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Horsehead Holding (NASDAQ:ZINC)

Q1 2011 Earnings Call

May 06, 2011 11:00 am ET

Executives

Ali Alavi - Vice President of Corporate Administration, Secretary and General Counsel

James Hensler - Chairman, Chief Executive Officer and President

Robert Scherich - Chief Financial Officer, Principal Accounting Officer and Vice President

Analysts

Steve Riccio - Landmark Capital

Mitesh Thakkar

Carter Driscoll - Capstone Investments

David Shapiro - Aegis Financial

Eric Prouty - Canaccord Genuity

Paul Forward - Stifel, Nicolaus & Co., Inc.

Unknown Analyst -

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Horsehead Holding Corporation 2011 First Quarter Earnings Conference Call [Operator Instructions] And 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

Good morning, everyone. Thank you for joining us on our first quarter 2011 earnings release conference call. My name is Ali Alavi, and I'm Horsehead’s Vice President of Corporate Administration, General Counsel and Secretary.

Before I turn the call over to Jim Hensler, I would like to quickly remind everyone that this communication may include forward-looking statements about our company or 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, 2011, for a more detailed description of the risk factors that may affect our results.

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

James Hensler

Thanks, Ali. I'd like to welcome you to this conference call to discuss the results of the first quarter 2011. I will review the performance of our operations and markets during the quarter and Bob Scherich, our CFO, will review the financial results.

Demand for our products and services was strong during the quarter, allowing our zinc smelting facility to operate at full capacity throughout the quarter and our EAF dust recycling plants to operate at near-full capacity. We are pleased with the successful restart of our zinc oxide refinery and the return to fully servicing our zinc oxide customers.

Monthly shipments of zinc oxide increased throughout the quarter. By March, shipments have approached 2010 pre-incident levels. INMETCO also operated at full capacity and showed strong earnings growth versus the prior year's first quarter.

The consolidated net earnings for the quarter were $14.8 million or $0.33 per share. This figure includes a $6.2 million benefit after taxes or $0.14 per share from insurance recovery related to the Monaca refinery incident which occurred in July of 2010.

Consolidated net earnings, excluding the insurance recovery, were $8.6 million or $0.19 a share, which is a 26% increase over the first quarter of 2010 net earnings of $6.8 million or $0.16 per share.

We're also pleased to announce that we reached a settlement, which we believe to be fair with our insurance provider related to the Monaca incident. We settled our claim, covering physical damage, business interruption and extra expenses for a sum of $29.6 million. We collected the final cash payment in the amount of $9.1 million in April. Bob will provide a more detailed analysis of the quarter and the insurance settlement.

We processed 144,000 tons of EAF dust during the quarter, a 13.5 % increase from the same quarter last year. This increase reflects primarily the increase in our processing capacity with the addition of the Barnwell plant. We took a brief outage on one kiln at Rockwood during the quarter due to the need to rebalance the dust backlog across our system, otherwise, we operated the other kilns at full capacity.

EAF dust receipts declined about 2% compared to the prior year's first quarter to 134,000 tons, but were 5% higher than the fourth quarter of 2010 as output from the steel industry increased moderately. According to industry statistics, domestic steel production averaged 74% of capacity utilization during the first quarter of this year, which is up from the 69% during the fourth quarter.

Currently, industry statistics indicate that steel industry capacity utilization remains in the mid-70% range. We believe the near-term outlook for steel production and hence EAF dust receipts will continue to be positive based on recent public announcements by several steel producers. However, utilization rates are still well behind the 85% to 90% levels experienced in the first half of 2008. Therefore, we believe there is still considerable upside to these current dust receipt levels.

We expect to operate our EAF dust recycling facilities with the equivalent of 1 or more kilns idled intermittently over the next few months as we begin a series of major maintenance outages. EAF dust inventories expect to be stable under the current market conditions.

Zinc product shipments increased by 9% compared with the prior year's first quarter. On a sequential quarter basis, comparing the first quarter of 2011 to the fourth quarter of 2010, zinc product shipments increased by 13.7% to 36,461 tons. This increase was primarily attributable to the restart of the 6 smelting furnace in Monaca coinciding with the restart of the refinery. Zinc oxide shipments declined by 12% from the prior year's first quarter but increased 95% from the fourth quarter of 2010.

We are pleased to have our zinc oxide production capabilities fully restored and to re-establish commercial relationships with our customers. We expect zinc oxide shipments to be higher in the second quarter compared to the first quarter.

During the first quarter, we approached pre-incident shipment levels in March. Shipments in January and February, which increased significantly from fourth quarter shipment levels, were lower than March's shipments as we awaited final approval from some customers who required us to complete requalification testing before shipments can commence. Other customers also held safety stocks in their warehouses, which they needed to reduce before we could begin shipping to them. By the end of March, we had worked through the majority of these transition issues. It may take 1 or more quarters, however, before we fully recover a portion of business that we lost during the refinery outage as we await for current contracts to expire.

Regardless of the fluctuations we may experience in zinc oxide shipments, we expect to make up any shortfall by selling additional zinc metal to maintain the smelter producing at flow output.

Zinc metal shipments increased 29% compared with the prior year's first quarter but decreased about 11% compared with the fourth quarter of last year. The increase, compared against the first quarter of last year, reflects the fact that we operated only 5 smelting furnaces for most of the first quarter due to the weaker economy.

The decrease in metal shipments versus the fourth quarter is primarily a result of the restart of the refinery and our desire to ship the portion of our smelter capacity to produce zinc oxide. Also during the fourth quarter of last year, we increased the production at PW metal in order to partially offset the loss of revenue from zinc oxide and refined zinc metal while the refinery was idle.

We were able to sell the additional metal in the markets outside our domestic general galvanizing market. Underlying demand for PW zinc metal in our traditional domestic markets during the first quarter was comparable to the fourth quarter of last year. We also began shipping refined zinc metal or SSHG once again in the first quarter. We expect a small amount of PW metal -- we exported a small amount of PW metal during the quarter, and we expect the near-term outlook for PW and SSHG metal to be favorable as we enter the construction season in many parts of the country.

Moving on to discuss the zinc pricing environment. The LME zinc price averaged $1.09 per pound during the first quarter, which was $0.05 higher than the prior year's quarter at $1.04 and $0.04 higher than the fourth quarter 2010 average of $1.05. Zinc prices have declined slightly since the end of the quarter and are currently trading at approximately $0.95 per pound.

The realized premiums on zinc metal averaged $0.03 during the quarter, which is a $0.06 increase from the fourth quarter. The increase reflects generally stronger premiums in the domestic zinc market, the return to selling higher premium SSHG and less export sales in the mix. Transactional premiums in our domestic markets have increased slightly and are in the range of $0.035 to $0.05. Realized premiums for zinc oxide in the quarter were approximately minus $0.06, which is comparable to the fourth quarter of last year.

The first quarter realized premium was negatively impacted by the fact that we delay price increases for some large accounts until the start of the second quarter. Prices were also affected by a slight lag in the contractual premiums with tire producers as a result of the lower LME prices at the end of the fourth quarter.

INMETCO continued to perform well during the first quarter. INMETCO's net income increased 23% compared against the first quarter of 2010, the $3.2 million after taxes. Totaling receipts increased 10% compared with the prior year's first quarter, reflecting stronger production levels at stainless steel producers. Shipments of nickel-bearing remelt alloy decreased about 3% compared to the prior year's first quarter, primarily as a result of lower production levels due to the timing of plant outages at the Ellwood City operation. Nickel prices averaged $12.20 a pound during the first quarter, which was up $3.09 for the first quarter of last year. Currently, nickel prices are trading at approximately $11 a pound.

INMETCO installed a new oxy-fuel burner system in their submerged arc furnace at the end of the first quarter 2011 and is beginning to ramp up the use of that equipment. We expect to realize a 10% gain in production capacity during the second half of 2011, as a result of this investment and others made at the end of last year.

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

Robert Scherich

Thanks, Jim. Detail of the quarter's performance reflects an increase in revenue of $12.2 million or 13% compared to the prior year's quarter. The increase reflected an increase in price realization of $3.2 million, a $7 million effect of higher volume of shipments and $1.1 million added by INMETCO.

The average sales price realized for zinc products on a zinc-contained basis was $1.18 per pound or $0.09 per pound above the average LME price for the quarter, compared to $1.15 per pound or $0.11 above the average LME price for the prior-year quarter, reflecting primarily the temporary shift in product mix from oxide to metal and a lower premiums on exported metal that Jim mentioned earlier.

Sales of zinc metal increased $12.7 million or 36% to $48.5 million for the quarter. This increase reflected a $10.5 million increase in sales volume and a $2.2 million increase in price realization. Sales of zinc oxide decreased $3.6 million to $29.7 million for the quarter, reflecting primarily a decrease in sales volume versus the first quarter of last year. On a sequential quarter basis, oxide sales increased $16 million or 117%.

INMETCO sales increased $1.1 million or 8% to $15.5 million for the quarter, reflecting higher average nickel prices and an increased mix of higher-valued metals, partially offset by an increase in shipments to satisfy tolling obligations.

Cost of sales, excluding the effect of the insurance settlement, increased $8.9 million to $86 million for the quarter; reflecting the effect of higher production shipment volumes and higher energy costs partially offset by lower raw material costs. Percent of the EAF-based feed to the smelter increased from 65% from the prior year's quarter to 71% for the current quarter. Purchase feed costs were approximately 1% lower on a percentage of LME on a zinc-contained basis.

As Jim noted, we were pleased to have arrived at what we view as a fair settlement on the insurance claim. Our preliminary claim for property damage, expenses and loss margin through March 31 was $33.8 million. Our final settlement was for $29.6 million, of which $19.3 million was recorded in the fourth quarter of 2010. Net of expenses and taxes, this resulted in a $6.2 million of net earnings or $0.14 per share effect in the first quarter. We estimate that this settlement of $29.6 million breaks down at $17.5 million for business interruption and extra expenses, and $12.1 million related to repairs and the protective measures that were implemented. We believe the settlement was fair for both parties, and we are pleased with the timeliness of completion as we reached agreement in less than 9 months on a somewhat complicated claim.

We receive $20.5 million of this settlement as of March 31, with the balance received in April. From a net earnings perspective, first quarter earnings, excluding the effect of insurance, we're 26% higher than the first quarter of last year and increased 25% on a sequential quarter basis. Cash provided by operating activities was $3.8 million for the quarter. Cash used in investing activities netted $2.5 million as capital spending of $5 million was partially offset by a $2.5 million reduction in the restricted cash.

We ended the quarter with $137 million of cash, of which $24 million was restricted. Total debt was $0.3 million at quarter end. EBITDA was $27 million for the quarter or 25% of sales. EBITDA for the last 12 months was $71 million or 18% of sales.

This time, I'd like to turn things back to Jim for some final comments. Jim?

James Hensler

Thanks, Bob. In summary, before we open the call for questions, I'd like to say that we were pleased with the performance of the business during what could be described as a transition quarter as we are able to operate the fully-restored refinery for the entire quarter, re-entered the markets for zinc oxide and refined zinc metal while operating the zinc products businesses at full capacity. I'm also pleased with the settlement we reached with our insurance carrier. We essentially received the equivalent of full recovery of our 2010 business interruption and property damage claim and partial recovery of the cost of safety-related upgrades we made in the refinery.

We continue to be pleased with the performance with INMETCO, and we are evaluating several other potential strategic opportunities that either enhance our current businesses or expand our portfolio of environmental service and metals recovery opportunities. We have the liquidity to complete these transactions should they develop into viable and attractive investments.

I'd also note that during the first quarter, we announced that we have completed a preliminary feasibility study to construct a 150,000 ton per year zinc plant based on state-of-the-art green technology to replace the existing zinc smelter in Monaca. The goal of this project is to produce zinc at much lower cost to significantly reduce air emissions and to provide opportunities for the company not only to serve its traditional hot-dip galvanizing and zinc oxide markets, but also to serve the broader market for special high-grade zinc and the continuous galvanizing market as well. We continue to work on the basic design and engineering, and we are narrowing in on a site to build this new facility. This project which would still require Board approval and financing could begin construction by the end of this year and start up as early as the end of 2013.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of Carter Driscoll with Capstone Investments.

Carter Driscoll - Capstone Investments

My first question is, if you could prioritize -- if you had a wish list and you could prioritize, in what order would you, say, you would like to deploy the cash in the balance sheet? Would it be the expansion at INMETCO? Would it be finding another kind of lateral hazardous metal opportunity? Would it be pursuing a technology-sharing agreement? Could you maybe layout your priority and the way you think about deploying the cash you have?

James Hensler

Well I mean our #1 priority right now is this new zinc plant project. The preliminary study we did suggests it has an excellent return and it would be a very good use of the cash. And its return on investment is primarily driven by cost reductions as opposed to new business, and it's not as subject to commodity price fluctuations. So we look at it as a very attractive project. Secondly, we would like to continue down the path of diversification and looking for environmental service and metals recovery projects that fit that model. Some of those could be related to our existing businesses and others may not be. And then we would look for other investments that we believe would be compatible with our existing businesses. I'd say those are the priorities.

Carter Driscoll - Capstone Investments

Have you reached the stage yet -- I realize it's fairly early and you've only conducted an engineering study, but if you could maybe compare and contrast what it cost to build the Monaca facility and then, maybe a ballpark, what you might be able to save in terms of a true construction of this new technology or help us frame out where that savings would be, obviously, operationally it be a lot lower and, obviously, diversification in terms of the end market you serve. But just from a CapEx perspective, could you frame what you spent on your current facility versus what you think you might have to spend to build it?

James Hensler

Well, the current facility has been there for 85 years, so it's sort of not too relevant to talk about what it would cost to build that facility. I think that what we have seen so far is, and I don't want to put a number out there in the capital investment until we've got more concrete numbers, but what we've seen so far is that the investment for the type of facility we're looking at is about a third less than the investment for a typical zinc smelter. And the reason for that is that we're going to be feeding this with Waelz oxide from our EAF dust recycling process. We don't have to make the investment to be processing zinc concentrates that would be the case in a typical zinc smelter. And so the capital investment is going to be lower. And so from a competitive standpoint, we think we can build a plant cheaper than other more conventional-type zinc smelters could be built. From an operating cost standpoint, we think that for 150,000 ton per year of zinc production, we think that potential is in the order of $40 million to $50 million a year of cost savings. So we're pretty excited about that. And then we also believe that there is some capital avoidance because as we head down the road with the Monaca smelter, we're going to be faced with some decisions about the environmental emission controls, not only for the smelter but also the power plant. And so there will be some capital investment that would be involved there that we would avoid with this new facility. So that's not answering your question specifically but directionally, that's where our thinking is.

Carter Driscoll - Capstone Investments

No, that's really helpful. Maybe I could shift over to ask Bob a question. Bob, can you talk about your initiatives on the hedging side this quarter? Obviously, we've had a bit of a roll over in the commodity prices in April, and could you talk about what you initiated in terms of your existing program?

Robert Scherich

Well, we haven't done anything differently here thus far this year. We've got in place the $0.65 strike put options for 2011. We are looking at 2012 and '13. But we’re looking at that a little differently and, obviously, market is off right now. So it's not as attractive. But as we look at this very important project, as Jim described, the capital availability we think comes from basically 3 areas. We've got a lot of cash on the balance sheet today. With hedging strategy at right market conditions, we think we can lock in some cash flow from existing operations. And then we look beyond that as to what the remaining capital need is. And we think there is ready availability of capital out there, and we can lever our balance sheet. So we have not done any hedging. We're going to look at potentially hedging at higher levels to generate cash flow during this investment periods. It's really for a short period of time when it comes down to it.

Carter Driscoll - Capstone Investments

And then my last question before I pass along, can you talk just about the P&L mechanics and in the financial statement mechanics of the insurance settlement, the booking versus the cost of goods sold versus the actual receipt of the payment? And you're getting $29 million approximately from the insurance settlement. But if you look at it from P&L perspective, the offset versus the cost of goods sold versus what you expect to receive in April, can just talk about those mechanics? Just a refresher.

Robert Scherich

Yes, and it kind of breakdown in a couple of categories. We have laid out single-line item treatment on the income statement to keep it very clear what the, in essence, insurance income is and kind of in this cost of sales category. So you may recall we had a piece of that on a preliminary basis for fourth quarter, and now we have the final piece. In combination, they add up to the $29.6 million. And we have disclosed that we've charged to expense our cost of sales during the fourth quarter and first quarter amounts that offset that slightly. In the first quarter, for instance, we recorded $10.3 million of income and $1 million of expense to cost of sales. So we don't believe there's any further expenses to record or any further income because we're to final settlement. So on the balance sheet, we have some capital spending that has occurred for investment that we've made in this facility I think to the tune of maybe $8 million, Jim? Approximately. And we have a receivable as of March 31 for this remaining $9.1 million of cash which, as Jim indicated, we've already received it in April. So I think on the go-forward basis, we just have the additional cash that has showed up here, and we should -- we have a slight incremental depreciation expense going forward because of some of this capital spending that we did.

Operator

Our next question comes from the line of Mitesh Thakkar with FBR.

Mitesh Thakkar

Gentlemen, my first question is kind of on the -- on using plant, and you mentioned at about $40 million to $50 million of cost savings from this facility. Is this the annual number?

James Hensler

Yes.

Mitesh Thakkar

Okay, great. And, second is, I mean you can't talk about your own zinc plants since I know I understand it's still you know there are a lot of things that could change between now and the final facility which you are trying to model it out. But just to give us some perspective, can you talk about over the last couple of years, any zinc facility which might have zinc plants which might have got constructed? Some cost capital expenditure ranges around that?

James Hensler

Well, I mean there's been several constructed in China. I can't really give you a good indications of what those numbers are. And as I said, most of the, or essentially all of the zinc plants that have been constructed around the world in recent time have been conventional roast or bleach, electrowinning-type plants, which are starting with zinc concentrates. So the capital investment for those plants is...

Mitesh Thakkar

Are a little bit higher?

James Hensler

It's going to be higher. So those numbers, to some extent, aren't particularly relevant.

Mitesh Thakkar

All right, fair enough. Second thing is, on the -- you mentioned you know one or more kiln will be idle. Can you just talk a little bit about your maintenance schedule for the rest of the year and how do you think about being opportunistic given that over the last couple of quarters, your EAF dust recycle pace has been kind of outrunning your EAF dust receipts?

James Hensler

Right. Yes, we expect to take outages, 4 separate outages on kilns at our Palmerton plant, our Calumet plant and also some work we're going to doing at our Rockwood plant over essentially between end of June through into the early part of the fourth quarter. Each of those outages could last as much as 6 weeks. There is some fairly major maintenance work. And yes, we've had some backlog of dust in the system, and so we've been able to run our kilns at a rate that's essentially higher than our intake rate. We're hopeful that steel production continues to pick up during the course of the year. And hopefully, at the end of the year, we come through these outages and we'll be at a higher operating level. But we think that the maintenance plan we have right now works well with what we see as the current dust generation rate.

Mitesh Thakkar

Right. And so you mentioned that these are some major maintenance outages, is there incremental capital spending associated with that? Which is -- or can you just talk about broadly what are your capital spending plan for 2011 is?

James Hensler

Yes. Well, for these particular outages, our spending is going to be on the order of about $5 million over the course of the year for our recycling side of our operation. In total this year, our CapEx plan will be probably less than $20 million, and $5 million of which are the items I just described.

Mitesh Thakkar

And you mentioned INMETCO will gain about 10% of volumes in the second half '11, right?

James Hensler

We expect to begin to get the productivity benefits from the investments we have made so far and begin to realize that in the second half. And so we'll be hopefully processing higher rates in the second half of the year.

Operator

Our next question comes from the line of Steve Riccio with Buyside Research.

Steve Riccio - Landmark Capital

Just a point of clarification. The new plant, is that going to be built as a replacement for or in addition to existing capacity?

James Hensler

It will be a replacement of existing zinc smelting capacity.

Operator

Our next question comes from the line of Eric Prouty with Canaccord.

Eric Prouty - Canaccord Genuity

Couple of questions here. The EAF dust on the kiln zinc -- the outages that you plan on taking, will that, do you think that's going to impact volumes at all? Or will your remaining facilities be able to handle as long as this kiln industry stays at kind of the current range?

James Hensler

Yes, I think we'd be able to handle it. That would be part of our planning. We think that the current dust generation rate, we effectively have about one kiln, maybe a little more than one kiln of excess capacity. So taking the outages, it should not be a problem for us to keep up with current dust generation rates. Now our hope is that obviously that improves over time, and we'll have these outages completed if the steel industry is running at higher levels at the end at the year. We'll be in a good position for that.

Eric Prouty - Canaccord Genuity

Okay, so for the June quarter, you would expect fairly similar dust recycling volumes kind of that 134,000 to 135,000 tons range you had?

James Hensler

Yes, I think that would be about right. We may actually run a little bit higher than that, but that should be in the right range.

Eric Prouty - Canaccord Genuity

Okay, great. And then on spreads, which are now starting to increase in your business with the resumption of zinc oxide playing a little catch up with the lag. Maybe a little commentary on what you would expect out of the metal spreads going forward here for the next quarter or 2?

James Hensler

Yes, we think premiums are improving on metal, and we also see our mix improving as we're bringing zinc oxide back into the mix. And we also -- we'll be getting some price improvement in zinc oxide in the second quarter. We made a decision on some of our accounts to hold price increases through the first -- until the end of the first quarter, given the fact that we caused some disruption for our customers in the fourth quarter of last year. And so we'll be realizing some improvement as a result of those price increases.

Eric Prouty - Canaccord Genuity

Right. So we'd expect some expansion off the $0.09 premium you did in the March quarter?

James Hensler

Yes.

Eric Prouty - Canaccord Genuity

Okay, great. And then also just a quick question off the feed was up to 71% this quarter. With the outage at some of the kilns or the discussion we just had with the outage at the dust facilities, can you maintain that 70% level, or are we going to dip from that?

James Hensler

We should be pretty close to that. Yes, because the recycling processing level should be similar, and we expect to remain on the 6 furnace operation, second quarter same as first. So it should be fairly similar.

Eric Prouty - Canaccord Genuity

Then finally, off on INMETCO, the volume's down a little bit year-over-year. I know you're running at full capacity, but anything beyond just some rounding to account for the lower volume there?

James Hensler

What happened there is that we had -- every periodic, we have to do a tap lock change. It turns out that we did that in the first quarter of this year, we didn't do it in the first quarter of the prior year. And so that accounts for a few days of lost production. So that's the reason why we were down a couple of percent. But the underlying business is strong, we've been running at full capacity, and we don't see any major issues there. They may be able to continue to operate in that mode.

Eric Prouty - Canaccord Genuity

Great. Well, if I could just follow-up to that then, I mean traditionally, the June quarter has been the weak quarter for INMETCO. Would -- given what you just said, will there be I guess less weakness in the June quarter, or will it be as -- have that traditional decline in business again in June?

James Hensler

Right. Yes, well, the reason why we had that decline last year is we took our major outage, which is really a several week outage. That's not the outage I was referring to, this tap lock change, which is only a few days. The major outage in INMETCO is now getting pushed. It looks like we're going to push it into the third quarter. We've been able to make some improvements in essentially the materials we use in the furnaces there, and we're getting a little better life. So instead of 12 months, it looks like we're pushing it to about 15 months before we have to do the rebuild. So we expect the third quarter to be affected and not the second quarter.

Eric Prouty - Canaccord Genuity

Right. So June could kind of approximate the March quarter from a result standpoint?

James Hensler

For INMETCO? Yes, I think...

Eric Prouty - Canaccord Genuity

From a volume standpoint, obviously.

James Hensler

From a volume standpoint? Yes.

Eric Prouty - Canaccord Genuity

Yes, the commodity price.

Operator

Our next question comes from the line of Pierre Depalla [ph] from MF Global.

Unknown Analyst -

I just had a quick question on the cash and cash equivalents, which as you stated $112 million above $113 million. Does that include the restriction of cash?

James Hensler

No, that's separate. Separately, we have just under $24 million of restricted cash.

Unknown Analyst -

Okay, and as a second question is the financing of the new plant, new zinc plant. I believe the cost was $270 million, is that going to be spent over an 18-month period? And if not, how is it going to be finance with the…

James Hensler

Well, we have not concluded on what that full cost would be. That's coming out of the soon-to-be completed engineering. But we expect to use our cash. We feel we can put a revolver in place to, in essence, free up restricted cash and support the working capital needs of the business. And then we'd look, depending on what we do on the hedging side to have some certainty around cash flow from operations, that will be determined for us, the end result, the remainder of capital needed, which will get spent out over an 18-to-24-month time period. So that last piece of capital, we see that as probably putting some leverage on the balance sheet.

Eric Prouty - Canaccord Genuity

Through bond issuance or going out to the capital market stocks or what?

James Hensler

I think what's most attractive right now, are bonds, whether it's high-yield or converts. We look at even converts as simply being debt. We wouldn't be looking to have it convert into stocks. So those markets seemed pretty attractive right now. But we need to finalize the investment look and see what we can conclude on the hedging before we arrive at that conclusion. And obviously, the Board has to approve the project before we move forward on financing.

Operator

Our next question comes from the line of David Shapiro with Aegis Financial.

David Shapiro - Aegis Financial

Just a quick question here, on the -- what was the comps for the nickel segment? I'm not sure if you disclosed it already?

James Hensler

I may not have. I'll find it here for you shortly. Do you have a second question while I'm looking that up?

David Shapiro - Aegis Financial

Yes, on the project, are there any environmental issues with closing the existing plant, and have those liabilities been assessed as part of the study?

James Hensler

Yes, we have considered that as part of the overall analysis. And the answer to the question is somewhat dependent upon what we would continue to operate on the site, and that's all part of the planning that we're going through right now. In any case, we've got some estimates of what we think might be involved there. And we also considered that there may be some alternate uses for the site, and so that's also part of our planning.

Robert Scherich

The COGS number, David, for INMETCO was $8.8 million, which was basically flat with the prior year quarter.

David Shapiro - Aegis Financial

And the dust service fee revenue?

Robert Scherich

That was relatively flat, also at $9.2 million.

David Shapiro - Aegis Financial

Okay so then just based on your sort of cost per contained pound, you're over $1 here, I guess you have that $1 million sort of the non-cash charge I think was mentioned maybe in the COGS there. So that would bring down a little bit. But still running a little bit higher than historically where we would believe that at the current zinc price, you would probably be in the low 90s is sort of where we historically thought you could run. Can you explain the bridge? Is there -- have electricity costs just shot up dramatically and getting into the low-to-mid-$0.90 per pound range is just not feasible anymore?

Robert Scherich

I'd say our conversion costs on zinc products is a little bit higher simply because of energy costs, metallurgical coke costs, in particular and what's happened with electricity. But that's not a huge difference. We were probably in the low $0.40 per zinc pound smelting and refinery when we're running a 6 furnace operation and we're probably closer to the $0.45 level now. So there's a little bit of an energy inflation there. But other than that, we're seeing the improved mix of the EAF-based feed, and that's probably coming through on the net cost around $0.20 per pound net-net of the revenues. So I think of the breakeven is still probably -- I don't know Jim, what would you say? At an EPS level, in the 70s or closer to 80. EBITDA at this level, this volume of operation, is more in the 60s

James Hensler

.

I'd agree with that.

David Shapiro - Aegis Financial

Okay, and then lastly, when you're doing the analysis on the plant, I think you mentioned 150,000 ton production level was sort of what you guys are running at? Do the payoffs just go down substantially based on zinc price? Or these assumptions that you're making are really more volumetric and you're sort of isolating for the zinc price?

James Hensler

Well, the benefit of the project is really mostly on the cost reduction side. So the savings in the benefit side is somewhat independent of the zinc price.

David Shapiro - Aegis Financial

Okay, but it's very -- I would imagine there would be a lot of volume sensitivities I mean to be able to run 150,000 tons?

Robert Scherich

There is some volume sensitivity. What we're trying to do is size the plant in part to what we think will generate on the recycling side from a zinc unit standpoint. And also build in the capability that we can expand it in the future if we needed to. But the first focus right now is to replace the current smelter, which has the capacity of 150,000 tons a year with the new smelter that has the capacity of 150,000 tons a year.

Operator

Our next question will come from the line of Paul Forward with Stifel, Nicolaus.

Paul Forward - Stifel, Nicolaus & Co., Inc.

Could you talk a little bit about customer inventory levels for zinc metal or zinc oxide? Just what you're seeing today?

James Hensler

On the oxide side of things, as I've mentioned in my comments, we had some situations where customers have built up some safety stocks while we are out of the market. And it took, in some cases, 30 days or more for that to work its way down and they have begin to take shipments from us. It appears that that's you know work its way through the system pretty well. And we don't see that as a big issue here, it's going into the second quarter. On the metal side, our galvanizing customers, and I'd say this is true for the general galvanizing community, by and large. I think they tend not to hold a lot of inventory. We're their inventory holder for the most part. So their inventories are fairly lean.

Paul Forward - Stifel, Nicolaus & Co., Inc.

All right. And you mentioned approximate conversion cost at $0.45 or so. As you project that forward through the rest of the year and into 2012, any visible changes that you can see as you go through these maintenance outages? Or is that a pretty good number to think about for the next couple of years?

James Hensler

Well, I think it's highly dependent upon a few factors. What happens with energy prices, coke prices, particularly. I'd say we probably seen the greatest inflation in price, in metallurgical coke prices over the last 12 months. And if that trend continues, then we would expect conversion cost to go up. We also expect to see a slight increase in labor cost. We've just gone through contract renewal at the Monaca site, and we'll see a slight increase. We estimate it's a 3-year labor agreement that would average about 3%, 3.5% a year annual increase. So there will be a slight increase in labor cost. Beyond that, we don't anticipate much other inflation.

Paul Forward - Stifel, Nicolaus & Co., Inc.

Great. And I guess lastly, on the new zinc plant, you talked about site selection a little bit. But how much flexibility do you have on location? Or is it if you moved too far away from where you are now, the transportation costs are to eat away at some of that cost savings you'd get elsewhere?

James Hensler

You know there are 2 aspects of transportation costs. One is the cost to ship wells off-site from our recycling plants into the zinc plant. And the other is the cost to ship metal to our customers from the site. Both of those have been modeled, and we look at that for each location that we've had under consideration. Interestingly enough, when you look at the difference between locations, the overwhelming factor is really the cost of electric power. And while transportation cost might vary, plus or minus $1 million from one location to another, the cost of electricity can vary $10 million from one location to another. So that's the overwhelming factor. And then also, there is some factor associated with labor and the level of incentives that we can get from the state and local governments that we're talking to. So we've sort of winnowed down to a relatively few sites now that are under consideration, and we're kind of in the final stages of negotiation.

Operator

We have a follow-up from Carter Driscoll from Capstone Investments.

Carter Driscoll - Capstone Investments

A lot of them have been answered. But just a follow-up on the oxide repricing of the contracts, could you maybe quantify maybe lost business versus what you if we had kind of a steady run rate and realized there is a lot of qq [quarter-to-quarter] variance? But if you take 2010, and looked at what you produced on an oxide level, how much of the contracts coming up for renewal this summer would compromise kind of like an average production on the oxide you use 2010 average oxide production?

James Hensler

Well, I mean 2010 was obviously an unusual year because we are out. So our oxide production number was pretty low for the year. We're expecting 2011 to be 20% to 30% higher than 2010.

Carter Driscoll - Capstone Investments

Let's say you annualize the first half of 2010, just to smooth it out since you have the obvious...

James Hensler

If I annualize the first half of 2010, we could be 5% to 10% below that. It was a higher price, but we think pricing is better this year than last year. And I guess the other important point is those zinc units, we believe we can offset that with additional metal sales.

Carter Driscoll - Capstone Investments

Do you expect a dramatic shift in mix this quarter, or is it more gradual?

James Hensler

I don't think it's dramatic. I think we'll sell more oxide this quarter than we did last quarter. So we'll see some shifting in the mix, but won't be dramatic.

Carter Driscoll - Capstone Investments

So even though you might pull back on the metal production, maybe not just vis-à-vis oxide but oxide at the same time obviously try to make up for the lack of oxide in the fourth quarter, you could have maybe metal going down and oxide going up, so or where do you think metal would be in a fairly steady state?

James Hensler

Well, we're going to continue to run the smelter at about the same rate in the second quarter as we did in the first quarter, 6 furnaces beyond. So the mix is probably going to shift a couple thousand tons additional of oxide and maybe 1,500 tons of less metal, that would be the kind of shifting we'd be seeing.

Operator

And at this time, I'm showing no further questions. Please continue.

James Hensler

Okay. Well, that wraps up the conference call, and we'll talk to you next quarter. Thank you.

Operator

Thank you, and ladies and gentlemen, that concludes your conference call for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

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