Horsehead Holding CEO Discusses Q3 2010 Results - Earnings Call Transcript

Nov. 5.10 | About: Horsehead Holding (ZINCQ)

Horsehead Holding Corp. (ZINC) Q3 2010 Earnings Call November 5, 2010 11:00 AM ET

Executives

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

Jim Hensler - President and CEO

Bob Scherich - CFO

Analysts

Carter Driscoll - CapStone Investments

Eric Prouty - Canaccord

Paul Forward - Stifel Nicolaus

Scott Blumenthal - Emerald Advisers

Steve Riccio - Buyside Research

Mitesh Thakkar - FBR Capital Markets

Operator

Welcome to the Third Quarter 2010 Earnings Conference Call. (Operator instructions) As a reminder this conference is being recorded.

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

Ali Alavi

Good morning everyone, and thank you for joining us on our third 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 US 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

I would like to welcome you to this conference call to discuss the third quarter 2010 results. I will review the performance of our operations and markets during the quarter, while Bob Scherich, our CFO will review the financial results.

Although demand for our products and services was strong and the commodity price have strengthened considerably during the quarter. Our financial results were overshadowed by the impact of the incident, which occurred in the Monaca refinery on July 22nd, which fatally injured two employees and temporarily shutdown our production capability for zinc oxide and refined zinc metal.

The net loss for the quarter was $2.4 million or negative $0.05 per share versus the net loss of $3.6 million or negative $0.10 per share in the third quarter of 2009. As a result of the incident, zinc product production was 25% less than expected and earnings per share by were reduced by approximately $0.13.

The quarter was helped by positive net income from INMETCO, which was not in our results in the prior year quarter. We were also pleased to have started up the second kiln at our new Barnwell facility in September. Bob Scherich will provide detailed analysis of the quarter.

The smelting facility at Monaca operated at a reduced rate during the quarter, as we were forced to idle one of our six furnaces due to the refinery shutdown because we did not have sufficient downstream capacity to handle these additional metals. We were able to offset a portion of lost revenue from zinc oxide and refined zinc metal with additional sales of prime western zinc and by resuming zinc oxide production in our Larvik furnaces.

I am pleased with the very thorough investigation of this incident by our team and by the rapid response of our engineers and operators to design and implement enhanced safety measures in the refinery.

It is estimated that the cost of the repairs and safety enhancements combined with the restart cost of Larvik furnaces will be approximately $13 million. I am pleased to report that after several weeks of diligent effort, production has restarted on the first two refinery columns yesterday.

We expect to start up the remaining eight columns in stages over the next seven weeks, as construction activity is completed. It is expected that full production capability we restored by the end of the year. We expect to restart the six smelting furnace by the end of November.

We are pursuing recovery of the cost of repairs and lost profit under our property insurance and business interruption insurance. We submitted the first claim covering the time period from the date of the incident until the end of the third quarter. We will be reviewing these initial claims in the middle with our career in the next few days. Our insurance provider has already made an advance partial payment of $4.5 million before we submitted this claim.

Moving on to discuss other matters, EAF dust receipts increased 6% compared to the prior year quarter to 135,000 tons. Receipts were 3% lower than the second quarter of 2010, as output from the steel industry softness slightly.

According to industry’s statistics domestic steel production averaged 71% of capacity of utilization during the third quarter, which is down slightly from the 73% of level during the second quarter. The steel industry capacity utilization has been operating in the high 60% range for the past four weeks. Industry receipts have dropped slightly as a result of this decline in steel production.

We expect to operate our recycling facilities at full capacity from most of the fourth quarter as we reduced the backlog of dust at each plant. I am happy to report that the Barnwell operation is now fully commissioned. The start up of the second kiln, which occurred in mid September, is on very smoothly.

Production is still ramping up at this facility as training and debugging of equipment continues, but overall we are very pleased with this project. The Barnwell facility is designed to be a very clean, safe and short cycle time method of processing the EAF dust and we believe is the industry model for the handling and processing of the EAF dust.

We spent approximately $63 million on Barnwell through the end of the third quarter. We have been estimating that we will be able to complete this project for the total cost of $65 million and as we approach the close of the project it appears that at estimated really close.

I want to recognize the outstanding work of our engineering, operating and start up teams for this successful project. The original investment analysis was estimated at $88 million has been through the efforts of our project team that we have able to build this plant for considerably less money. We are also realizing better than expected quality in the (inaudible) oxide from Barnwell, which will have downstream benefits at our zinc smelter.

Moving on to discuss zinc products, market demand for our zinc products continued to be steady during the quarter. Zinc product shipments increased 14% compared with the prior year’s third quarter, on a sequential quarter basis, comparing to third quarter of this year to the second quarter, zinc products shipments decreased 6% to 34,700 tons. This decrease is primarily attributable to the Monaca refinery audit.

Zinc oxide shipments declined by 41% from the prior year’s quarter and 56% from the second quarter of this year. During the third quarter, we had about three weeks of production from refinery in July prior to the incident. The balance of our oxide shipments primarily came either from the inventory we had on hand or from oxide we purchased from our competitors to help serve our customers. We also restarted three of our four Larvik furnaces by the end of the quarter, which also contributed some shipments.

As I said earlier, we started production in zinc oxide on two refining columns yesterday. We expect to produce approximately 9500 tons of zinc oxide in the fourth quarter, is begin to ramp up production at the refinery and continue to operate the Larvik furnaces.

We would expect to be producing at about the same way we experienced prior to the incident by the end of the year. We will idle our Larvik furnaces early next year and our refinery capacity is fully restored.

The discussions we have had with our zinc oxide customers have indicated that they are anxious for us to return to the market. As the largest producer in the Northern American market, the loss of our capacity has caused supplies to tighten.

Spot prices have reportedly increased by as much as 30%. Based on our conversation with tire producers, we expect the demand for zinc oxide next year will be stronger than this year.

Zinc metal shipments increased 58% compared to the prior year’s third quarter and 44% compared with the second quarter of this year. As noted previously, partially offset the loss of revenue from zinc oxide and refine the zinc meal or SSHG as we call it. We increased production PW zinc metal.

Our capacity to produce PW metal is limited by the casting capacity in our smelter. Since the incident, we have been operating our smelter at the full capacity of our casting lines. We have been able to sell the additional metal we have produced in markets outside our traditional general galvanizing market.

We will continue to produce additional PW metal through the end of the year. Demand for PW zinc metal in our traditional domestic markets remain steady and continued the comparable shipment levels so far in the fourth quarter.

However, traditionally PW metals shipments fall off in this market in December. For this reason, we would expect fourth quarter metal shipment to be up slightly form the third quarter. We will restore our capability to produce refined zinc metal by the end of this year and we would to resume normal shipment levels with SSHG in January.

Moving on to discuss the zinc pricing environment, the all new zinc price averaged $0.91 per pound during the quarter, which was 14% higher than the prior year’s quarter at $0.80 a pound and equal to the second quarter 2010 average of $0.91.

Zinc prices moved lower as we exited the second quarter, but have rebounded strongly since that time and are currently trading around $1.10 per pound range. The trend toward a weaker dollar appears to be having positive impact on base metal prices as it did earlier this year. We have continued our program of purchasing put options for 2011 at a strike price of $0.65 per pound, at this point we have fulfilled about 95% of our requirement.

The realized premiums on zinc metal averaged about $0.035 during the quarter, which is comparable to the second quarter of 2010. Transactional premiums are in the same range.

Realized premiums for zinc oxide in the quarter were approximately minus $0.07, which is down from the second quarter average of plus $0.07. The third quarter realized premium declined due to the lag effect in the contractual premiums with tire producers, as a result of the lower LME prices at the end of the second quarter.

We have honored our contractual prices during this fourth measured period, while front refinery has been shutdown, even through spot prices have increased.

We continue to be pleased with the performance in INMETCO during the third quarter. Shipments of nickel-bearing and remelt alloy increased 11% compared to the second quarter, which was affected by the planned annual outage taken in May. INMETCO operated full capacity during the quarter.

Total receipts in the third quarter were up about 3% compared with the second quarter reflecting additional receipts from stainless steel producers. Nickel prices averaged $9.61 per pound during the third quarter, which was down 5% from the second quarter of this year. Currently nickel prices are trading at approximately $10.90 a pound.

Work on Phase I of the expansion program at INMETCO continues. Installation of the bulk addition system will be completed by the end of this year and installation of the oxy-fuel burner system will be completed by the end of the first quarter of next year.

This first phase is expected to increase capacity at Elwood City operation by 15%. All of the environmental approvals needed to begin this work have been received. INMETCO has also realized a $1.2 million say, in cost reduction and synergy-related savings this year, since we are set to take ownership and they have also negotiated a new 30-month power supply agreement that will go into effect next July, which will result in annual savings of about $750,000.

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

Bob Scherich

For the third quarter, our net loss was $2.4 million or $0.05 per share, which approximately one time loss excluding hedge mark-to-market non-cash charges. INMETCO contributed about $0.05 per share of earnings for the third quarter.

Horsehead’s zinc business excluding the hedge charges cut a loss of approximately $0.06 per share. As Jim mentioned, our estimate of the effect of loss production during the quarter was about $0.13. We expect to recover a significant portion of this loss under our insurance policy, but the timing is uncertain. We will not be recording income recovered until an agreement has been reached with our insurer.

Detail of the quarter’s performance reflects an increase in revenue of $30 million or 50% compared to the prior year’s quarters. The increase was the result of an increased in price realization of $10 million and an $8 million effect of higher shipment volume.

The current quarter’s revenues were reduced by $3.2 million for non-cash charge related to hedges compared to $1.4 million charge in the prior year’s quarter. INMETCO added $17 million into our sales in the third quarter.

The average sales price realization for zinc products on a zinc contained basis was $0.98 cents per pound or $0.07 per pound above the average LME price for the quarter, compared to $0.87 per pound or $0.07 above the average LME price for the prior year’s quarter.

On a sequential quarter basis, the average sales price realized for zinc products decreased $0.10 per pound on a zinc contained basis, reflecting primarily the lag effect associated with the zinc oxide products and the shift in mix of shipments to a larger share of metal.

Sales of zinc metal increased versus the prior year quarter by $23 million, or 85% to $50 million for the quarter. This increase reflected primarily a $7 million increase in price realization and a $16 million increase in sales volume. Sales of zinc oxide decreased $7 million versus the prior year’s quarter, or 34% to $14 million reflecting the effect of the refinery outage.

Revenues from EAF's dust recycling increased $1 million for the quarter, or 11% to $10.4 million reflecting both the higher volume of receipts and higher average price realization. INMETCO sales of $13.1 million for the third quarter compared to $11.3 million for the second quarter reflecting higher production shipment levels.

Total returns made up of approximately two-thirds of the remelt alloy shipments for the quarter. Cost of sales increased 52% to $29 million. The increase included $7.8 million related to INMETCO.

Given the disruption of our operations in Monaca, we did not have a normal cost profile for the quarter, while EAF dust-based feeds made up 85% of our feed mix for the quarter versus 65% to the prior year quarter and 61% to the second quarter of 2010. A portion of the benefit was held up and with inventory; as the smelter operated at reduced levels.

Overhead cost that normally would be part of the refinery production along with temporary costs associated with buying product for zinc oxide customers added approximately $2.1 million to cost for the quarter. We expect to recover the majority of these costs as part of our insurance claim.

We also had a higher than normal level of (inaudible) repairs during the quarter along with start up expenses related to Barnwell. In combination recycling costs were about $3.5 million higher than expected for the quarter. We expect recycling cost to return to normal in the fourth quarter.

SG&A expenses were $0.9 million higher for the quarter with INMETCO adding $0.7 million. Cash provided by operating activities was $18.8 million for the quarter, approximating the refund of prior year’s income taxes received during the quarter. We used $6.4 million of cash for investing activities primarily capital spending. We ended the quarter with $126 million of cash of which $31 million was restricted. Total debt was $0.3 million at the end of the quarter.

Relating to our insurance claim surrounded in Monaca loss, we were closely with our insurance company to quickly take steps to mitigate potential losses and continue to work with them on development of the claim. As Jim mentioned, they have been very supportive advancing $4.5 million during the quarter, as we began to rebuild the refinery and start up the Larvik operation.

We spent approximately $3.1 million during the quarter on these efforts and expect to spend an additional $10 million during the fourth quarter. We have filed our first claim for business in interruption and will be meeting with the insurers’ representatives shortly to work toward settlement.

Under the accounting rules, we will not be recording any benefit under our business in interruption coverage until agreement has been reached with the insurer. While timing of the settlement is uncertain, we will be working to conclude as quickly as possible.

In summary, the results for the third quarter reflected the effects of the Monaca incident. The loss of $0.05 included $0.04 due to hedge accounting. We estimated the $0.13 effect from loss production and extra expenses of approximately $0.05 from higher recycling cost. Absentee’s items we would have expected earnings to be $0.16 to $0.18 for the quarter.

In looking towards the fourth quarter, we expect the zinc production to increase progressively during the quarter, as columns are brought back on line. As Jim mentioned, inventories were depleted shortly after the accident and we will need to be restored.

We expect that increase working capital and completion other refinery repairs will consume some cash during the quarter. We anticipate ending the year with strong liquidity.

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

Jim Hensler

In summary, before we open the call for questions, I would like to say that while the third quarter was a difficult period for our company as we dealt with both the loss of life in one of our facilities and the temporary loss of substantial part of our business. I am proud of the way our employees dealt with the situation.

We have developed and implemented the rebuilding plan, which will significantly enhance safety and we are bringing this facility back on line very quickly, given the extent of the damage.

We took quick action to mitigate the loss and we also expect the full recovery and of customary detectables, of loss profit and property damages from our insurance provider. We are now looking forward and we are optimistic about the outlook for 2011, as we bring the Monaca facility back to full production by the end of this year.

We are also very pleased and excited to finally bring our first Greenfield EAF dust recycling facility fully on line this quarter after nearly three years of planning and construction.

Horsehead is well positioned now to gain additional business in the southeastern part of the US, and we are poised the process more dust, as steel industry output returns to historical levels.

We are also pleased with the progress being made on the expansion projects at INMETCO. There is still a significant amount of nickel-bearing waste products generated by stainless steel producers better being land-filled. That we will be able to service once this capacity is in place.

In addition, we continue to pursue acquisition opportunities that leverage our capabilities in INMETCO expand our environmental services business and broaden our global reach.

Thank you and we will now open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions)

Your first question comes from line of Carter Driscoll of CapStone Investments.

Carter Driscoll - CapStone Investments

My first question, I have a number of them but obviously I do not want to steal all them before I go back in the queue but the first is maybe you could help me with the what issues are outstanding with the insurance carrier? Is it lacking agreement today, definitional or is it simply process or working through the mechanics the calculation, are there any outstanding issues that you think might not be as favorably resolved? Let me start there and then I have got a number of follow-ups?

Jim Hensler

Carter, it is really quite just the process, I mean, it is a fairly a tedious process to capture what the losses associated with loss production in detail cost format. We've shared all of the cost detail with them. We developed our own model a basis for what we believe the claim is. We've put them in front of them. It is kind of a normal process and we expect to be sitting down very shortly to compare notes and work towards a final conclusion.

No way to anticipate how that process goes but I can say that they have been entirely supportive and cooperative as we have been with them. We expect to work through that process as quickly as possible.

Carter Driscoll - CapStone Investments

Let me ask maybe clearly in a way, for example, the rebuilding of the draw down in your working capital be something that you would consider part of the claim?

Jim Hensler

Probably not. It is really loss production so, we use the working capital. After the accident we will have to restore it when we start back up. The claim is really based on the values of the loss production during the period.

Carter Driscoll - CapStone Investments

Then the move from five to six furnaces obviously, you have talked about alternating between that based on end-market demand given what we know is traditionally a weak December period with some of the minimal shut downs. Is the move to five to six really because you have such tremendous working capital need to rebuild back up and satisfy that demand that was going to stilt in the third quarter or did you just see demand steadily improving as it has to in the course of the year?

Jim Hensler

We see an opportunity to sell additional oxide here now that we are restarting the columns. We also have commitments for sell more metal than we typically would sell even though December is going to be a soft month for the domestic shipments. So, in order to satisfy those requirements and also in order to begin building some inventory in zinc oxide we need to get back to six furnaces.

Carter Driscoll - CapStone Investments

You mentioned better yields coming out of Barnwell is that correct? If so, could you share with us may be a what the yield may have improved to?

Jim Hensler

The design that we put in Barnwell was slightly different sort of took the best practices we had across all our facilities and the net effect is that we are producing a much pure wells oxide, in other words, we do not have as much non-zinc material in it. So, that means that when we bring that in to our smelter will improve the yield down to he smelter because we will not be bringing in a lot of non-zinc material.

Carter Driscoll - CapStone Investments

The problem you had with some of the kilns, could you elaborate on whether this was kind of normal maintenance or whether there were actually some problems with the kilns themselves and what are you doing to rectify that?

Jim Hensler

We typically have kiln outages where we have to go and replace brick and in some cases those are more extensive than others. We had several of those occur in the third quarter which I would characterize as not unusual other than the fact that the timing overlapped in one quarter. What was unusual is we had a unexpected failure of, what we call, the dust catcher in two of our plants in Rockwood, Tennessee, plant and also in our Palmerton plant.

Those tend to be fairly expensive rebuilds and in the one case I characterize that as, in Palmerton case, not unexpected given the life of the light catcher and in the Rockwood case, I would say, it was unexpected and we have learned some things from that but we believe we have rebuilt that in a way which should prevent that from happening again in the future.

Bob Scherich

I would add, during the first half of the year with the elevated intake of dust prior to bringing Barnwell capacity online we were, in some sense, trying to stretch out operation of the kilns simply to service the customers. So, by stretching things out during in the first half of the year we ended up with more repairs than you typically have in a quarter during the third quarter. We don’t think see that repeating in the fourth quarter.

Carter Driscoll - CapStone Investments

Would it be fair to use the $13 million you have estimated to restart production partly for what your exposure might be in the business interruption value or is that completely separate from the customer?

Jim Hensler

They are completely separate items. The $13 million is the repairs to the facility, the rebuild of all the columns, and also includes the spending to start up Larvik operation in the middle of the quarter to get some oxide production. So, all of that really kind of falls under a physical damage claim and actuary expenses with the insurer and its completely separate. The business interruption, as I alluded to earlier, is simply the loss production in the value that loss production and we net out of that any of the mitigating effort that we have been able to put in place to reduce those lost sales.

Carter Driscoll - CapStone Investments

Sort of to clarify, it is part of claims process just not the interruption portion, correct?

Bob Scherich

Right.

Carter Driscoll - CapStone Investments

Just one more and then I will pass it on. The dust proceeds obviously we've seen some small roll over in mini mill production. It sounds as though the recycling side had some additional costs. Maybe you could elaborate, was it diverting some dust from other areas and transportation costs or is there something else that I am not catching?

Bob Scherich

On the recycle side, the main increasing costs was the maintenance and outage related cost we talked about. The other cost that was unusual in the quarter was in fact that we were starting up Barnwell and so, we were staffed and operating a kind of full plan basis but we weren’t getting the throughput yet for the most of the third quarter that we would expect from our plans. So, our conversion costs was a little higher given the fact that we were in a startup mode. That should works its way out as Barnwell continues to ramp up and the cost I mentioned earlier on maintenance and outages should check it back to more normal level.

Carter Driscoll - CapStone Investments

Just lastly just a housekeeping item, the cash credit that you received for Barnwell the mechanics of how that has that been pulled out of the balance sheet and come through?

Bob Scherich

Yes, we are actually working now here during the fourth quarter. That cash is setting in restricted cash about $5.9 million under the new market tax credit financing. It really comes out of restriction as we complete the spending, it's last dollar spent basically on the project that we then submit to the banks and we are in the process of doing that. They basically release it release the restriction out of it at that point. We are working to have that $5.9 million released from restriction here so would shift on the balance sheet when that does occurs hopefully here in the fourth quarter.

Operator

The next question comes from the line of Eric Prouty of Canaccord. Please go ahead

Eric Prouty - Canaccord

First on the rebuild, is there going to be any additional capacity that you can add during the rebuild or will it be the same nameplate capacity?

Jim Hensler

It's basically would the same capacity, we're rebuilding the same ten columns. We have though spend some money in upgrading these Larvik furnaces. We learned somethings this time running these Larvik furnaces that has allowed us to run them more efficiently than we have in the past. So, that capacity sort of stands in the wings if we need it, if market conditions strengthen to the point where will need that extra capacity.

Eric Prouty - Canaccord

Maybe if we look beyond the rebuild period here, you can give us a look of where company-wide you stand in the different processes with capacity, with Barnwell up and running what would your total annual capacity for EAF dust? Maybe then you can go through what the smelter capacity look like?

Jim Hensler

The total annual capacity with Barnwell now is in the low to 700,000 ton range, 720, 730. we're running at a fairly high rate right now and obviously the industry is not generating enough dust, the feeds are in 20,000 tons but we're working through our backlog of dust. We'll probably run fairly close to capacity for rest of year. Now, depending upon what steel production does next we may have one kiln down in the system or maybe a kiln and half during different times of the year. That’s going to depend totally on what happens with both the steel industry output and to the extent that we can pick up some additional market share particularly in the southeast.

On the zinc product side, the smelter capacity is nominally 150,000 zinc equivalent units if we put it on the zinc equivalent basis. Our capacity for zinc oxide, if we don’t run the Larviks is about 80,000. the Larviks would add another roughly a little more than 10,000. if you take that 80,000 tons zinc oxide that’s roughly 64,000 zinc equivalent units. Deduct that from the 150,000 and I will tell you roughly what our metal capacity is, so it's something in the order of about 90,000 tons.

Eric Prouty - Canaccord

Then it sounds like by the end of this year a lot of your CapEx both Barnwell, the INMETCO expansion etc is going to be ramping up, barring acquisition or an internal project what would you expect your 2011 CapEx to be at more of a normalized maintenance level? What should that be at for 2011?

Jim Hensler

Yes. We're going to have some unusual, call it, put in the category of maintenance CapEx expenditures next year we've three kilns that we want to do a shell replacement on which is going to be more of an unusual kind of an investment, a little more expensive than normal. We also have some other work that is kind of in a maintenance area but it needs to be done just due to the age of equipment in some facilities. Next year --

Unidentified Company Speaker

We do have continued expansion work at INMETCO also. Overall, our plan it's still preliminary we are developing our detailed budget right now. It is about $25 million next year and that includes the INMETCO continued expansion as we complete Phase 1 and even move towards Phase 2 and some of these items that Jim talked about.

Jim Hensler

We have some cost reduction CapEx in there as well.

Bob Scherich

We still think normal maintenance CapEx is probably in that $15 million to $17 million level.

Eric Prouty - Canaccord

Finally, you touched upon this but just wanted to get a little more detail. Obviously, it seems like some of the risk of the rebuild is really getting behind you and now we can look forward to turning the furnaces back on and regaining the zinc oxide production. Is there anything to prevent customers from coming back? I mean, do you feel like you've lost anyone permanently etc? If you could just give a little more detail around any insight you can provide into your ability to, I guess once the rebuild occurs for it to be business as usual that would be great.

Jim Hensler

There are three considerations there that we can talk about. We're only aware of two customers that represents about a 1,000 tons zinc oxide business that ended up entering into extended agreements because we are out of business there. So, those extended agreements run through part of next year so, to some extent, they won't be available to us until those agreements end up. So, it's not a significant amount of volume that we think is lost to us in the market.

Second point is we're just starting to get into negotiations right now with the tire companies. They're beginning their first round of negotiations here and what they're telling us is that they think that oxide is going to be stronger next year than this year.

As we get into those discussions we'll see where we are in terms of their strategy in terms of hedging their exposure. To the extent we were 100% supplier and then they say, 'Well, gee, this experience we don’t want to have all our eggs in one basket.' We haven’t really seen that indication yet. It might come up but we haven’t really seen it yet.

The third point I'd make is that our business interruption insurance provides for the fact that we may not recover zinc oxide business immediately after restarting the capability. So, assuming we have full capability in each and everyone if we don’t return to the same kind of sales that we expect to have if we hadn’t had the accident that becomes part of the ongoing claim for first six months after we restore that capability. So, to the extent that we do see any tail in terms of trying to recover our business we feel that becomes part of the claim that we will make with the insurance provider.

So far, we are not of the opinion that that’s going to happen. We may see a little bit effect in the first quarter. We don’t know that yet but we'll certainly have the option to recover those losses under our policy.

Operator

Next question from the line of Paul Forward of Stifel Nicolaus. Please go ahead.

Paul Forward - Stifel Nicolaus

You had mentioned 85% [appliance] on the EAF dust for the heat mix in the quarter. You gave a range of 70% to 75% going forward. How do we end up toward the higher end of that range? What could get us to 75% or even beyond that now that you got the Barnwell capability at both counts going?

Jim Hensler

It's really a matter, Paul, of whether we're operating at that full capability on the recycling side which is dependent on the steel output. Closer to full capability and we're operating six smelting furnaces we're at the upper end of that range. So, it's really a question of what's happening with steel output.

Paul Forward - Stifel Nicolaus

With only on the order of $25 million of CapEx for next year, %95 million of unrestricted cash today, zinc prices are back and so cash generation ought to be strong. What do you see as your options as far as expansion on whether it's acquiring growth or potentially you talked about some organic growth options, but probably not that large in terms of uses of cash? How do you weigh that against return of cash to shareholders?

Jim Hensler

We've got a number of projects that are in the pipeline; projects let's say, in the form of both potential acquisitions and major capital projects that over the next quarter or two we hope we will get to a point where we can begin executing or enhancing them.

We think there a number of attractive uses of cash that we'll be breaking here and we are not at a point right now where we can talk about this but we certainly want to put the cash to work. We do think that the idea is that we have got in the pipeline which fit in both in the area of further expansion of our environmental service model, as well as complimentary businesses to our current line of businesses, as well as fairly significant cost reduction projects that could significantly change our cost structure on the zinc side of our business are all in the development stages and some that are fairly far along at this point that we see as uses for cash going forward.

Paul Forward - Stifel Nicolaus

Maybe lastly, I know I have asked this before, any update that you can give us on competitors' investments in the areas either dust processing or smelter capacity in the US and do you see projects advancing to the point that they become eventual threat?

Jim Hensler

Nothing that, I don’t think we've talked about. I mean, Zinc National has been working on putting a second kiln in their Alabama facility and we are not exactly sure where that stands from a timing standpoint, but we would expect to see that at some point of time. We don’t see any more activity in the US from ZincOx. Maybe they are focusing on in South Korea and appear to see anything more in terms of new entrants coming in the market.

Of course, zinc prices continue to move up that always becomes essential threat but with the fact that steel industry is operating at 70% rather than 90% and the fact that there is not a lot of dust left over in the landfills, I don’t think that we will see a lot of new capacity coming in the market unless zinc prices got very high or unless somebody came up with a much more cost effective process which I don’t see on the horizon.

Operator

Next question comes from the line of Scott Blumenthal of Emerald Advisers. Please go ahead

Scott Blumenthal - Emerald Advisers

Bob, could you tell us if you are holding and expect to build any finished goods inventory at all in lieu of Jim’s comments that you have commitments to sell more metal than usual?

Bob Scherich

I would say as we ended the third quarter and even as we go through fourth quarter, we expect our metal inventory to stay fairly well and balanced, which is what is typically been. We did build an inventory of excess production during the course of the quarter but by the end of that quarter had brought that back in line. So, on the metal side, we don’t see much changes.

It's really restoring the zinc oxide finished inventory that’s been completely depleted obviously but we typically only carry 2,000 or 3,000 tons of finished product at any point of time. It's not a huge build. Typically even without the accident, December is kind of a working capital build month as most of our end markets have downtime during the holiday\s and we typically build a little bit and turn it over fairly quickly in the first quarter. So, there is some layout but I don’t think its that’s significant.

Scott Blumenthal - Emerald Advisers

In lieu of the accident and disruptions with zinc oxide production, would it be your gas that some of your customers would have much more of an appetite for zinc oxide than usual since you have been out of the market for all intents and purposes since July?

Jim Hensler

Yes, there might be although that they been hearing our timing and that they made an adjustment so, I think that their supplies and inventories have been adjusted to soon we are going to be available after the first of the year. In the short-term, I’m not sure, there is much more opportunity than we laid out.

Scott Blumenthal - Emerald Advisers

Jim, the premise of my question I guess is, I’m sure that the customers are holding a certain amount of zinc oxide safety inventory of their own, which they possibly have had to go through due to the accident and Horsehead not being in the market. I was wondering if you had any read through as to whether they would be in the market to consume anything that you could produce and up to what point that would be?

Jim Hensler

Well, there maybe some of that to give you an estimate. I’d tell you that most zinc oxide is obviously sold to tire companies and for the most part they have involved into a just in time delivery arrangement, where the suppliers hold the inventory and they don’t really hold much on the ground. To that extent there may not be as much of a buffer there that used to be replenished.

Scott Blumenthal - Emerald Advisers

Thank you for that. Jim, you mentioned a lag effect with regard to pricing for one quarter or so is your expectation that Q4 pricing and that I understand that there is a lot to do with products next year and that’s going to be difficult for anybody to estimate for this quarter as you ramp production. Is it your expectation that product pricing for Q4 is going to be closer to the Q3 LME price that we saw?

Jim Hensler

For metal, the pricing will be pretty close to Q4 LME pricing and for oxide it will be fairly close to Q3 pricing.

Bob Scherich

We don’t think there will be as much of a lag effect in the fourth quarter. No, third quarter was characterized as starting the quarter at a relatively low, ending second quarter was a much lower LME price. We saw a fairly dramatic increase in the commodity price by the end of the third quarter. That’s somewhat leveled out here as we are going into the fourth quarter, so we wouldn’t expect. If commodity prices stay as they are much effect.

Scott Blumenthal - Emerald Advisers

That’s helpful to do. Thanks Bob. One last question would be, as you look towards maybe building up some working capital and I’d assume that include the finished goods inventory Bob. This probably a better question for Jim, then, how do you know how long to run the lot of X and Y and when would you turn those off?

Jim Hensler

We typically maintain about two to three-week supply of inventory of both metal and oxide and so, when we are at that level, we tried to scale back any further production. We think will be in that position. By the end of the year, in January we will have our inventories pretty well and balanced with what we see going forward. The Larvik, we will assuming the start up of these columns goes as we expect and we have no reason to believe that they won’t.

We will run the Larvik basically until, that happens and we purchased some metal and some draws that we want to consume in Larvik once we consume that and there will be no reason to really to run the Larvik unless we see a stronger demand for oxide then we will get produce on the columns we have, which we don’t see that being the case. We would expect run the Larvik in maybe few weeks into the next year and then probably idle.

Operator

The next question comes from Steve Riccio of Buyside Research.

Steve Riccio - Buyside Research

Hey guys, good quarter considering the tragedy, but all my questions have been asked and answered. Thank you.

Operator

The next question is from the line of Mitesh Thakkar of FBR Capital Markets.

Mitesh Thakkar - FBR Capital Markets

My first question was on, what kind of capacity utilization numbers are you assuming; Jim mentioned about 722 to 730, 1000 tons of capacity for the EAF. What kind of steel capacity utilization you are assuming and you also mentioned that they are some terms which probably you will need to do some maintenance to work on.

In that case, cam you give us a range of like sensitivity thing, depending on where you see steel capacity utilization say 65%, 75 or 70%. What kind of EAF that utilization you will have accordingly?

Jim Hensler

I just give you a rough idea of that. When the steel industry was at 90% capacity utilization in 2007 and 2008, we saw that the total market for EAF that was about 1.1 million tons of EAF does in general. That’s the benchmark we go by.

The steel capacity utilization was up or down; you can reach off of that number. Now the other factory that can affect that is if more electric furnace capacity is greater proportion look at furnace capacity in the market.

We haven’t seen a significant change on that, but could occur there have been announced projects, new electric furnace shops. There is some questions about certain integrated steel producers, whether they will continue to operate. That ratio may change here in the next couple of years. It has been running around 60%, 61% of steel production has been electric furnace based and the rest is integrated.

Mitesh Thakkar - FBR Capital Markets

When you are looking at that, basically are you looking for like 60%, 65% market share of the EAF dust produce?

Jim Hensler

We are in that range and maybe a little higher that I always say that does not bad approximation.

Mitesh Thakkar - FBR Capital Markets

Fair enough. When you are talking to the customers, I know you mentioned about your oxide customer mostly the tire manufactures, they see a very tight market for the oxide product. How do you feel about metal customer?

Jim Hensler

The metals the general galvanizing market, I would say, in a business condition they have been staying. They haven’t been outstanding. They were better than they were last year, but the economy still has to recover more before those guys get back to where they were say in the previous session period.

We have seen for this incident that they are some markets for PW metal outside the US that we traditionally haven’t happen to sell there. That’s opened up a new outlet for us.

Mitesh Thakkar - FBR Capital Markets

In terms of volume, is it a meaningful volume the export market you talked about is it a little bit more like in the incremental thing helps (inaudible) outside of the US helped in fact the other as well?

Jim Hensler

We started treated this incremental, but we are learning that maybe there is an opportunity for us there. It really comes back to question of, if we made 150,000 tons of zinc, where do we get the best value for it. If turns out that’s the piece that we are likely to get.

It seems to me, we can sell 10,000 tons to 20,000 tons of PW in to that market if we needed to.

Mitesh Thakkar - FBR Capital Markets

My last question is just on the INMETCO side, you mentioned that do you have an expansion project on the way, which is going to increase the capacity by about 15%. When previously we have talked about there are other ways where you can expand capacity as much as 50% with little more incremental CapEx.

Can you provide us some color regarding, are you planning to take up those expansion after you finish off this 15% increase or is it going to be there are other projects, which you think are more important than the other ones?

Jim Hensler

We are certainly going to continue to look at the opportunity. We feel that certainly this 25% expansion that we can see the market being able to use. We are going to take that in steps. The first step is 15% and then we will evaluate the second step.

Once we get the first 25% and we have to see, where the market is, to some extent depends upon what happens in the stainless steel business and there has been a lot of talk about (inaudible) building in metal shop in their Alabama facility and that would factoring in to our planning, so we will take one step at a time.

Operator

The next question is comes from the line of [Chris Summer] of TCMI Research. Please go ahead.

Unidentified Analyst

Yes, after the explosion did you see an uptick in Canadian primary metal competition in to your markets?

Jim Hensler

I can’t say that we saw any particular increased competition on the metal side. In fact from what we saw the metal market got a little tighter after our explosion because from what we can see how they was the very and more metal in to their Zochem zinc oxide business and at the same time they are having some production difficulty. We are hearing rumors more about rightness than more competitor supply.

Unidentified Analyst

Have you been following this fiasco of the (inaudible) field there is dispute over the control of the units and the argument is that smelter, which have to be wind down in seven years because of the lack of concentrate.

You talking about tightness, could you comment on that?

Jim Hensler

There are three big mining projects that are winding down. Certainly the Brunswick mine, which is the one you are referring to, we got Century mine and you have some mines in South America that are coming near the end of their effective life over the next couple of years here.

In total, that’s 700,000 tons zinc roughly in the 11 million or 12 million ton market. That’s a fairly significant been and there is some feeling that the concentrate market will be getting tighter.

I know we see it car business mostly in the form of enquires from zinc smelters around the world of our interest in selling them (inaudible) oxide because they are looking for additional sources of zinc units.

There is a perception that the concentrate market will be tight and there is a lot of discussion about other projects that could come on. I haven’t heard discussion about really big projects that still that void.

Of course it is zinc price there would be incentive to explore and begin to look at those projects again, but there is a general sense of some tightening concentrate.

Unidentified Analyst

One last one, did you actually say that you are going to think about (inaudible) export wouldn’t the freight be prohibitive even 2400 zinc. Did you suggest that you are going to sell some PW metal abroad?

Jim Hensler

We done here in this quarter really as they mitigating factor to offset the revenue you asked that we had with zinc oxide. I’m not suggesting that something that we would do on a normal business basis. We have found that there are some opportunities but to the extent that we can increase output from our smelter at the right zinc price and certainly at these zinc prices it's attractive as business.

Operator

We have a follow up question from the line of Carter Driscoll of CapStone Investments. Please go ahead

Carter Driscoll - CapStone Investments

The cost of the purchased oxide and the metal in the quarter, is that a material effect on your cost to sales, if you could quantify it?

Jim Hensler

Oxide, in particular, I quoted between kind of unabsorbed and the oxide was about $2.1 million of cost. The purchase of oxide was a little more than half of that. That’s not material but it certainly added to that against the cost performance. It’s really being done to continue to service oxide customers holding on until we get back in the market. We think it gets covered under insurance claim eventually.

Carter Driscoll - CapStone Investments

Given the pent up demand and what you foresee with the negotiation with the tire manufacturers, is it possible we could have noticeable mix shift in the fourth quarter as you make up for this built up demand in the oxide side and therefore you see that high margin business potentially being outsized in the fourth quarter maybe we can back in the first quarter?

Bob Scherich

Actually because we are just starting the columns up and they will continue to starting up for balance of the quarter our look is the mix is going to be fairly similar to what it was for the third quarter. As we move in the first quarter, we except to be back at traditional base.

Carter Driscoll - CapStone Investments

It would be possible that may be that scenario I laid out applies in the first quarter?

Bob Scherich

It is possible, I mean that it also possible that things there it takes some time to get back to normal in he first quarter. So, at this point it is hard to predict that. Customers are waiting for us to actually get back in to production and that just happened yesterday. So, we haven’t been in a position where we can go out and aggressively take orders.

Carter Driscoll - CapStone Investments

My very last question is, just building upon the earlier question about expansion and the macro, you had mentioned in the past potentially looking at some partnerships to export your technology in APAC and did the accident delay any of those discussions? Are those still on a timeframe where you might able to collaborate in the second part of 2011?

Jim Hensler

The accident didn’t delay. We are going through an analysis right now of a potential project like that in Asia. We haven’t completed that analysis but we've got a potential target in mind and we're running to the numbers right now to see if it makes sense.

Operator

There are no further questions in queue, please continue.

Jim Hensler

Thank you all very much and we will talk you again in the next quarter

Operator

That concludes our conference for today. Thank you for your participation and for using AT&T Executive teleconference service. You may now disconnect.

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