is relatively short but it may take us three to six months to get through that approval process. So we would expect that project to be completed late first quarter of next year.

Carter Driscoll – CapStone Investments

And then, just lastly before I pass it on, you mentioned the liquidity you believe is sufficient, now is that sufficient to get through the rebuild process or does that include any potential M&A like you’ve set at least in your mind aside some portion of that for any potential opportunity that might come along?

Bob Scherich

Yes our view is that the M&A opportunities we’re looking at we’ve got the liquidity to be able to do this.

Carter Driscoll – Capstone Investments

Okay, thank you gentlemen.

Operator

Thank you and our next question comes from Mitesh Thakkar from FBR Capital Markets, your line is open.

Mitesh Thakkar – FBR Capital Markets

Good morning.

Jim Hensler

Good morning.

Bob Scherich

Good morning.

Mitesh Thakkar – FBR Capital Markets

First of all my condolences for those who were injured in the accident, but just starting on the Larvik side, why were those Larvik furnaces idled in the first place?

Jim Hensler

Well the Larviks, when we got into the recession in late 2008, 2009 and zinc oxide demand dropped, the Larviks were higher cost operating units and so we cut those back first. We haven’t had volume come back to levels where we needed to bring them back online, because we had enough capacity in our refining facility. But now that we are in the refining facility we can rely on restarting the Larviks.

Mitesh Thakkar – FBR Capital Markets

Okay, and is there like if these – if the Larvik furnaces on the high cost furnaces and you have the business interruption insurance which covers any lost profits. So when you restart these furnaces, wouldn’t you – would you get a kind of credit for the furnaces which are not started or these things would be getting backed out?

Bob Scherich

Yes exactly the restart of the Larvik, we believe will do two things, one it’ll let us continue to provide some service to our customers, but it will also help to mitigate some of what would have been the total losses involved with the shutdown of the refinery. So from the insurer’s perspective, Larvik startup should be looked at something to help mitigate losses under the insurance plan.

Jim Hensler

And we believe the additional cost is part of what we’ll be able to submit as a claim.

Mitesh Thakkar – FBR Capital Markets

You would be able to submit it to claim?

Bob Scherich

Yes.

Mitesh Thakkar – FBR Capital Markets

Yes, that’s good. And so I mean, can you typically comment on the timeline you are looking for insurance recovery, I know it’s difficult for you to give an exact time frame, but in these kind of situations, if you can just give like a tentative timeline that will be helpful.

Jim Hensler

It’s very difficult to say, we’re actively working on it. We’ve engaged resources on our behalf, the insurance companies have reacted very quickly and have adjusters assigned immediately. So we’re working together and meeting to kind of develop that methodology, what I believe will be the kind of the format here is that once we get a full month host incident so the month of August basically, we will work with the insurers to kind of layout here is the actual results for August versus what would have been reasonably expected and that becomes a basis for a claim and we would expect to start submitting monthly claims at that point.

The first month in working through that methodology will take a little longer and you don’t know what the losses until you have actual results. So you could attempt to project and forecast but we again don’t know exact timing of the restarts of when volume starts coming back on the refinery. So at this point it would kind of be a guess but, we expect as we get through third quarter, we will have work through the beginning points of that claim submission and how they’re going to look at it and how we look at it and hopefully be able to come up with some good estimates for the third quarter. From a GAAP standpoint, whether we can record that or not is going to be highly dependent on whether we have some formal recognition at least of a range from the insurers.

So if they haven’t concluded on that and be able to give us something as a good indication then we may not be able to record anything until they do.

Mitesh Thakkar – FBR Capital Markets

Okay, and when you look at this column refurbishment, is there something which you can do to speed up the process, I know that is based on preliminary assessment you believe that the columns will need to be refurbished, but just from a point of view of that maybe once you would get your assessment done maybe there are designing changes or safety changes which you can make by adding teams or supplementing the resources or something in which you can speed up the process of recovery which right now you believe that full recovery could be in the beginning of 2011, could you speed it up to maybe like a fourth quarter. And what do you need to do for it?

Jim Hensler

Well we’re working, once the reconstruction plan gets clear we’re going to work to expedite that as much as possible. The limiting factor one limiting factor is when we will receive the components that we use in rebuilding these columns and we have already expedited those components and so we should have the last set of components for tray rebuilds in late November or early December. So we’ve moved that up a couple of months from where the original schedule was. So getting the last columns online the early as possible would be December. So it is possible that we could get everything running by the end of the year but at this point in time, we’re not really in a position to have a definitive schedule.

Mitesh Thakkar – FBR Capital Markets

Okay fair enough. Thank you, thank you very much. That’s all my questions for now.

Jim Hensler

Thanks.

Operator

Thank you. Our next question comes from the line of Robert Howard from Prospector. Your line is open.

Robert Howard – Prospector Partners

Good morning. I had a couple things here, one thing I’ve been hearing a lot from utility companies, there has been a lot of talk about the new proposed clean air proposals and the potential that that would force a lot of smaller coal fired power plants to close, I was wondering sort of if you guys have looked at the potential of some of these proposals on your plant and what options you’d have or if it would impact you at all?

Jim Hensler

Yes, we’ve been monitoring that, we’re in a unique somewhat unique situation given that we’re a captive power plant is feeding an existing operation. We do sell some incremental power on the grid and much of what’s been discussed regarding utility environmental Reg changes don’t affect us in the same way they would in public utility.

So we’re not aware anything specifically on the horizon that we see as a major issue for our power plant, but we monitor it fairly closely.

Robert Howard – Prospector Partners

Okay, great. Then when you’re talking about rebuilding the columns at the refinery and potential design changes obviously safety is, the safety aspects would be important to that. But are there also potential adjustments that would lower the cost of production there? It maybe you’ve had an idea, you just haven’t had a chance and now is the chance to kind of do a whole widespread adjustment that might be able to lower production costs, anything like that as well?

Bob Scherich

Well nothing in this immediate recovery plan. There are some changes that we’ve thought about from a longer term perspective but and we’re still considering those but those are not things we could implement in the time period we’re talking about.

Robert Howard – Prospector Partners

Okay.

Jim Hensler

But we should also mention that we rebuild individual columns on an annual basis inside of a year so in a typical normal operation we’re doing five or six rebuilds a year. What we don’t do is build out 10 of them at once.

Robert Howard – Prospector Partners

Sure.

Jim Hensler

So as we do those year in and year out, there has been lots of improvements constantly interjected into the process.

Robert Howard – Prospector Partners

Great, and lastly just wondered what your guys thoughts might be on the zinc market in general. We’ve had a nice little recovery the last couple weeks. Zinc prices have are going up, but if you look at the LME stocks and those are have also been going up considerably and so just sort of wondering what you might have thoughts on the market there in general.

Jim Hensler

Well we like the recent trend in pricing and it looks like all commodities have had some lift here recently, and looking at the LME inventories and the exchange inventories in general, it’s hard to get a good understanding based upon that and I think we do have a sort of an usual situation where you have marketing contango here for a period of time and you have relatively low interest rates and so in some cases it made sense for producers to dismove material into warehouses just to be able to get some financial benefit off of that contango. So it’s not necessarily a reflection of a net increase in inventories.

It looks to me like the market is starting to get a little bit more imbalance and the growth of inventories has slowed down which I think is positive. I think ultimately what happens over the zinc prices are going to be determined by what happens with global growth in the steel output and I think everybody is sort of waiting to see what’s going to be happening with GDP growth going forward and I think those are going to be some of the factors that really drive what ultimately happens with the zinc prices.

Robert Howard – Prospector Partners

Okay, great. Thanks.

Operator

Thank you. Our next question comes from the line of Paul Massaud (ph) from Stifel Nicolaus. Your line is open.

Paul Massaud – Stifel Nicolaus

Good morning guys.

Jim Hensler

Good morning.

Paul Massaud – Stifel Nicolaus

Just a quick or just a question on Larvik. I was hoping you guys could remind us of some of the details of that plant and how it compares to Monaca. Whether or not it contains both smelting and refining facilities or if it is just a refining facility, and if it is just a refining facility where, if the feedstock was, if you were expecting to transport some feedstock from the smelting furnaces at Monaca to Larvik. And then building on that if you could just talk a little bit more specifically about the cost differences in producing zinc oxide between the two facilities if for example they were both running at full capacity.

Jim Hensler

Well just to explain that the difference in the technology. In a refining facility that we have that’s now done, we have distillation columns there, we’re removing primarily lead and other impurities from the zinc that comes out of the smelter to produce high purity zinc oxide. In the Larvik furnaces, there is no refining capability. All of basically we have there is a melter, we melt and boil zinc vapor and then we convert it into zinc oxide.

The so the raw materials that come in have to be pure than what we can take into the distillation causes is refinery. The actual conversion cost is about the same refinery versus Larvik, but the difference is in the raw material cost, in the Larvik we will be using a combination of PW metal that comes from our smelter and special high grade metal so we can balance the composition to keep the impurity levels low enough to meet the zinc oxide specification, whereas in the refinery we are able to bring in 100% PW metal and more than PW metal so that we don’t have we have lower raw material cost because of that.

Our plan is that we’ll probably use a like a 50-50 mixture of PW in special high grade. So we’ll have to go out and buy the special high grade at market prices to be able to feed the Larvik. We may find that we can use less special high grade to meet the specifications but as we start going in a plant.

Paul Massaud – Stifel Nicolaus

Okay, thanks for clearing that up. I appreciate it. And then just shifting gears a little bit I know in the past there was the goal was to do acquisitions similar to INMETCO with some of the funds that were raised last year. But since then I think other opportunities, possibly Greenfield expansions or JVs have popped up, I mean could you talk about your perspective on that. Where the preference is, I mean whether or not your preferences have shifted from acquisition to possibly new Greenfield projects and?

Jim Hensler

We’re really looking in three areas, one area is acquisitions that are compatible with INMETCO. We think INMETCO has some nice leverage both with their battery recycling business as well as their nickel recycling businesses. So we’re looking for businesses that have a good fit with that model and there are few out there. The second area, we’re looking at is further diversification opportunities and businesses that fit the environmental service model that we’re looking at but are not in zinc or not necessarily in the same business that INMETCO is in and we’ve got a couple of opportunities there that we are considering and then the third would be expansion opportunities using the INMETCO technology and we’ve been looking primarily outside the US for that and we are just about lining up a study looking at the Asian market as and looking at potential sites over there that might be good candidates INMETCO type of processing facility of service stainless steel producers in that region.

So we’re working down all three of those paths, I wouldn’t say that one is more important than the other right now. We think all the three offer some nice return opportunities and it becomes a matter of really which of those three areas develops the quickest.

Paul Massaud – Stifel Nicolaus

Thanks.

Operator

Thank you. Our next question comes from the line of Albert Sebastian from Prospect Advisors. Your line is open.

Albert Sebastian – Prospect Advisors

Good morning gentlemen.

Jim Hensler

Good morning.

Bob Scherich

Good morning.

Albert Sebastian – Prospect Advisors

A couple questions, first can you give some guidance on CapEx for the remainder of this year and if you have some range or guidance for next year? And second, just an update on the tax refund situation.

Bob Scherich

Yes maybe the latter first, that’s a quicker one. We did file our Federal tax return at the end of the second quarter and have subsequently filed for refund carry back of prior years. So we anticipate at this point, most likely in the fourth quarter, it could be late third quarter but during the fourth quarter, we do expect to get refund of prior year taxes. We think that number I think as we said before is I think we said $12 million to $15 million. We do expect to fully recover that level here later this year. So we expected to be at current year event, so.

From a capital spending standpoint, I think through the first six months we had spent about $25 million, our plan this year was right around $45 million and as we complete the Barnwell project and start the expansion work at INMETCO I think that’s really the balance. So I think we’re still looking at a $45 plan generally as we set today.

Jim Hensler

No we’ll have some additional expenses relatively to this rebuild that will fall under a capital item perhaps but and we may spend some of that this year but expect to get that recovered under our property insurance.

Albert Sebastian – Prospect Advisors

And how about for next year for CapEx?

Bob Scherich

Well it really depends on what projects we come up with. We think the normal maintenance CapEx is probably in that $15 million to $17 million range including the INMETCO. We do expect to be moving into Phase II wrapping up Phase I and moving into Phase II of expansion of the INMETCO. So don’t have a definitive number but that underlined maintenance CapEx of about $15 million is the starting point.

Albert Sebastian – Prospect Advisors

Thank you.

Jim Hensler

Thank you.

Operator

Thank you. And our next question comes from the line of Scott Blumenthal from Emerald Advisers. Your line is open.

Scott Blumenthal – Emerald Advisers

Good morning, Jim. Good morning, Bob.

Bob Scherich

Good morning.

Jim Hensler

Good morning.

Scott Blumenthal – Emerald Advisers Jim, I think that you mentioned it might have been Bob, one of you mentioned that materials are going to be delivered at the end of the quarter in order to start rebuilding the columns. Can you talk about how – what’s the lead time on those materials? How much you would be able to stage since you tend to rebuild I guess, a couple of columns no more than a couple of columns at one time, and the availability of those materials?

Jim Hensler

Yes the primary materials that are going to set the pace are the silicon carbide trays that we use in the distillation column and, we there are two supplier of those trays in the world that we buy from and we had number of orders on their books prior to this incident that we’ve now had to order additional materials but the lead times were out several months on the orders that we had in placed, but we should begin receiving some of those materials in September for a couple of columns and then we’ll get essentially a column set, enough column sets between September and December to build all the columns out and they will come in basically every two to three weeks.

We’re going to be airfreighting them in to cut down on the delivery time as much as possible. They’re coming in from outside the US and as we get them to extend we’re a position to rebuild the column of that time based upon the other things I mentioned, the other safety modifications we are contemplating then we’ll be positioned from a tier down and so on standpoint to immediately go in and start rebuilding those columns.

Scott Blumenthal – Emerald Advisers

Okay, so all other things being equal, you have your safety plans set, you have the go ahead from the OSHA and the unions and you’re comfortable with where you are. How long from starting to build the column until, you could have the column completely built and ready to start it?

Jim Hensler

Well from the time, assuming we’ve with all the tier down which would be a good assumption in this case, by the time the materials come in take us about two weeks to build, rebuild the column and then we have about 10 day very gradual heat up process, we have to do before we can begin to produce oxide and fill it with metal. So it’s about a three week – three, 3.5 week process.

Scott Blumenthal – Emerald Advisers

Okay, that’s really helpful. And to follow up on one of the previous caller’s questions the Larviks are in Monaca, correct?

Jim Hensler

Yes they are.

Scott Blumenthal – Emerald Advisers

Okay, and you mentioned Jim, I think that they deliver about one-sixth, if you had them running at full capacity you could deliver about one-sixth that you would from your 10 columns right?

Jim Hensler

Correct, yes we get about 1000 tons a month out of Larvik.

Scott Blumenthal – Emerald Advisers

Okay, and so switching gears to that side, you’re going to be doing some build or some additional capacity improvements or bringing up some additional casting capacity in order to make I guess, more metal. And how long do you think that’s going to take and?

Jim Hensler

Yes, we’re constraining right now by casting capacity, the smelter has enough capacity to cast 260 tons to 300 tons a day of metal. We have a casting line in the refinery which has been idled as well by this incident and we think we can get in and get that restarted sometime in mid September, and so that will give us roughly another 50 tons a day of casting capacity. So we should be able to get into the 300 to 350 tons a day which is equivalent to a good five furnace operation in the smelter, but that will start to gradually pick up over the next four to six weeks.

Scott Blumenthal – Emerald Advisers

Okay, so are you ever going to, do you see a situation in which you would need more casting capacity then to consume the five furnaces or do you have agreements with outside processors maybe some of your competitors for some of the off take to take the balance of that when you not able to cast?

Jim Hensler

Yes, if we can’t cast that, we can’t produce it. So we will be limited by that casting capacity but frankly I think there will be market limitation in how much metal we could sell even if we have the casting capacity, we think that we can get up to 350 tons a day that’s going to be a good level of output for us.

Scott Blumenthal – Emerald Advisers

Understood, and just one, I guess one technical question. To feed the Larvik you have to cast it first, you can’t put liquid metal directly in there?

Jim Hensler

Yes, I mean just logistics, that department as we can’t get liquid metal over in there.

Scott Blumenthal – Emerald Advisers

Got it, okay. Well, thank you.

Operator

Thank you. Our next question comes from the line of Eric Prouty from Canaccord. Your line is open.

Eric Prouty – Canaccord Genuity

Thank you, just a question more on the EAF dust side of the business. Is there going to be any issues there with the lack of ability now that produce the oxide or can you take in and process as much dust as your customers need you to?

Jim Hensler

Yes, there is no limitation there, we’ll – we can consume all the wells oxide we’ve produced out of the recycling side of the business and we can use that to produce PW metal. So with five furnaces operating we’ll have a higher percentage of internal feeds that will feed the smelter.

Eric Prouty – Canaccord Genuity

Great, and your expectations on bringing up the second kiln. Do you believe that current utilization rates out of the steel industry, will that kiln be fully utilized, partially utilized?

Jim Hensler

Well I think for the next several months, it will be fully utilized we’ve got fairly large backload of material that we need to process and then we’re also hoping to gain some additional business in that region.

So depending upon what happens in terms of further market growth and working down through the backlog and depending on where the steel industry, capacity utilization is we would expect, we certainly be expect to be pretty full through the end of the year and next year it depends upon all of these other things come together as I mentioned.

Eric Prouty – Canaccord Genuity

Okay, great. Thank you.

Operator

Thank you. Our will go through line of Carter Driscoll from CapStone. Your line is open.

Carter Driscoll – CapStone Investments

Thanks, just a quick follow-up guys. If I understand it correctly the property insurance deductible is about $0.5 million. Is that, I’m assuming there is a much more complex calculation to figure out what the exposure for the business interruption side is, maybe you could help us frame that let’s say $30 million in EBITDA was your back half estimation. What will your exposure be or is that the proper way to think about it?

Bob Scherich

You’re correct, the $0.5 million is really on the physical damages and repairs related to that, on the business interruption its seven days average daily value that average daily value will be the difference between our actual results off of the Monaca facility versus what the results would have been estimated out without the incident and then you divide that by the days, the number of days that the in essence you have reduced production. So right now we don’t know the denominator as to how many days and frankly, we don’t know exactly what the difference between what the actual is going to be and what it would have been expected to be. So it’s somewhat, yes it’s a really a number that you can’t arrive at yet. We don’t think it’s going to be significant, it’s going to be in relation to the total loss anyway.

So there will be some deductible there again seven days worth of that but we expect as Jim said to be in an impaired production mode through the balance of the year. So we’re going to have an excess of 50 days of reduced output.

Carter Driscoll – CapStone Investments

And when would those seven days be applied, like the beginning of the period of the impairment?

Bob Scherich

It’s the average daily value, I mean we haven’t arrived at this conclusion with the confirmed with insurers but it’s certainly reads as the average during the period. So you can take the entire period and what the calculated loss is and arrive at an average daily value.

Carter Driscoll – CapStone Investments

Is it possible you might have that before the end of the quarter?

Bob Scherich

We won’t – still won’t know how many days to divide by.

Carter Driscoll – CapStone Investments

All right.

Bob Scherich

But we’ll be developing an approach on that before the end of the quarter.

Carter Driscoll – CapStone Investments

Okay, thanks gentlemen.

Operator

Thank you. And at this time, I’m showing no further questions, please continue.

Jim Hensler

Okay, well thank you very much and we will be speaking with you at the end of the third quarter and hopefully be in a position to give you some update before the end of the quarter on our recovery plan. Thanks very much.

Operator

Thank you and ladies and gentlemen, that does conclude your conference call for today. Thank you for your participating and for using AT&T Executive Teleconference service. You may now disconnect.

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Source: Horsehead Holding Corp. Q2 2010 Earnings Call Transcript
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