Horsehead Holding's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Nov. 4.11 | About: Horsehead Holding (ZINCQ)

Horsehead Holding (ZINC) Q3 2011 Earnings Call November 4, 2011 11:00 AM ET

Executives

James M. Hensler - Chairman, Chief Executive Officer and President

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

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

Analysts

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

Carter W. Driscoll - Capstone Investments, Research Division

Eric Glover - Canaccord Genuity, Research Division

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Horsehead Holding Corporation 2011 Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ali Alavi. Please go ahead.

Ali Alavi

Thank you. Good morning, everyone, and thank you for joining us on our third 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 M. Hensler

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

The consolidated net earnings for the quarter were $23.1 million or $0.52 per share, including a noncash mark-to-market adjustment after taxes of $23.7 million related to open hedge positions or $0.54 per share. The net loss of $0.7 million for the quarter, excluding the hedge adjustment, compares to a net loss of $2.4 million for the third quarter last year. Demand for our products continued to be strong for the quarter. However, we experienced unusually high operating costs and reduced shipments due to production difficulties at the Monaca smelter, planned maintenance outages in our recycling operations and other onetime costs. We also continue to experience higher energy costs, particularly for metallurgical coke.

Regarding the production difficulties at Monaca, at our last call, I reported that we experienced an issue with the smelter related to the combination of an electrical transformer failure and an issue with coke quality and availability, which impacted the productivity of the smelting furnaces. This issue resulted in a shortfall in production of about 2,800 tons or 8% during the quarter compared against the run rate for the first half of 2011, which reduced shipments and increased unit production costs. Production was restored to normal levels by the end of the quarter, and we would expect the fourth quarter output to be more similar to the run rate during the first half of the year.

In addition, we took the previously announced major maintenance outages at our Palmerton, Calumet and Rockwood plants during the quarter. The Palmerton outage is still underway and not expected to be completed until November 10. These outages addressed long-term equipment integrity issues at each plant and will not need to be addressed again for several years. We incurred about $2.3 million in extraordinary maintenance costs during the quarter.

Finally, there were several other onetime costs that hit the third quarter. As part of the wind down of our power plant, which was idle in mid-September, we sold excess coal at a net loss to fulfill our coal supply contract, which will run through the end of this year. We also incurred some additional costs to mothball the power plant, which will continue into the fourth quarter. Once these transition costs are behind us, we expect to realize a net cost savings of about $400,000 per month going forward from our new power contract. Other onetime costs included a lower of cost or market adjustment to inventory, triggered by the drop in zinc prices at the end of the quarter and transaction expenses related to an acquisition and financing activities.

Metallurgical coke prices continued to increase during the quarter and availability of good quality coke became more difficult to find, which contributed to the smelter productivity issue mentioned earlier. Coke prices are up over 20% since the beginning of this year. However, we are starting to see some moderation of coke prices and increased availability as we enter the fourth quarter.

I am pleased to report that on November 1, we completed the acquisition of Zochem, a zinc oxide producer located in Brampton, Ontario for a cash purchase price of $15 million on a debt-free basis. This acquisition is complementary to our current zinc oxide business. It broadens our geographic reach, provides added flexibility and allows us to diversify the technologies we use to produce zinc oxide for our customers. Zochem's revenues for the first 9 months of 2011 were approximately CAD $69 million on shipments of about 31,000 tons of zinc oxide. Horsehead expects to continue to operate its current zinc oxide production facilities.

I'd now like to turn to the operating results. We processed 139,000 tons of electric arc furnace dust during the quarter, a 2.4% increase from the same quarter last year. This increase reflects primarily the productivity gains we have achieved over the past year. Processed tons declined about 4% from approximately 145,000 tons in the second quarter this year primarily as a result of the planned kiln outages noted previously. EAF dust receipts were essentially the same as the prior year's third quarter at 134,000 tons, but were 3% lower than the second quarter of 2011, reflecting a slight decrease in output from electric furnace steel producers.

According to industry statistics, domestic steel production averaged approximately 76% of capacity utilization during the third quarter this year, which is up very slightly from 75% during the second quarter this year and 71% from the third quarter of last year. We believe the slight increase in capacity utilization in the third quarter of this year was primarily a result of the restart of integrated steel capacity, which did not affect EAF dust generation.

Currently, industry specifics indicate that steel industry capacity utilization remains in the low- to mid-70% range, and while we continue to believe that there is considerable upside to our current dust receipt levels in the long run, we're anticipating a decline in steel output in the fourth quarter based on recent announcements from several steel producers. We were very pleased to announce a few weeks ago that we've entered into a 10-year agreement to expand and extend our recycling services with Nucor Steel. We expect to begin receiving dust from the additional Nucor plants under this agreement by the beginning of next year. At the projected steel industry operating levels, it's likely that we'll idle one or more kilns in our recycling plants for the balance of this year and keep them down until such time the receipt levels increase.

Zinc product shipments increased by 3% compared to the prior year's third quarter, a decrease by 5% to 35,650 tons compared against the second quarter this year. Comparisons against the third quarter of 2010 are not very meaningful because that quarter was affected by the refinery outage, which cut back operations at the smelter and the zinc oxide production unit. Zinc oxide shipments were flat compared with the second quarter of this year and market demand for zinc oxide remains steady. We're at the early stages of negotiations for 2012 oxide contracts. So far, the market appears to be accepting price increases for next year. Zinc metal shipments decreased by 9% compared with the second quarter of this year due to the production shortfall we mentioned earlier. Demand for zinc metal, however, continues to be strong.

Moving on to discuss the zinc pricing environment. The LME zinc price averaged $1.01 per pound during the third quarter, which was about $0.10 higher than the prior year's third quarter at $0.91 per pound and $0.01 lower than the second quarter of 2011 average of $1.02. Zinc prices dropped to the low $0.80 per pound range by the end of the third quarter and are now trading in the mid-$0.80 range. I will remind you that we put in place a hedging strategy earlier this year with a collar structure but has a floor at $0.85 per pound and an upper limit of $1.20 per pound, covering 75% of our expected production from January 1, 2012, through June 30, 2013.

The realized premiums on zinc metal averaged $0.036 during the quarter, which was up nearly $0.01 from the second quarter this year. Transactional premiums in the domestic market continued to be strong due to a tightening of supply of SHG metal. Realized premiums for zinc oxide in the quarter were approximately minus $0.01 and were comparable to the second quarter of this year.

INMETCO had another solid quarter. INMETCO's pretax income increased 82% to $6.6 million versus the third quarter of 2010. The increase was due to higher shipment volumes and higher nickel prices. The higher shipment volume was due to higher productivity from the INMETCO melting furnace as a result of several improvements that have been implemented at the Ellwood city facility. Shipments of nickel-bearing remelt alloy increased by 9.9% compared to the prior year's third quarter and 6.1% when compared against the second quarter of this year. INMETCO was able to defer the start of their annual maintenance outage until late September of this year. The outage was completed in mid-October, on schedule and on budget.

INMETCO continues to operate at full capacity, even though tolling receipts have softened due to a decline in stainless steel production. We expect stainless production will continue to be soft during the fourth quarter. However, INMETCO should continue to operate at full capacity by working down its inventory backlog and taking on spot business that is currently going to a landfill.

Stainless melting capacity and EAF dust generation is expected to increase sometime next year when ThyssenKrupp starts up its new melt shop in Alabama. With the productivity gains that we have already realized and other modest investments that are planned, INMETCO will be well-positioned to service this additional capacity once it comes online.

Nickel prices averaged $10 per pound during the third quarter, which was up $0.39 from the second quarter of last year. Currently, nickel prices are trading in the mid-$8 per pound range. We hedged about 50% of INMETCO's nickel price exposure earlier this year at $11.45 per pound through the end of 2011.

I'm pleased to report that we continue to be on track with our plan to construct a new lower-cost environmentally friendly zinc production facility. We announced that we have selected Rutherford County, North Carolina as the site of this new facility in September. Site preparation work is underway. Construction progress can be followed on our website. We've received the NPDES permit for the facility, and we are proceeding with applications for the other permits, which are expected to be minor in nature. Front-end engineering is expected to be completed in the next few weeks. And we should be in position to begin foundation work in the first quarter of next year.

We continue to target start-up of a new plant by the end of the third quarter of 2013. Our estimate of the total capital investment for the plant remains at $350 million to $375 million. Once fully operational, it should provide us with annual incremental EBITDA of approximately $90 million to $110 million. The plant will utilize the ZINCEX solvent extraction technology developed by Tecnicas Reunidas, combined with state-of-the-art electro-winning and casting capabilities designed by Xstrata zinc for the production capacity -- or for production capacity in excess of 150,000 tons of zinc metal per year from recycled sources. The new plant will be capable of producing special high-grade zinc and continuous galvanizing grade in addition to the Prime Western grade that the company currently produces.

In addition, the new plant will be capable of recovering value from other metals contained in the feedstock including silver, lead and copper.

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 that increased reported net earnings $23.7 million or $0.54 per share. The adjusted net loss for the quarter was $0.7 million or $0.02 per share compared to a loss of $0.05 per share for the prior year quarter or adjusted earnings of $0.14 for the second quarter of 2011. Adjusted EBITDA was $63 million for the quarter and on an LTM basis, was $81 million.

Cash flow was strong for the quarter as net working capital declined, more than offsetting capital spending. Cash provided by operating activities was $16 million for the quarter, reflecting the reduced working capital. Capital spending was $13 million for the quarter. Financing activities added $97 million in net proceeds from the convertible notes issued during the quarter and $21 million of restricted cash was freed up, primarily as a result of putting a revolver in place. The cash balance at September 30 was $250 million with debt at $79 million.

Detail of the quarter's performance reflect an increase in adjusted revenue of $14 million or 15% compared to the prior year's adjusted quarter. The increase included an increase in price realization and higher zinc product shipments of $7.3 million, $4.2 million for coal sales and $2.5 million added by INMETCO. The average sales price realized for zinc products on a zinc-contained basis was $1.12 per pound or $0.11 per pound above the average LME price for the quarter compared to $0.98 per pound or $0.06 above the average LME price for the prior year's quarter.

Sales of zinc metal decreased $6.3 million or 12% to $43.9 million for the quarter. This decrease reflected a $10.3 million decrease in sales volume, partially offset by a $4 million increase in price realization. Sales of zinc oxide increased $14.9 million to $28.6 million for the quarter, reflecting an increase in both sales volume and price realization as a result of the refinery outage last year and the higher commodity price in the current quarter.

INMETCO sales increased $4.2 million or 32% to $17 million for the quarter, reflecting higher average nickel prices and a 10% increase in shipment volume. Consolidated cost of sales increased $10.6 million to $96 million for the quarter, reflecting the effect of higher shipment volumes and energy costs, increased purchase feed in the mix of raw materials, the effect of the plant maintenance outage at the recycling operations and wind-down costs associated with the idling of the power plant.

EAF-based feed to the smelter decreased from 85% in the prior year quarter to 73% for the current quarter, reflecting a lower smelter operating level in the prior year quarter. Shipment for zinc product increased 3% versus the prior year quarter. Cost of coal sold during the quarter increased cost of sales to $5 million. An LTM adjustment of $0.8 million was made against the inventory, reflecting the lower zinc price on September 30. INMETCO cost of sales increased $1.7 million over the prior year quarter, reflecting the higher shipments. SG&A increased $1.1 million over the prior year quarter and included costs associated with canceled financing efforts and acquisition expenses.

In summary, the impact of the production issues, maintenance outages and the other onetime expenses in the quarter had an estimated effect on EBITDA of approximately $5 million or about $0.07 to $0.08 per share. Adjusting the EBITDA that I mentioned earlier, our $6.3 million EBITDA, with this $5 million of additional onetime items, puts the EBITDA close to the number that the analyst estimate for the quarter was at approximately $12 million.

As noted in our release, our 2012 and 2013 hedges were a range through MF Global, who filed for bankruptcy earlier this week. We did not have cash on our accounted MF Global and our 2012 and 2013 hedges are LME-registered contracts. We are working to move these contracts to alternate clearing members. These hedges are expected to remain in full effect.

As seen in the recent quarters, hedges will be subject to noncash mark-to-market adjustments on each reporting date and, therefore, may result in significantly volatility in reported earnings. We had an unfavorable adjustment at June 30 when zinc price was approximately $1.10 per pound and a favorable noncash adjustment when the zinc price was closer to $0.85 at September 30. We would expect to have another unfavorable adjustment at December 31, if zinc price is noticeably above $0.85.

The objective in putting 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. Current cash levels and the availability on the revolver are expected to cover our investment requirements for the new zinc plant over the next year. We continue to work on additional financing alternatives for the remainder of the potential requirement. Our target is to a range from additional $100 million of debt in the next year or so. These alternatives are primarily focused on term notes.

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

James M. Hensler

Thanks, Bob. In summary, before we open the call for questions, I'd like to say that while the results from Horsehead Corporation did not live up to our expectations at the start of the quarter, I'm pleased with the efforts of our operating management in dealing with some difficult production issues at the smelter and turning them around very quickly. We also had to deal with the wind down of the power plant and major maintenance outages, which should be behind us by the middle of the fourth quarter.

We're very excited about our recent acquisition of Zochem. The acquisition should be immediately accretive, while providing us with greater flexibility as we consider our options for the zinc oxide production facilities located in Monaca after the smelter is idled. We're also very pleased with the continued strong performance at INMETCO. We continue to invest in INMETCO to expand its capacity and extend its product range.

It's a quarter like this one that drives home the value of our decision to build a new state-of-the-art zinc plant to replace the 85-year-old technology that we operate in Monaca. The Monaca facility, while we continue to work diligently to optimize its operations, is susceptible to occasional upset -- process upsets due to its aging infrastructure. Its production costs are also strongly affected by energy prices, particularly coke. We're very excited to have put in place the hedging and financing to begin construction of our new North Carolina facility. This project will be transformational for Horsehead Corporation. It will not only position Horsehead among the global low-cost producers of zinc and allow us to become a model of environmentally friendly sustainable manufacturing, but it also addresses the long-term vulnerabilities of our current zinc-smelting process. We're working diligently to expedite this project.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from the line of Carter Driscoll with Capstone Investments.

Carter W. Driscoll - Capstone Investments, Research Division

My first question, I guess, one of your last comments, Bob, you mentioned you're potentially looking at, I think, term loan of $100 million and wanted to dig a little deeper. Is the -- the thought process, I think, before was you felt you had sufficient funds raised until you got closer to the projects. And then you might evaluate some potentially, some attractive EU export financing. Has any of the thinking changed maybe because of the acquisition, or a new price expectation for zinc between now and the completion of the project? Maybe we could just start there and you can characterize that comment.

Robert Scherich

I'd say nothing has changed from our end. We felt that at the lower end of our hedge range, we probably would have to raise some financing and zinc is setting at that lower range as we said today. So we believe there are some attractive alternatives. We are continuing to pursue export credit financing and are working through an arrangement currently. We think that will take a while to see how that develops. But we think there's other alternatives also on term loans around that. So if we operate at that lower end of the hedge, we believe we will want to put some financing in place where we most likely need to. So I think it's consistent with what we've been saying before. So we think we've got some time to work with.

Carter W. Driscoll - Capstone Investments, Research Division

The next question is, talking about, Bob, the new contract that you signed. Could you maybe discuss what percent or give a dust receipt amount you hope to incrementally acquire from having a new -- a couple of the new facilities? If I understand, it was 2 or 3 new plants that were added in the new agreement. Could you talk about how that may or may not affect dust receipts starting next year?

James M. Hensler

I guess, to put it in perspective, obviously, it depends upon what steel output is for next year. But if we were to say steel output remains where the year-to-date average is, we would estimate that next year, we would pick up on the order of about 10% to 15% additional volume through our facilities.

Carter W. Driscoll - Capstone Investments, Research Division

Could you -- just switching gears a little bit, could you talk about the acquisition of Zochem and how long it was in the works and the Genesis behind the deal, did you approach them, did they approach you? How seamlessly you imagine the acquisition will be, will it be similar to INMETCO and how value added that has been?

James M. Hensler

Yes. Well, we've been looking at the zinc oxide business. And from a strategic perspective, we realize that once we made the decision, and were thinking about the decision regarding the closure of the smelter in Monaca eventually with this new North Carolina plant, that we would be faced with the decision of what to do with zinc oxide. And so we have been considering a number of different possibilities. And we've always been interested in Zochem as an entity. And so we approached Hud Bay Mining and Smelting earlier in the year and discussed the possibility. And their strategic focus has been to move more in the direction of mining, and so they began to look at Zochem as more of a noncore asset and so discussions developed from there. And we felt that the valuation was very attractive, and we estimate that the replacement cost for those assets would have been somewhere in the $75 million to $100 million range. And so we felt that the valuation was very attractive, and we think it gives us a lot more flexibility and options as we think about our zinc oxide business going forward.

Carter W. Driscoll - Capstone Investments, Research Division

Can you talk about any other effects that you expect from winding down the coal plant and maybe in fourth quarter and/or beyond, and lingering potential environmental exposure? How do you think about the process of winding that down and what things we can expect over the next couple of quarters?

James M. Hensler

Yes. Well, I think most of the wind down is behind us, although there will be a little bit that will play into the fourth quarter. We made the decision. We felt the power plant is a valuable asset, and so we didn't want to just shut it down and walk away from it. So we opted to mothball it in such a way that it could be restarted very easily if needed to be. And so that involves some costs to make sure that the equipment is maintained in the right condition going forward. And so we have maybe $0.5 million of costs associated with that, that we needed to incur. We probably took half of that in the third quarter and the other half is going to be in this quarter. We also had a coal supply contract, which ran through the end of this year, and we were not able to consume all of that coal with the power plant obviously because we idled the plant in mid-September. We were able to make arrangements to sell some of that excess coal to a utility in the third quarter. We still have some to sell in the fourth quarter, but we're probably looking at less than $0.25 million of net exposure there that would hit us in the fourth quarter in addition to the other wind-down cost I mentioned. Coming out of the fourth quarter, we would expect the cost of mothballing the facility will be roughly minimum. And we would incur the net benefit of having a much lower cost power contract. Our generating cost prior to idling the plant were in the $55 per megawatt hour range, and our new power-supply contract is going to be closer to $45 per megawatt hour. So that's going to translate into about $400,000 a month of additional savings. From an environmental standpoint, we don't see any issues affecting its -- going forward. We are pursuing multiple options with that facility including potentially selling it. And so depending upon how that plays out over the next several months and quarters, we will see. But we think most of the transitional costs will be behind us here in the fourth quarter, and we'll start reaping some benefits from this move before the end of the year.

Carter W. Driscoll - Capstone Investments, Research Division

My last question before I step aside is just could, Bob, could you review what steps you guys are taking or what you can do in terms of reporting the hedging contracts away from MF? And when do you think you might be able to have completion of that announced if...

Robert Scherich

Yes. I'm not sure on the completion of it. We're working on it actively. But it's important to recognize these are LME contracts. That's the reason that we did them. To have that protection, there are numerous clearing members of the London Clearing House. And we have approached several of those. We expect to probably move these positions to multiple clearing members. Those moves have been occurring not for us yet, but for other MF Global positions. We've been getting regular updates from the London Clearing House and those positions are being transferred. That's consistent with what we felt all along would happen. It's consistent with what happened under the Lehman failure, the -- and past events where those contracts stayed intact with alternate members, and there was no loss to the holders. So we believe, over the course of the ensuing really, days, a week or 2, is when we would expect to have that completed.

Operator

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

Eric Glover - Canaccord Genuity, Research Division

I'm just wondering on the Zochem acquisition, if you could provide a little additional color on that in terms of what do you expect for, say, revenue in the fourth quarter? And how accretive do you think it will be to either EBITDA or earnings on a go-forward basis?

James M. Hensler

Yes, I don't want to put a forecast together right now. I could give you -- I mentioned where they were year-to-date. Their EBITDA on a year-to-date basis is in the order of about $4.7 million. So I think that we found that to be pretty attractive. We're working through a transition plan right now because we are looking at what business makes sense to produce at Zochem versus what makes sense to produce in Monaca. And we're sorting through that right now, and we'd expect the transition of some production up to Zochem. And we also see Zochem as being a potential outlet for some of the Horsehead metals. And so we see that as a potential synergy that we probably won't fully realize until starting into next year. So, hopefully, that helps. I mean, we're working through that plan right now. Obviously, during our due diligence, we're careful not to get too actively involved on the commercial side of reviewing them. And so we're spending our time right now working through that transition plan.

Robert Scherich

And I'd add, Eric, that this was a November 1 acquisition. So there will only be 2 months in the fourth quarter. And we'll have to go through kind of the purchase accounting process. So it's difficult to say at this point what types of impact purchase accounting might have. But we do believe it will be accretive. We'll get some further developments on that probably as we work through this quarter.

Eric Glover - Canaccord Genuity, Research Division

Okay. And then just a little more on Zochem. What's the -- their primary feedstock inputs? And is there a significant customer overlap with you?

James M. Hensler

They purchase metal. And up until this point, they have purchased most of that metal from their parent company Hud Bay Mining and Smelting. And we will continue to purchase some metal from Hud Bay going forward for a period of time. We intend to supplement that with, as I mentioned earlier, our own metal. The customer overlap is actually not very significant. Horsehead's business tends to be very concentrated in tire and rubber, roughly 2/3 of the Horsehead's business is tire and rubber. And Zochem's focus is -- the other markets for zinc oxide, their exposure to tire and rubber is less than 20% of their business. So they also have an active export business and some businesses, obviously, in Canada. So we found that their customer mix was quite complementary to our own.

Eric Glover - Canaccord Genuity, Research Division

Okay. And finally, on the new zinc plant, you mentioned that it should be much more reliable than the current Monaca's plant. So I was wondering, what has been the customer's -- or the companies that are using the same technology, what has been their experience in terms of downtime, unplanned downtime, I should say?

James M. Hensler

Yes. Well, I mean, the main example of that would be the Zochem -- or excuse me, the Skorpion plant in Namibia. And that's been very reliable here. And as I've looked at their operation, their recent performance, they're generally considered to be the low-cost producer, if not, one of the lowest-cost producers in the world. And so that reflects a very high level of reliability.

Operator

Our next question comes from Mitesh Thakkar with FBR.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

A quick question on Zochem. Can you talk about the acquisition process in general? I mean, typically, if you look at INMETCO or your related zinc plant, you go through an IRR calculation and come up with how much rate of returns it's going to earn? Can you talk about a little bit of that? And maybe just kind of give us an overview why did you choose this particular plant given its in Canada and $15 million kind of an acquisition?

James M. Hensler

Well, yes. I mean, we did a cash flow analysis looking at this acquisition and felt that the IRR on a stand-alone basis looked very attractive. We put it in the 20% to 30% range and felt that, that was a very attractive opportunity for us to gain the added flexibility that we're looking for. The Zochem process is a very cost-effective process for making zinc oxide. It's a lower-cost process than we have today at Horsehead at the Monaca location. And we felt that it would probably be low-cost technology out there for making zinc oxide. It's different from the configuration in Horsehead in that it starts with metal, pure metal and makes oxide from it, whereas in Horsehead, we're taking PW metal in molten form directly from the smelter to our refinery and distilling it, which tends to be a costlier process. So we felt that there were some real opportunities by moving to that technology and that it was an attractive manufacturing option for us given that we would be idling the smelter at some point here in the not-too-distant future and beginning to produce special high-grade metal of our own.

Operator

Your next question comes from the line of Paul Forward from Stifel, Nicolaus.

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

Bob, I think you mentioned earlier some -- a few items that you consider to be onetime expenses in the quarter. I just wonder if you could go through that again, if possible, just to think about maybe exactly what's onetime versus what's recurring, what you consider to be onetime? I think, I just -- there was a few items, I just wanted to make sure I captured them all?

Robert Scherich

Yes, the way I looked at it, Paul, was this high level of planned outages at our recycling, as Jim had quoted, had about $2.3 million of higher cost impact. The LCM adjustment on inventory was about $0.8 million. The coal sales, which are ramping up, had negative margin of about $0.8 million also. And as I mentioned in the SG&A side, we had some financing costs that we wrote off or financing that we were pursuing and canceled, and then acquisition-related expenses as you write off those, as you're developing and pursuing acquisitions. Those totaled about $1 million to $1.1 million in combination with the SG&A line. So when you put those together, it comes out to about $5 million. I didn't attempt to do anything with the reduced operating level at the smelter. That's just part of the ups and downs of that operation. So $5 million on top of the $6.3 million that we had put us between $11 million and $12 million on the EBITDA standpoint, which I thought was kind of the right bridge or the right way to look at it versus where kind of analyst averages were at.

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

Okay. And I think toward the end of your comments, you talked about in the new zinc plant that you're working to expedite the process. So I was just wondering if there's anything obvious as you look at the process for starting up third quarter 2013. Is there anything obvious that, let's say, a potential project -- component of the project that can be expedited that might allow you to start up earlier? And also, can you talk about the timing of the expected cash outlays as you're thinking about that project as it goes through 2012?

James M. Hensler

Yes. I mean, I think some of the good news that we've been getting from a scheduling standpoint is that our original schedule contemplated fairly long lead time for some of the critical electrical components for the new plant. And we were anticipating that, that might take as long as 20 months. And now we're starting to see lead times on these components that are in the 12- to 14-month range. So we believe that based upon that, we have the opportunity to pick up some time on the schedule, maybe not that full difference, but we're now beginning to get to a point where we can start to work through a more detailed schedule and understand what the critical path is. I'd say we're probably at least 1.5 month away before getting our arms around that in the kind of granularity that we would like. But we believe that there is the potential to improve upon that schedule. But by how much? At this stage, we don't know.

Robert Scherich

The spending profile as we see it right now, Paul, I think we're looking at probably $30 million to $40 million this year. And this is going to be dependent on how successful we are in expediting some of the schedule. I think next year, the range is very broad, $100 million to $150 million. It could be a little more if we can expedite. But we believed all along that the heavy part of this spending is going to fall into the beginning of 2013 and through the start-up. So we think it's probably less than $200 million before you get to 2013, unless we can expedite it, which is our preference.

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

Great. And you talked about potentially idling some kilns, potentially right away? I was just wondering if you might be able to talk about which ones stand out as possibilities? And what's your inventory of EAF dust looks like?

James M. Hensler

Yes. Well, we're probably going to idle both kilns at our Rockwood, Tennessee plant. Perhaps before the end of this month, say, it looks like in December, we would definitely be in that position. We may take some extended outages at Barnwell. We're looking now at maybe taking the last week in November and the last week of December as outages there to try to match capacity with what we see coming in. And we may stay in that mode until we see what happens with the steel industry activity. And also, once the switchover occurs with these new contracts that -- new plants from the new quarter were picking up. There may be 1/2 month to 1 month lag in terms of when we actually start to receive that dust in our plants. And so managing through that transition will probably keep some capacity sitting on the sidelines until that time.

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

Okay, and your -- so your inventory situation?

James M. Hensler

Inventory, I guess the way we look at it, we probably have a 2- to 3-week supply of inventory sitting in our plants right now. So relatively -- a relatively low inventory situation.

Operator

Your next question comes from the line of Carter Driscoll from Capstone Investments.

Carter W. Driscoll - Capstone Investments, Research Division

Just some couple of quick follow-ups following this last point. Having such low levels of inventory, are you all concern that you might not have enough to feed production for, let's say, beyond the December quarter if you see another downturn in steel capacity utilization and production?

James M. Hensler

Well, I mean, we'll just, if it went down further, we would take capacity out of the system and essentially match capacity to what's coming in. We are pretty good at doing that, and we have a flexible manufacturing process in that we have multiple kilns in multiple locations. And so in many cases, it's just a matter of rerouting dust to load up certain facilities.

Carter W. Driscoll - Capstone Investments, Research Division

And then my last question is, could you comment at all on geographically, which plants you may have added from Nucor?

James M. Hensler

I can't really get into the specifics of the contract, but we think we're very excited about the extended and expanded relationship we have with Nucor.

Carter W. Driscoll - Capstone Investments, Research Division

At least -- could you at least comment if they are within relatively -- in expense of traveling distance with one of your recycling facilities?

James M. Hensler

Yes. I mean, they're plants that are -- I'd say, the best way to put it would be there...

Robert Scherich

East of the Mississippi.

Carter W. Driscoll - Capstone Investments, Research Division

East of the Mississippi. Fair enough.

Robert Scherich

Certainly East of the Rockies.

James M. Hensler

Okay, yes. Maybe I'll take that back. Maybe they're not all east of the Mississippi but...

Robert Scherich

East of the Rockies.

James M. Hensler

East of the Rockies, yes. They're not out west.

Robert Scherich

That's where you're getting the transportation problems.

Operator

Your next question comes from the line of Mitesh Thakkar from FBR.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Just a quick follow-up. Did you mention the zinc tons -- sorry, EAF tons processed this quarter? I missed that for some reason.

Robert Scherich

I believe we did.

James M. Hensler

Yes, we processed 139,000 tons of EAF dust.

Operator

And at this time, there are no further questions.

James M. Hensler

Okay, well that ends our conference call, and we appreciate everybody's interest, and we'll talk to you again next quarter.

Robert Scherich

Thanks, everybody.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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