Horsehead Holding's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug. 8.11 | About: Horsehead Holding (ZINCQ)

Horsehead Holding (ZINC) Q2 2011 Earnings Call August 8, 2011 5:00 PM 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

Mitesh Thakkar - FBR Capital Markets & Co.

Carter Driscoll - Capstone Investments

Eric Prouty - Canaccord Genuity

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

Albert Sebastian

Robert Howard - Prospector Partners

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Horsehead Holding Corporation 2011 Second Quarter Earnings Call. [Operator Instructions] As a reminder, the conference is being recorded. And I'll now turn the conference over to our host, Mr. Ali Alavi. Please go ahead.

Ali Alavi

Good afternoon, everyone, and thank you for joining us on our second 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 second quarter of 2011. I will review the performance of our operations and markets during the quarter, while Bob Scherich, our CFO, will review the financial results.

Our zinc product shipments for the quarter continued to improve over shipment levels for the first quarter of 2011 and the year ended 2010. The improvement reflects the continued strengthening of the economy and our efforts to expand our shipments of zinc metal beyond our traditional markets. Our zinc smelting facility, and our recycling plants operated at near-capacity during the first 6 months of 2011. INMETCO also turned in another solid quarter.

The consolidated net earnings for the quarter were $6.3 million or $0.14 per share, excluding the non-cash mark-to-market adjustments after taxes of $9.9 million or $0.23 per share related to recently completed hedges. This represents an increase of 9.7% over net earnings for the second quarter 2010 of $5.7 million or $0.13 per share.

Including the after-tax impact of the non-cash mark-to-market adjustments, company had a consolidated net loss of $3.7 million or $0.08 per share. I'm happy to report that we have successfully renewed all of our key labor contracts, of particular concern was the renewal of Monaca labor contract, which had been set to expire at the end of October of this year. We were successful in reaching an agreement with the Monaca local for an early settlement in April, which extends through April 2014.

In addition, we extended the contract of the Monaca Power Plant workers at no additional cost through the middle of September of this year, to coincide with our plans to temporarily idle that operation as we enter into a lower cost, 20-month, power supply agreement for the Monaca smelter.

We also reached agreements with the locals in Palmerton, Calumet, and Rockwood. As a result of these agreements, we incurred upfront costs of $2.2 million related to lump-sum signing bonuses that affected the quarter's results. However, these costs will be partially offset going forward, our cost savings in the new medical insurance programs negotiated under several of these labor agreements.

This wage increases in these contracts are 2.5% to 3% per year. New contracts have terms of 3 to 4 years, and are staggered to avoid having multiple contracts expiring in the same year.

In addition to the onetime cost associated with these labor agreements, performance during the quarter was affected by the rising cost of energy, primarily in metallurgical coke. Coke prices have been steadily increasing over the past several quarters.

We are also seeing a tightening of supply, particularly for the size of coke we use in the Monaca smelting operation, as integrated steel producers are increasingly opting to use the smaller sized coke, that we typically use in our process, to offset a portion of the higher cost, larger size blast furnace coke that they typically use.

We see this trend continuing until such time that additional coke making capacity comes online in the U.S. market such as sun coke's new plant scheduled to start up later this year. We are also pursuing lower cost alternatives to the coke we currently use.

We are pleased with our hedging program in place for 2012 and the first half of 2013 and with our recently completed $100 million convertible notes offering, the company is now positioned to move forward with the new zinc plant project that we announced earlier this year. I will be discussing the project in more detail later in this presentation, and Bob Scherich will discuss both the hedging program and the notes offering during his part of the presentation.

Now I'd like to turn to the operating results. We processed 145,000 tons of EAF dust during the quarter, 4.5% increase from the same quarter last year. This increase reflects primarily the increase in our processing capacity with the addition of the second kiln at the Barnwell plant. EAF dust receipts were essentially the same as the prior-year second quarter at 138,000 tons, or 3% higher than the first quarter of 2011, reflecting a slight increase in output in the steel industry, and an increase in market share as we entered into new long-term contracts with additional steel mills during the quarter.

According to industry statistics, domestic steel production averaged approximately 75% of capacity utilization during the second quarter of this year, just up very slightly from the 74% during the first quarter of this year, and 73% for the second quarter of last year. Currently, industry statistics indicate that steel industry capacity utilization remains in the mid-70% range.

While we continue to believe there's considerable upside to these current dust receipt levels, both from growth and steel output and market share gains, we do not anticipate significant changes in EAF steel production in the short term based on recent public comments by several steel producers.

As noted previously, while we have this period of excess, EAF dust recycling capacity, we started a series of planned major maintenance outages at our recycling plants to assure the long-term reliability of these units. We will be taking the equivalent of 98 kiln days of outages during the third quarter, and 34 kiln days in the fourth quarter to complete this major maintenance work. EAF dust processing rates should match fairly closely with receipts during the third quarter.

Zinc product shipments increased by 2% compared with the prior-year second quarter. On a sequential quarter basis, comparing the second quarter of 2011 to the first quarter, zinc product shipments increased 3.4%, 37,688 tons. Zinc oxide shipments were somewhat flat compared with the first quarter. We had expected zinc oxide shipments to increase during the second quarter compared with the first quarter, as we resume commercial relationships with several customers following the restart of the Monaca refinery in the fourth quarter of last year. While we were pleased to reestablish supplier relationships with these customers, these gains were offset by weaker shipments to other customers due to softer end market demand.

It may take until the start of next year after we renegotiate annual contracts for oxide shipments to fully recover. Regardless of the fluctuations we may experience from zinc oxide shipments, we expect to make up any shortfall by selling additional zinc metal to maintain the smelter producing at full output.

Zinc metal shipments increased 25% compared with the prior-year second quarter, and 6% compared with the first quarter of this year. Increase reflects both stronger demand for our end markets -- from our end markets, particularly in the brass sector, and our successful efforts to sell PW and SSHG metal outside our traditional markets. We expect the near-term demand for PW and SSHG metal to be comparable to the second quarter.

We expect to continue to operate our full complement of 6 zinc smelting furnaces for the balance of the year. However, during the month of July, we lost about 1,500 tons of production due to production difficulties stemming from a lost transformer, and issues with raw material and coke quality impacted production. These production issues are beginning to stabilize but may result in lower third quarter shipments.

Moving on to discuss the zinc pricing environment. LME zinc price averaged $1.02 per pound during the second quarter, which was about $0.10 higher than the prior-year second quarter at $0.92 per pound, $0.07 lower than the first quarter 2011 average of $1.09. Zinc prices have been volatile since the end of the quarter and are currently trading below $1 per pound.

The realized premiums on zinc metal averaged $0.03 during the quarter, just comparable to the first quarter of this year and the second quarter of last year. In general, transactional premiums in the domestic market are improving due to a tightening supply of SHG metal.

Realized premiums for zinc oxide in the quarter were approximately LME flat, which is about $0.06 higher than the first quarter of this year. We implemented price increases for several large zinc oxide accounts, which took effect in the second quarter. Realized premiums also increased due to the slight lag effect, the contractual premiums, the entire producers as a result of the higher LME prices in the first quarter.

INMETCO had another solid quarter. INMETCO's pretax income increased 166% compared against the second quarter of 2010, $5.8 million. Increase was due to higher shipment volumes and higher nickel prices. Shipments of nickel-bearing remelt alloy, increased about 14.5% compared to the prior-year second quarter, primarily as a result of lower production levels last year due to the timing of the annual maintenance outage. INMETCO will take their annual maintenance outage before the end of this year. We currently expect to take it either in late September or early October, depending on equipment condition.

Nickel prices averaged $10.96 per pound during the second quarter, which is up $0.81 per pound from the second quarter of last year. Currently, nickel prices are trading at approximately $10 per pound. We hedged about 40% of INMETCO's nickel price exposure earlier this year, and $11.84 per pound through the end of 2011.

INMETCO continues to operate at full capacity, even though tolling receipts softened during the quarter, stainless steel producers took outages during the summer months. We're getting some indications that stainless steel production is expected to pick up in August.

We continue to invest in INMETCO to expand smelting capacity and to extend product capabilities. During the third quarter, we plan to commission a new processing line for alkaline batteries which will separate the zinc containing core of the batteries from their steel case. The zinc-rich material will be sent to the Horsehead's smelter to recover the zinc, while the steel casing will either be melted at INMETCO or sold.

INMETCO recycles about 2,500 tons per year of alkaline batteries, which are received along with the other batteries that INMETCO recycles. The volume of alkaline batteries is expected to grow. This new process will be a more cost-effective way to recover the contained zinc in these batteries and it will increase the availability of capacity in INMETCO's melting furnace which will create space for higher valued nickel containing materials.

I am pleased to announce that we are continuing with our plans to construct a new lower-cost, environmentally friendly zinc production facility. We estimate that the total capital expenditure for the construction of a new zinc plant will range from $350 million to $375 million. And once operational, should provide us with annual incremental EBITDA of approximately $90 million to $110 million. The estimated internal rate of return for the project is 45% to 50%. The plant will utilize the ZINCEX solvent extraction technology combined with state-of-the-art electrowinning and casting capabilities, with production capacity in excess of 150,000 tons of zinc metal per year from 100% recycled materials.

New plant will be capable of producing special high grade and continues galvanizing grade zinc metal in addition to the Prime Western grade that the company currently produces. This technology opens up the entire one million ton U.S. market for zinc to the company rather than limiting us to the PW market, which is only about 14% of the U.S. market.

New plant is expected to reduce annual operating costs by $60 million to $70 million, resulting from higher zinc recovery, lower energy usage, higher labor productivity, lower maintenance costs and reduced freight cost. In addition, the new plant will increase revenues by $25 million to $30 million, primarily from the recovery of metals such as silver and lead contained in EAF dust, increased premiums on special high-grade zinc and increased metal shipments.

It's important to note that the vast majority of these benefits are independent of the price of zinc. Another benefit of this project is that it avoids spending at least $40 million in the Monaca facility over the next few years with 0 return, to comply with more stringent environmental regulations. The project continues to be on schedule as we finalize incentives and complete preliminary permitting activities before we publicly announce the final site location for the new facility, expect to begin construction by the end of this year and achieve startup as early as the third quarter of 2013.

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

Robert Scherich

Thanks, Jim. My discussion of the financial performance for the quarter excludes the effect of noncash mark-to-market adjustments of $15.2 million related to the recently completed hedge program for the new plant construction period of January 2012 through June 2013. These non-cash charges reduced reported revenues and reduced earnings per share by $0.23. Adjusted net earnings for the quarter were $6.3 million or $0.14 per share, a 10% increase over the prior-year quarter. Earnings for the current quarter included upfront cost of $2.2 million or $0.03 per share associated with the labor contract renewals that Jim discussed.

Adjusted EBITDA was $15 million for the quarter and on an LTM basis, was $92 million. Cash flow was strong for the quarter as the ending cash balance including restricted cash was $153 million, an increase of $16 million during the quarter.

Detail of the quarter's performance, reflects an increase in adjusted revenue of $12.5 million or 13% compared to the prior year's quarter. The increase included an increase in price realization of $5.7 million, a $1.7 million increase due to higher zinc product shipments and $4.7 million added by INMETCO.

The average sales price realized for zinc products on a zinc-contained basis was $1.13 per pound or $0.11 per pound above the average LME price for the quarter, compared to $1.08 per pound or $0.16 above the average LME price for the prior year's quarter, reflecting primarily a shift in a portion of our product mix from oxide to metal.

Sales of zinc metal increased $13.4 million or 38% to $48.3 million for the quarter. This increase reflected an $8.8 million increase in sales volume and a $4.6 million increase in price realization. Sales of zinc oxide decreased $6.3 million to $29.6 million for the quarter, reflecting primarily a decrease in sales volume of $7.5 million, partially offset by a $1.1 million increase due to higher price realization.

On a sequential quarter basis, oxide sales were flat. INMETCO sales increased $4.7 million or 41% to $16 million for the quarter, reflecting higher average nickel prices in the absence of the planned annual maintenance outage in the prior-year quarter, as noted previously. On a sequential quarter basis, INMETCO sales were up 3%.

Consolidated cost of sales increased $11.3 million to $91 million for the quarter, reflecting the effect of higher shipment volumes, higher energy and upfront labor contract costs partially offset by an improved mix of raw materials. EAF base fee to the smelter increased from 61% in the prior year's quarter to 71% for the current quarter. Shipments of zinc products on a zinc-contained basis increased 5% versus the prior-year quarter.

Horsehead's energy costs increased $3.8 million, which reduced earnings per share by $0.06 for the quarter versus the prior year, reflecting higher production levels in the recycling operations and higher prices from metallurgical coke.

INMETCO cost of sales increased $1 million over the prior-year quarter, reflecting the higher shipments. Cash provided by operating activities is $24 million for the quarter, reflecting collection of the insurance claim receivable from the first quarter and the cash generated from operating earnings. Capital spending was $8 million for the quarter.

Turning to the hedges for 2012 and the first half of 2013 that we put in place in June. The hedges cover approximately 75% of our expected zinc shipments during that period, matching up to expected zinc units from EAF dust. We put a min/max cap structure in place with no cash out of pocket when we entered into the positions. The rational for this structure was to provide downside protection at a zinc price level at which we would expect to generate cash flow from operations, while preserving our cash to invest in the new zinc plan rather than to purchase put options. Our estimate is that the put options would have cost us approximately $25 million.

Our put options have a strike price of $0.85 per pound, with sold calls at a strike right price of $1.20 per pound. This arrangement subjects us to potential collateral calls with our counter parties if the foreword zinc price increases. For this reason, we put a collateral cap feature in place by buying calls with a strike price of $1.81 per pound, established in a ceiling for collateral requirements.

During the hedge period, we will receive $0.85 per pound if the monthly zinc price falls below this price, and we will pay our counter party if the monthly zinc price increases above $1.20. If average zinc prices exceed $1.81 per pound, we will begin to participate again. As seen in the recent quarter, hedges will be subject to noncash mark-to-market adjustments on each reporting date and therefore, may result in significant volatility in reported earnings.

The driving force to put this hedge program in place was to establish a range of expected cash flow from operations as a source of capital for investment in the new zinc plant.

In July, we completed the convertible notes offering that Jim mentioned. These notes have the following features: $100 million par value with a maturity of July 2017; 3.8% coupon rate; conversion to 66 in 2/3 shares for 1,000 par value; an effective conversion price on issuance at $15 a share. As mentioned on prior calls, we look at converts as debt. We expect to pay the par value in cash at maturity, and we'll have the option to pay any in the money conversion amounts in cash or shares at our sole discretion.

The end of money conversion will be dependent on the stock price as the notes approach maturity. We plan to record the debt component and the embedded equity component separately on the balance sheet, and use the treasury method for reflecting any in the money conversion affect and diluted shares outstanding.

In round numbers, the debt component is estimated to be $78 million, the equity component to be $13 million, and the balance will be at deferred tax liability relating to the tax versus booked rate of interest. The debt will accrete to the full value, par value at maturity.

The combination of proceeds from these notes offerings, existing cash and expected cash flow from operations should be sufficient at current zinc prices to fund the investment in the new zinc plant. Since zinc prices -- should zinc prices decline, we may need to raise more capital at a later date. We are also in the process of putting a $60 million revolver in place to free up the restricted cash and to provide working capital support.

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 continued strengthening of our markets and with the performance of the business if you discount the impact of the non-cash charges related to hedging program and the onetime cost associated with settling the labor contracts. The rising cost of energy, primarily metallurgical coke, could be with us for some time. We are working on developing lower cost alternatives.

We're also pleased with the continued strong performance at INMETCO. We continue to invest in INMETCO to expand its capacity and extend its product range.

We are very excited about putting in place the hedging in program and the notes offering to position the company to move forward with our new zinc plant project. This project will be transformational for Horsehead. It will not only position the company among the global low-cost producers of zinc and allow us to become a model of environmentally friendly sustainable manufacturing.

It also addresses the long-term vulnerabilities of our current zinc smelting process. We have received the approval of the Horsehead Board of Directors to commit the resources to complete this project. We have the internal team and the technology providers in place to execute the project on time and on budget. We're moving forward with the detailed engineering and environmental permitting, and we are finalizing several details before we announce the location of the plant. We will give you regular updates on the status of this project on these quarterly calls and through press releases as significant events occur.

Finally, I'd like to point out that we continue to pursue acquisitions that will expand our environmental service business and enhance our current product offerings. New zinc plant project has not changed our long-range goal of growing Horsehead into an environmental services and metals reclamation business, to critical mass that recovers a broad range of metals from a broad range of waste streams. If the right opportunity comes along, we are positioned to take action.

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

Question-and-Answer Session

Operator

[Operator Instructions] We have a question from the line of Carter Driscoll with Capstone Investments.

Carter Driscoll - Capstone Investments

First question is, I guess, just kind of the accounting treatment for the mark-to-market. I guess we see fairly volatile reported results starting obviously with the top line since that's where the large came off of going forward. Is that correct from now until basically the effect at the end of the hedge?

Robert Scherich

It really depends on where the zinc price is on the last day for the quarter. Zinc prices rallied rate at the June 30 time period. And as Jim said, they're down off of that right now. So it's entirely dependent on the price at the end of the quarter. And you're right, it is a impact against the revenue line. It's good to point out, separate from settlements if they occur once we get into the months of January 2012 through the middle of 2013. Setting the settlements aside, the mark-to-market adjustments will tend to reduce to 0 as these contracts expire. So anything we're taking as a negative now will come back as a positive later. Again separately, settlements will occur on their own, if the zinc price is outside of our range.

James Hensler

I guess it's worth noting, and maybe it's obvious, that the most volatile period will be between now and the end of the year, where we have the most exposure as these options begin to settle, there'll be fewer contracts outstanding that will be subject to mark-to-market adjustments.

Carter Driscoll - Capstone Investments

Okay. And then, Bob, if I may, if the energy cost, cost approximately $0.06 in the labor, upfront fee cost about $0.03, so x that we're looking at $0.23 if you backed out the charge, is that correct?

Robert Scherich

Yes, that's right.

Carter Driscoll - Capstone Investments

The next -- so can you maybe give me a conversion cost given you had the 1,500 reduction in your production for this quarter, could you give me the conversion cost for this quarter?

Robert Scherich

Well, it's hard to give that guidance. We do think that volume is going to be off a little bit or it has been for July, we'll see if we can make up for it in the balance of the quarter. We still expect to work the smelting operation at full capacity, full 6-furnace operation. We don't see any near-term relief on the energy price. So I think our conversion cost in the second quarter, absent the labor cost, was probably in the mid-$0.40 range.

James Hensler

I guess, I'd have to say that probably the best way to look at it would be, if we didn't recover, our production would be off about 10%, 12%. So absent -- and certainly the worst case scenario, you can see a 10% to 12% increase in the conversion cost.

Carter Driscoll - Capstone Investments

Perfect. Thanks, that's very helpful. And then maybe you can talk about what changed -- I guess the one thing you did catch me by surprise is the flat Oxide shipments, maybe you could just give a little color to what progressed through the quarter versus expectations heading into the...

Robert Scherich

Yes what we saw was that we did pick up some new business as we expected to pick up with contracts that were scheduled to renew in the second quarter. What caught us by surprise was that shipments, particularly to the tire companies, actually softened a bit in the second quarter. And we saw some of our tire companies take outages in June and also some took them in July as well. So that offset the gains that we picked up.

Carter Driscoll - Capstone Investments

And then maybe just shifting over to the -- I'm sure a lot of the discussion is going to focus on the new facility. Can you talk maybe a little bit about, I guess, heading into the quarter, or at least I should say in the last earnings call, you talked about initial estimates of maybe between $40 million and $50 million of EBITDA savings and/or improved -- improvement in EBITDA I should say. And now we're talking $90 million to $110 million. What changed? Was it the impact of the engineering study? I mean, what additionally was pulled out from the cost side? Obviously, the new revenue opportunities, I can back out of that, but what additionally, on the cost side did you discover?

Robert Scherich

Yes, I would say the $40 million to $50 million that we were looking at a quarter ago was predominantly the conversion costs at the smelter, and that basically didn't change much at all. It really has the engineering work was more detailed, the savings in kind of recovery of zinc units and our recycling operations. And as you noted, the revenues from recovering value from other metals became a significant piece of that. So we've been very pleased the further we get into this project while the investment is quite significant, the incremental benefits have continued to prove out to be very attractive.

Carter Driscoll - Capstone Investments

Then maybe, this is my final question, do you have a kind of a range of zinc prices where they have to be, where you might have to consider an additional capital raise, or a little maybe too early to tell?

James Hensler

Well at the bottom end of our color, if we went to $0.85 and stated $0.85...

Robert Scherich

Or below.

James Hensler

Or below for that entire period, we would need to go out and raise some additional money. I point out that you'd see some very attractive equipment financing options out there for us. And much of the equipment in engineering for this plant is going to be sourced out of Europe. And there are attractive export credit financing options in Europe with very attractive rates. And so we potentially could tap into that if we need it.

Robert Scherich

And I'd add to it, Carter, that if we need additional capital, it probably doesn't come into play until 2013. And we're setting with $250 million of cash now headed into this project and that certainly takes us well into 2013 and the majority of this project. So we're a couple of years out if, in fact, we do need additional capital.

Operator

We go next to the line of Eric Prouty with Canaccord.

Eric Prouty - Canaccord Genuity

Just a quick follow-up to some of your earlier comments. If you look sequentially at zinc contained volumes, would you expect them, with some of these outages to be down in the September quarter from the June or relatively flat?

James Hensler

Well, if we don't recover from the smelter July shortfall, we would be down. On the shipment side, I think a lot depends upon what we might see on the zinc oxide front if we can -- we do have some zinc oxide inventory that we could ship if we find the market for it. So maybe it will offset the loss if we sell some additional zinc oxide in the quarter. At this point, I'd say, Eric, it's hard to judge but all things being equal, we have to find some way to make up for the 1,500 ton shortfall if we're going to keep shipments at the same levels.

Eric Prouty - Canaccord Genuity

Right. Okay. And then on INMETCO, I know the previous quarter, you said that the outages could be more than a year long et cetera. Is there going to be maintenance during the September quarter for INMETCO?

James Hensler

We're targeting right now to do it in October, but we're really monitoring the condition of the equipment, and we're ready to jump in if we need to earlier. So we're internally saying it could be end of September or could be early October. It really depends upon -- we're going to try to get as long a life out of the equipment as we can before we have to jump into it. So it's something we monitor week to week.

Eric Prouty - Canaccord Genuity

Great. And then finally, on the zinc oxide side of things, any -- you basically said, looking at some flat numbers, but any visibility? Is there an issue with too much inventory at the tire producers or is it merely a lack of production? Could you just put that into a bit of context?

Robert Scherich

Well I think that initially, we saw some inventory replenishment going on, so the first quarter actually had a little higher than expected shipments from them, and then I think they got their inventories in balance in the second quarter, and demand was a little softer than expected. So we think net over net, it's going to be a reasonably good year for tire producers and maybe up 3% or 4% from where it was last year. But in terms of our plans with them, we didn't anticipate the shortfall in the second quarter.

Operator

We have a question from the line of Mitesh Thakkar with FBR and Company.

Mitesh Thakkar - FBR Capital Markets & Co.

Quick question on the coke side, how much coke do you need in a year? And is there like a do enter [ph] and look more like annual contract? Or are these set quarterly to?

James Hensler

On the smelting side of the business, we use about 100,000 tons a year of coke. And on the recycling side, it's...

Robert Scherich

Probably more than that now with the additional capacity.

James Hensler

With the addition of Barnwell it's maybe a little more than that, 110,000, 120,000 tons. It's 2 different types of coke. The coke we buy for the recycling side tends to be a very fine coke, typically called coke breeze. It's a different price point than the coke we buy for the smelter, which tends to be a little larger size maybe 3/4, 1 inch in diameter would be ideally what we'd like to be buying. And so we're seeing prices go up in both areas, but it's going up at faster rate on the smelter side.

Robert Scherich

It's generally quarterly pricing that we're seeing. We do not have -- given the volatility in that market have not been able to go, go out longer than a quarter on price contracts.

Mitesh Thakkar - FBR Capital Markets & Co.

Great. And I see that over the last few quarters, you have been running -- you have been processing a little bit more EAF dust than you have received. Any color on how we should see it going forward, and how are the dust inventory levels in general?

James Hensler

I think in the third quarter, receipts and processing will be about equal. We're going to have a lot of capacity out with the outages that I mentioned. I say we have about 98 days worth of kiln outages in the quarter. So effectively, we're now one kiln done or maybe a lot more than 1 kiln done for the quarter, so we won't have a lot of excess capacity that work down inventories. We expect to be mostly out of that in the fourth quarter, although we will have about well over 30 days of kiln outages in the fourth quarter. And at that point in time, we'd expect the processing rate of the dust to be a little higher than our intake in the fourth quarter.

Mitesh Thakkar - FBR Capital Markets & Co.

Okay. And 98 and the 34 days kiln outages, how will you characterize in percentage terms?

James Hensler

Well, I mean, the way I look at it is we have 9 Waelz kilns, and they each operate 7 days a week, 24 hours a day. So with these major maintenance outages, we're going to take 98 days worth of outages for kiln process system. So that's...

Robert Scherich

1/9 of our capacity...

James Hensler

About 1/9 of our capacity. And then in addition to that, the kilns typically operate at about 90% of availability. So we take them down for unplanned outages and clean outs, and that sort of thing, over and above these major scheduled outages.

Operator

And we have a question from the line of Albert Sebastian with Prospect Advisors.

Albert Sebastian

A couple of questions. First, do you have any thoughts on the long-term price of zinc? Specifically -- I know you've mentioned that there are number of large mines that are being depleted, and they don't have an impact on supply particularly in, I think, it's '13. But do you have any thoughts on what percentage of zinc might be produced as a byproduct of silver? And given how strong the price of silver has been, could we see higher zinc supply as a result of higher production of silver?

James Hensler

I really can't give you any figures on that. But I would say that I don't think that over mining is a strong factor in the zinc mining output. There obviously has some effect there, but I don't think that's a strong driver for zinc mining.

Albert Sebastian

My second question concerns the new plant. You've indicated 2 components of the -- of your benefits, the reduced annual operating costs of $60 million to $70 million and then the benefit from the margin $25 million to $30 million. At the top end, that's $100 million, but you've indicated that at the bottom end that's $85 million EBITDA. Now you've indicated $90 million to $110 million. Is there something else I'm missing? Is there a third component or benefit to that?

Robert Scherich

We think it's roughly about $100 million and the additional metals that we're saying were going to be able to sell the lead and silver in particular. If you look at kind of ranges of those commodity prices, you either get to an upper range -- it can go plus or minus $5 million to $10 million quite easily. So it's really an indication of the commodity price swings on those 2 metals.

Albert Sebastian

Just wanted to ask one last question concerning the construction. The cost of $350 million to $375 million, the last facility major CapEx that you had was Barnwell, that came in, I believe, significantly under budget. Is there anything you could say with regards to the construction of Barnwell and how it might relate to the new facility in terms of being able to manage the budget and bringing it in potentially to lower end or under budget?

James Hensler

When we originally looked at Barnwell, we were pricing it off at a lump sum turnkey contract, which was priced at around $88 million. And we decided not to pursue that method. We decided to manage the project ourselves. We found that, that was a very successful strategy because we were able to save a lot of money. We did it for $65 million. I think there's a potential for some savings in this project. There's obviously -- there's a contingency in the numbers. And I think that the construction market is still pretty attractive right now, where we think we can get decent rates for construction labor. So I think there's an opportunity to do better than that range, but we need to get a couple of more quarters into the project and really get into more detail and quote a higher percentage of the job before we feel confident that we can improve upon the numbers.

Albert Sebastian

Thank you very much. And congratulations on you getting the financing done, and the options as well, very good job.

Operator

We have a question from the line of Paul Forward with Stifel, Nicolaus.

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

A couple of things. One, as far as the new project goes, can you talk a little bit about the near-term timetable about ordering equipment and announcing a location? And we have seen a pretty drastic move and just the overall markets, not a very positive direction. I was just wondering if you could comment a little bit on how -- as you're beginning the project, has this had -- do you expect it to have any impact at all on your decision-making process through the first few months as you get the project started?

James Hensler

Well, I mean what we've seen in the markets here in the last two weeks is exactly the reason why we put the hedge in and exactly the reason why we used the structure we used. We didn't want to take $25 million of our cash and buy put options, and we wanted to have a strike price at the low end of the color that could generate positive cash flow for us. So we think we're positioned now to move forward with the project. And the fact is that we've got an environment with lower zinc prices and higher coke costs, the need for this new plant is even greater. And so we're anxious to move forward as quickly as we can to realize the benefits And get away from some of the risks we have with our current smelter. With respect to the near-term schedule, we're very close to making the site announcement we've -- in dotting Is and crossing Ts on legal documents and I think most of that's done, so we're pretty close. We've submitted the environmental permits for -- some of the environmental permits, they're going through the process right now. It would expect to -- in a position to start clearing the site probably in September. And so we're moving pretty aggressively in that direction.

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

Great. And you talked about idling the coal plant. I was just wondering if you could talk about how that's going to affect operating costs if you're billing the power instead? And then is there going to need to be some short of a write-down of the asset?

James Hensler

Well in terms -- I'll let Bob comment on the asset question, but we will switch over to this new power contract mid-September. And we'll realize an immediate savings, the cost of savings is on the order of about $10 per megawatt hour. We won't realize all of that in the fourth quarter because we have some transition costs. We've got some excess coal that we're going to have to dispose of, that we're going to sell at a slight loss. And we have some costs associated with the mothballing, the power plant and the proper ways that we could restart it when we need to. That will certainly get run-out in the fourth quarter. We're realizing that benefit in the fourth quarter; we won't really see the full benefit until first quarter next year.

Robert Scherich

As far as potential write-down of asset values, Paul, we view this as a temporary idling. We're simply taking advantage of the market prices that were out there early in the second quarter, and locking those in. And deferring some maintenance CapEx that would be required to continue to operate the plant. So we're going to idle it in a fashion that we can put the maintenance back into it and start it back up. And if market conditions are strong, it may make sense to operate that plant as a power generator. But that's probably something we'll be able -- we'll have the visibility of here in 1.5 years to 2 years.

James Hensler

I should point out we're considering multiple options with the power plant, including potentially selling the asset. And also, the possibility of converting it to a natural gas fired peaking unit, which may make some sense. And so we're doing that evaluation. And so there may be a different mode in which we operate that unit going forward.

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

Okay. And on the couple of other issues, can you talk about -- what was the second quarter EAF dust service revenues?

Robert Scherich

The dollar amount of the revenues were right at $9.3 million.

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

Okay. And then also on INMETCO, could you talk about the split between the tolling versus the remelt alloy for sale?

Robert Scherich

It was a little more weighted, I believe, it was about 2/3 on the tolling side during the quarter versus -- maybe slightly more than 2/3, versus 1/3 on the excess. And that was partly due to catching up from first quarter mix being a little bit the opposite direction.

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

Okay. And maybe lastly, you've talked about second quarter's and COGS side shipments came in soft. And you think about -- that might be 2012 you'd expect to be back up at full capacity. Can you talk a little bit about really in terms of volumes, what do you consider to be full capacity in oxide shipments? And then as we move from 2012 to '13 and '14, can you go over what the impact of the new zinc plant would be on oxide production, and what significant changes that will potentially be?

James Hensler

Just to clarify the comment on zinc oxide, I don't know that we would get back to full capacity but my comment really was that we should fully recover any business we lost as a result of the outage last year, which we're estimating to be about maybe 5,000 tons of zinc oxide this year...

Robert Scherich

On an annual basis.

James Hensler

On an annual basis, relative to what our plan was coming in if we were to fully recover the business. I think that next year, as contracts renewal we'll have a shot at that. Our annual capacity for zinc oxide if we run both the refinery and the Larvik furnaces is close to 90,000 tons. We've operated close to that level in 2007 but we haven't got back to that level since the recession. And I'd say in the current market, something in the 55,000- to 70,000-ton level is probably a more realistic number for the oxide market. For us. Getting to your question about zinc oxide going forward with the new plant, we have a decision to make on zinc oxide business. And it's part of the strategic analysis we're going through. We have this refinery that today we feed from our current smelter. We also have Larvik furnaces that we can feed from hold material draws or [indiscernible] or special high-grade metal. To operate the refinery independent of the smelter, we would have to take an investment in a melting unit to be able to feed that facility. And that's a decision we're making. What we're going through right now is what is the best strategy for staying in the zinc oxide business. And we're looking at a number of alternatives. We think it's going to be another quarter before we've kind of worked through that analysis and made the determination. So it's a little early to give you an answer on that.

Operator

And a question from the line of Robert Howard with Prospector Partners.

Robert Howard - Prospector Partners

Maybe tag in a little bit on what you're saying there at the end with Paul. But in general, the Monaca facility, when that's -- when you've got the new facility built, the one at Monaca, is that -- I guess can that be used for something else? Or what kind of options do you have with that?

James Hensler

Well one option is, if we continue to run the zinc oxide operation there, and that's our current plan is to have some zinc oxide production in that facility. We're looking at other options for the site, the facilities have a great infrastructure and could be used for other things that sits on the Ohio River, has barge access. We have a power plant on site. We have rail access on site. We also have a number of buildings that could be used for other purposes. One of the purposes we're considering right now is a iron waste recycling business where we can process and recover iron from various waste streams. And we're evaluating the economics of that. We've got -- we have a sinter plant in that facility, which could be used for that purpose, and there is the possibility of converting some of our zinc smelting furnaces for that purpose. We have to make some investment to make that happen. But the infrastructure is in place to be able to do something like that. So that's one possibility for the site, and we're looking at others as well.

Robert Howard - Prospector Partners

Great. And then with the new facility, the ZINCEX technology, I guess you guys, I think, have said that there's a couple of places that are using that. I guess I was just kind of wondering about the history of construction of those facilities. Has is it been something that has had technical problems getting them in, or is everything kind of always gone on budget? Or I guess there's a history so you're kind of -- expect that any -- the learning curve to have been used by the other constructors, and hopefully you can take advantage of that?

James Hensler

Well the most recent installation at Akita in Japan went very smoothly, and was up and running on schedule. I'm not completely privy to what their financials were for that project, so I don't know whether it came in on budget or not. The Skorpion plant, which was commissioned in 2004, did have some issues upon start up. Those were pretty well documented. And the cause is known, and those causes can be avoided now. And it's operated very reliably for the past several years.

Robert Howard - Prospector Partners

And is ZINCEX, I guess, is that sort of, I don't know, proprietary's the right word. But kind of used by a technology that you're getting from someone else that when I think about going back to the Barnwell construction that you were able to kind of go out and do a lot of that on your own, or at least do a lot of the work, and lower the cost line on your own where since this is maybe someone else's technology, the less ability to do that if the situation were to -- a similar situation were to occur like Barnwell?

James Hensler

No. Well the ZINCEX technology is developed and patented by Tecnicas Reunidas. They developed the technology and they continue to improve upon it. We'll have a licensing agreement with TR, and the advantage of that licensing agreement is that any development, anywhere, in any of their installations we get to share in that knowledge. So there is an opportunity to get learnings from other users out there that make developments. So the advantage here to us is that we can take a proven technology. And we also have an engineering provider that can provide us with ongoing technical support to optimize the process.

Robert Howard - Prospector Partners

Then lastly, with this major sort of kiln outages that you have going on, how long will it be until you sort of need the next debt? Does that put you out for quite a long way until a new set is needed?

James Hensler

Well one of the kilns in Palmerton we've replaced the shell. This is the first time in 80 years we're doing it. So we may be good for a while.

Robert Howard - Prospector Partners

So it's that kind of scale or -- these are...

James Hensler

These are -- essentially the major changes we're making is we're replacing the shell on different sections of the kilns, which have never been done. And they were warping and they were causing us unplanned downtime and other costs that now is the time to take care of that. We also replaced the entire conveyor system at the Rockwood plant, which is the first time that's been done since that plant was built. And these are long-term kind of large-scale upgrades to the infrastructure, which we think will help us for the next 20 to 30 years.

Operator

[Operator Instructions] And we go to Albert Sebastian with Prospector Advisors.

Albert Sebastian

Just a quick question on convertible note. Bob, can you explain how would the equity component works with regards to the impact on your financial statements due to movements in your share price? Would you be recognizing gains and losses to the income statement?

Robert Scherich

No, I don't believe so, Al. I think what happens from the beginning here is we record the debt at basically under a [indiscernible] issue discount as if we have gone out with, let's say, an 8.5% unsecured note. And you discount that back and study using the 3.8% coupon that we're actually going to be paying in cash. So that gets you back to about 78 million. You're going to accrete that and have this non-cash interest charge over the life of the notes. The equity piece is basically going to go into additional paid in capital for all intent and purposes. We sold an option, in essence, on the equity. What will happen between now and maturity, we believe, is just like if there's options outstanding that are in the money under the treasury method, you go through and do a calculation and end up with this difference in diluted versus basic shares outstanding. So it will have an impact if it's in the money under treasury method in arriving at diluted shares outstanding versus the basic shares. And as if they had been converted at this, in the money price if that circumstance exists. In that sense, it's similar to having stock options outstanding.

Operator

There are no questions at this time.

James Hensler

[indiscernible] and we will talk to you at the end of the third quarter. Thank you, everybody.

Operator

Thank you. And ladies and gentlemen, this will conclude our conference call for today. We thank you for your participation, and for using AT&T's Executive TeleConference Service. And you may now disconnect.

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