Executives
Gary R. Whitaker - Vice President, General Counsel and Secretary
James M. 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., Research Division
Carter W. Driscoll - Capstone Investments, Research Division
Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division
Robert Howard
Horsehead Holding (ZINC) Q4 2011 Earnings Call February 17, 2012 11:00 AM ET
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Horsehead Holding corporation 2011 Year End Conference Call. [Operator Instructions] And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Gary Whitaker. Please go ahead.
Gary R. Whitaker
Good morning, everyone, and thank you for joining us on our fourth quarter 2011 earnings release conference call. My name is Gary Whitaker, and I'm Horsehead's Vice President, 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 and our second quarter Quarterly Report on Form 10-Q filed on August 9, 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, Gary. I'd like to welcome you to this conference call to discuss the results of the fourth quarter of 2011. I will review our 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 a loss of $12.7 million or $0.29 per share, including a non-cash charge after taxes of $8.3 million, or $0.19 per share related to hedges and asset valuation adjustments related to the eventual closure of a portion of the Monaca site and related to a bargain purchase gain on the acquisition of Zochem. The net loss of $4.4 million, excluding these non-cash adjustments, compares to a gain of $7.6 million for the fourth quarter of 2010 after excluding insurance recoveries, net of associated expenses and taxes and non-cash hedge charges.
For the full year 2011, consolidated net income was $21.5 million or $0.49 per diluted share compared to $24.8 million or $0.57 per diluted share in 2010. Some of the major items affecting earnings before taxes for the fourth quarter of 2011, excluding the previously mentioned noncash charges, were the best production quarter in our zinc smelter since the second quarter of 2008, resulting in a 19% increase in production compared with the 14th -- fourth quarter of 2010 and a 13% improvement compared with the third quarter of 2011. The acquisition of Zochem and its inclusion in our results for 2 months, which combined with the production increase at the smelter, led to a 33% increase in overall zinc product shipments, and the increased smelting productivity in INMETCO, which substantially offset from a production standpoint the impact of a 15-day annual maintenance outage taken during the quarter. These positive factors, however, were more than offset by an 18% decrease in the price of zinc and a 22% decline in the price of nickel compared with fourth quarter of 2010.
We also incurred transaction and other charges related to the acquisition of Zochem of $1 million. And we processed 14% less EAF dust in our recycling plants during the fourth quarter of 2011 then during the prior year's fourth quarter due to planned extended maintenance outages taken to refurbish kilns during the quarter and forced outages due to lower dust receipt levels. The lower dust processing rates combined with the higher maintenance spending resulted in higher conversion costs per ton of zinc recovered in our recycling plants during the quarter. Our lower dust processing rates also contributed to a lower ratio of EAF dust-based fee materials used at the smelter, which further increased the operating costs.
The kiln refurbishment work completed during the fourth quarter winded up a program we started earlier in the year to make major structural refurbishments that must be addressed every 10 to 20 years. This work is now behind us, and we are well positioned for what is starting out to be a much higher level of EAF dust receipts in 2012 that I'll describe in more detail later.
We also completed the wind down of the Monaca power plant during the fourth quarter, which ceased operations in September. However, we incurred additional costs to mothball the facilities and disposed of excess coal during the fourth quarter. We expect to realize about $400,000 per month of cost reduction benefit from idling the power plant now that these transaction costs -- or transition costs, rather, are behind us. Demand for our zinc products was very good for our fourth quarter, which is typically adversely affected by lower seasonal demand. However, EAF dust receipt declined about 4% from the third quarter due to slightly lower steel industry activity.
I'm pleased to report that the transition following the acquisition of Zochem has gone very smoothly since we completed that acquisition on November 1. Coordination of sales and production between the Horsehead zinc oxide operations in Monaca, PA and the Zochem operations in Brampton, Ontario has progressed well. We've been shifting orders between the facilities to better match customer requirements with production capabilities. This acquisition is complementary to our current zinc oxide business. It broadens our geographic reach, diversifies our customers and markets for zinc oxide and provides added operational flexibility, and we expect this acquisition to be accretive to earnings immediately.
I'd now like to discuss the operating results in more detail. We processed 127,000 tons of EAF dust during the quarter, a 14.2% decrease from the same quarter last year. This decrease primarily reflects the kiln outages we took in the fourth quarter due to the major maintenance work described earlier, as well as outages taken on some kilns toward the end of the quarter due to low dust receipt levels at some plants. EAF dust receipts were essentially the same as the prior year's fourth quarter at 128,000 tons, but were 4% lower than the third quarter of 2011, reflecting a slight decrease in output from electric furnace steel producers. According to industry statistics, domestic steel industry capacity utilization averaged approximately 74.5% during the fourth quarter of this year, which is down slightly from 76.2% during the third quarter this year and up from 68.6% for the fourth quarter of last year. We believe the increase in capacity utilization in the fourth quarter of this year compared with the prior year's quarter was primarily the result of the restart of integrated steel capacity, which do not affect EAF dust generation.
Currently, industry statistics indicate that steel industry capacity utilization remains in the high-70% range. We've seen much stronger EAF steel production activity since the start of 2012. In addition, as noted during our last call, we entered into a 10-year agreement to expand and extend our recycling services with Nucor Steel during the fourth quarter, which has resulted in dust receipts from additional Nucor Steel mills since the start of the year. Currently, dust receipts are trending over 25% higher than 2011 annualized receipt levels. This should result in higher operating rates for our recycling plants and increased EAF-based feedstock for our smelter. At current dust receipt levels, we're operating all 9 of our Waelz kilns, and we expect to continue to operate at this level through at least the first quarter of 2012.
The zinc product shipments increased by 33% to 42,198 tons compared with the prior year's fourth quarter, an increase by 18% compared with the third quarter of this year. Approximately 52% of the increase compared with the prior year's quarter was due to the acquisition of Zochem, while 48% was due to higher production in Monaca, which is mostly attributable to the refinery outage, which cut back operations at the smelter, and the zinc oxide production unit during the fourth quarter of 2010, and partly due to the strong production quarter at the Monaca smelter during the fourth quarter of this year.
Zinc oxide shipments increased 32% compared with the third quarter primarily due to the acquisition of Zochem. Oxide shipments since the start of 2012 have been stronger than expected at both Monaca and Brampton, reflecting some increase in market share and some strengthening of underlying market demand. Zinc metal shipments increased 9% compared with the third quarter of 2011 due primarily to stronger production in the fourth quarter of this year. Metal shipments declined by 7% compared with the fourth quarter of last year when we were emphasizing export shipment of metal to mitigate losses in zinc oxide sales during the refinery outage. Demand for zinc metal as we start 2012 has been outpacing 2011 levels thus far.
Moving on to discuss the zinc pricing environment. The LME zinc price averaged $0.86 per pound during the fourth quarter, which was $0.19 lower than the prior year's fourth quarter of $1.05 per pound and $0.15 lower than the third quarter 2011 average of $1.01. Zinc prices dropped to below $0.80-per-pound range at the start of the fourth quarter and traded in the mid-$0.80 for most of the fourth quarter. We will remain -- we will remind you that we put in place a hedging strategy in 2011 with a collar structure that have floor of -- 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. We repurchased the $1.20 sold call position during the quarter and favorable pricing, and realized a pretax gain of $13.4 million. The $0.85-per-pound put options remain in place. Bob Scherich will discuss the hedging transactions in more detail later in this presentation. Zinc prices are currently trading near $0.90 per pound.
The realized premiums on zinc metal averaged $0.032 during the fourth quarter, which is up nearly $0.07 from the fourth quarter of last year and was about the same as the realized premiums for the third quarter of 2011. The increase in premiums compared with the prior year's quarter is primarily due to large quantity of lower premium export sales in the fourth quarter of 2010. Transactional premiums in the domestic market for PW metal continued to be favorable.
We have recently reached agreement on pricing for SSHG metal sold to a large zinc powder producer who supplied the Outland battery market. We expect to realize a significant gain in the metal premium for this high-quality metal starting in the second quarter of 2012.
Realized premiums for zinc oxide in the quarter were approximately $0.05 per pound, which is an increase of $0.10 compared with the prior year's fourth quarter and $0.06 compared with the third quarter of 2011. The increase reflected in part a lag effect on oxide pricing due to the decline in zinc prices from the third quarter to the fourth quarter, and in part, the effect of the Zochem acquisition. We expect to realize an increase in oxide premiums in 2012 as a result of contract negotiations, which took place in the fourth quarter.
INMETCO had a good quarter, even though their annual maintenance outage, which curtailed production for 15 days in October. INMETCO had pretax income of $3 million during the fourth quarter before hedge effects, which was lower than the prior year's quarter of $4.5 million due in part to the impact of the outage, which was the primary contributor to the $1.4 million increase in cost of sales, and in part, due to lower nickel prices, which averaged $8.30 per pound during the fourth quarter of 2011 compared with $10.70 per pound during the prior year's quarter. Despite operating 16% fewer days during the fourth quarter of 2011 then during the prior year's quarter, INMETCO's remelt alloy production was only 6% lower than during the prior year due to higher productivity from the INMETCO smelting furnace as a result of several improvements that have been implemented at the Ellwood City facility. We're starting the third phase of incremental capital investments to increase melting capacity in INMETCO. We will be installing an oxygen enrichment system on the arc furnace during the first half of 2012, which we expect to result in 10% to 15% greater melting throughput. INMETCO operated at full capacity during the quarter even though tolling receipts soften due to a decline in stainless steel production. We were beginning to see evidence of strengthening of stainless steel production as tolling receipts have gradually increased in the past few weeks. We've also seen some recovery of nickel prices to the mid $9 per pound range since the start of 2012. Stainless melting capacity and EAF dust generation is expected to increase in the second half of 2012 when ThyssenKrupp starts up its new melt shop in Alabama. With the productivity gains that we've already realized and the other investments that are planned, INMETCO will be well positioned to service its additional capacity if we're successful in winning this business.
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 non-cash mark-to-market adjustments and one-time charges associated with asset impairment charges and the acquisition purchase accounting. I will talk about these items separately a little later.
The adjusted net loss for the quarter was $4.4 million, or $0.10 per share compared to an adjusted loss of $0.02 per share for the third quarter of 2011 and a $0.17-per-share gain for the fourth quarter of 2010. The change in performance of the underlying business was attributable primarily to the reduction in the zinc price and the expected higher cost in the recycling operations partially offset by higher finished product production and shipment levels. Details of quarter's performance reflects an increase in revenue of $11.8 million, or 12% compared to the prior year's quarter. The increase includes the effect of higher shipments of $21.1 million partially offset by a decrease in price realization of $9.7 million for zinc products. INMETCO sales excluding hedge effects were flat with the prior year's quarter, as the effect of their annuality was offset by improvements in productivity. The average sales price realized for zinc products on a zinc-contained basis was $1 per pound or $0.14 per pound above the average LME price for the quarter compared to $1.06 per pound, or $0.01 above the average LME price for the prior year's quarter. Sales of zinc metal decreased $9.2 million, or 18%, to $41 million for the quarter, as the prior year's quarter temporarily had a higher mix of metal shipments during the refinery rebuild period. This decrease reflected a $3.6 million decrease in sales volume and a $5.6 million decrease in price realization.
Sales of zinc oxide increased $20.9 million to $34.5 million for the quarter, reflecting an increase in sales volume of $24.2 million partially offset by $3.4 million of reduced price realization. This included 2 months of shipments from the Zochem location. EAF dust revenue was flat with the prior year quarter. Consolidated cost of sales increased $21.4 million to $103.7 million for the quarter, reflecting the effect of higher shipment volumes and energy costs, increased purchase feed in the mix of raw materials and the effect of the planned maintenance outages at the recycling operations and costs associated with the Zochem operation. EAF-based feed to the smelter decreased from 81% in the prior year quarter to 77% for the current-year quarter, reflecting a lower smelter operating level in the prior year quarter and reduced recycling output in the current quarter. Shipments of zinc products increased 33% versus the prior year quarter. INMETCO cost of sales increased $1.4 million over the prior year quarter, reflecting the maintenance outage.
SG&A increased $2.8 million over the prior year quarter and included approximately $1 million associated with the Zochem transaction, as well as 2 months of expense at Zochem. Hedges and one-time charges associated with impairment of the assets at Monaca and the purchase accounting adjustments related to the acquisition of Zochem had a noticeable effect on the earnings for the fourth quarter. The change in value of hedges had an unfavorable non-cash effect before taxes of $9.5 million in the fourth quarter. This included an $8.9 million reduction in sales as a result of a $5.7 million impact related to the repurchase of the 2012, 2013 sold call positions and a $3.2 million unfavorable mark-to-market adjustment related to open-hedge positions as of December 31, 2011.
The repurchase of the sold call positions during the fourth quarter resulted in a realized gain of $13.4 million for the year. However, this was netted against an unrealized gain of $19.1 million that had previously been recorded for these positions through the end of the third quarter. Cost of sales was $0.7 million higher as a result of non-cash hedge charges. For the year, the effect of the 2012 and 2013 option was a realized gain of $13.4 million under repurchase of the sold call positions and a $2.3 million unrealized gain on the other hedge positions. Given the level of hedges in place, we expect the changes in values at each quarter end to continue to result in, at times, significant non-cash effects to earnings. While possibly creating volatility in reported earnings, these hedges will continue to provide protection against the risk to cash flow if the zinc price declines significantly. Also included in the quarter's results was $9.8 million of non-cash asset impairment charges to cost of sales associated with the Monaca facility as a result of the planned shutdown of the smelting operation at that location once the new zinc plant in North Carolina is completed. Under the accounting rules, we estimated the present value of the expected cash flows associated with these assets and where these estimates were less than the net book value of the fixed assets, we adjusted the carrying values accordingly. There remains approximately $50 million of net book value of assets for the Monaca facility. We will continue to evaluate the carrying values each quarter end as the continued use of the assets is evaluated. Or we expect to shut down the smelter when the new zinc plants starts up, we're still evaluating various alternatives for the remaining operations at the facility. The other significant non-cash item for the quarter was associated with accounting for the acquisition of Zochem. Our fair value assessment of the net assets acquired was greater than the purchase price, resulting in a bargain purchase gain of $4.9 million. Cash flow from operating activities, excluding the purchase of the call options, was approximately $8 million for the quarter and $52 million for the full year 2011. Capital spending was $39 million for the quarter and $65 million for the year. Current cash levels and cash flow from operations are expected to cover our investment requirements for the new zinc plant over the next year as we come into 2012 with $188.5 million of cash. We continue to work on additional financing alternatives for the remainder of the potential requirement.
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 our fourth quarter was primarily impacted by lower commodity prices for both zinc and nickel, we've put in place many changes during the quarter that will result in improved performance going forward, such as the acquisition of Zochem, the completion of major maintenance outages at INMETCO and at our recycling plants, completion of the wind down of our power plant, the new 10-year agreement we entered into with Nucor that will result in substantially more EAF dust starting in 2012 and improved premiums on zinc oxide and SSHG beginning in 2012.
The quarter was also impacted by several unusual non-cash charges related to hedging transactions and asset valuation adjustments, as Bob Scherich explained. We were pleased that despite all of these transitional issues and low commodity prices, cash flow from operating activities, excluding the hedge purchases, was favorable for the quarter. We're also pleased to report that project activity and capital spending is beginning to accelerate on our new zinc plant project in Rutherford County, North Carolina. Site clearing and grading has been completed, detailed engineering is underway and long lead time equipment is being ordered. We've completed the purchase of the majority of commodity price-sensitive components for the plant, such as the silver and lead that goes into the anodes, at favorable prices compared to our original estimates. We've also reached a major milestone in that we have started to pour some of the concrete foundations on the site. At this stage of the project, we continue to believe that we are on track to complete construction of the plant and begin start up in the third quarter of 2013. Our estimate for the construction costs of the new plant remains at $350 million to $375 million. And once fully operational, it should provide us with annual incremental EBITDA of approximately $90 million to $110 million. We spent $42 million on this project through the end of 2011.
We continue to develop financing alternatives for the balance of the capital that may be needed to complete the project. We've applied for export credit financing of approximately EUR 70 million associated with the equipment and engineering being supplied from Europe. The applicable credit agency has indicated preliminary approval for the financing. We're also exploring additional financing options to help ensure adequate liquidity to complete this project and to pursue other attractive investment opportunities.
Thank you, and we'll now open the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question will come from the line of Mitesh Thakkar from FBR.
Mitesh Thakkar - FBR Capital Markets & Co., Research Division
My first question is on -- you mentioned about pursuing attractive growth opportunities, which might come up on the way. I would like to get some color, if you can, on that area. What kind of things you are looking at and is there like -- are those opportunities something like Zochem, smaller one but immediately accretive, or something like INMETCO with some growth optionality in it?
James M. Hensler
No. Well, I point out that our primary focus right now is this North Carolina investment and that's getting much of our attention. We're also looking at other investments that have not only growth potential but also cost-reduction potential. For instance, we're considering the potential to relocate one of our kilns from our Palmerton plant to our Chicago plant, and this would occur around the time that we are ready to start up in North Carolina plant. But that would give us some significant cost savings from a transportation-cost standpoint, as well as help us grow our EAF dust business somewhat. We're also evaluating some acquisitions. We always have some of those in the pipeline. They're smaller, I would say, in terms of the size of the business that then would be immediately accretive if we went forward. And we're always evaluating those. And if good opportunity comes along, like INMETCO or like Zochem, we want to be in a position to be able to act on it.
Mitesh Thakkar - FBR Capital Markets & Co., Research Division
Okay, great. And can you also touch upon how your capital spending profile looks like, given that you have essentially committed to a significant portion of your commodity instead of procurement related to the project?
James M. Hensler
Yes, there's a benefit to that relative to what we originally thought our cost for the project would be. But it's still in that same $350 million to $375 million range we've been quoting. This year, we'll probably spend on the order of $190 million capital, most of which is going to go toward the North Carolina project.
Mitesh Thakkar - FBR Capital Markets & Co., Research Division
Okay, great. And my final question is you mentioned about additional financing opportunities outside of the $70 million in equipment financing. Any range at all on those numbers and what kind of insurance are you looking at? Any color around that?
James M. Hensler
Well, to some extent, it depends upon these other investment opportunities and how much additional liquidity we think we would like to have to be able to pursue those. But we're probably looking at something in the neighborhood of maybe an additional $50 million to $75 million.
Mitesh Thakkar - FBR Capital Markets & Co., Research Division
And type of instrument that, that converts or it's still being reviewed?
James M. Hensler
Yes, we're looking at a wide range of alternatives there, Mitesh, from private placement of debt to even senior-secured and second lien. So we're going to look at all the debt alternatives along with this export credit financing.
Operator
Our next question comes from the line of Daniel Moore with CJS Securities.
James M. Hensler
I'll let Bob cover that because he's been handling this.
Robert Scherich
Yes, there's really a couple of steps to the process, Dan. One is submitting contracts from exporters that we're engaged with to the export credit agency itself. And once they qualified for the program to issue credit insurance, the thing gets turned over to a bank and they use that credit insurance to underwrite, basically, an equipment loan, which we believe is very attractive because you pay a relatively small commitment fee, unused fee, and then it starts amortizing that to the projects up and running out over 6- or 8-year time period. We think the all-in cost out over the life of the lending is probably 6% or less. So it's pretty attractive, and it's kind of a preferred piece of financing. And -- but you don't know whether financing is going to happen until what happens. So that's why we're pursuing other alternatives, and a very broad range of alternatives. That's our preference, but if it doesn't play out, then we'll be developing other alternatives that can take its place.
Robert Scherich
Well, it's all depending on what happens on the price of zinc. I think that if zinc is at the bottom of our -- well, at $0.85 put range, we would probably need additional financing. If zinc trades up north of $0.95 or $1, we probably don't need additional financing. So it's highly dependent upon what happens with that price.
James M. Hensler
Relatively small. I mean, it's going to be on the order of $0.5 million this year.
James M. Hensler
Well, first of all, we're very pleased with the operation. It's a very efficient, reliable operation, and we really like what we see in terms of the people and the equipment and where they're positioned in the marketplace. And so from that standpoint, it's sort of reinforced some of the pieces that we had going in. What we have seen is that we believe Zochem has a better capability to handle certain types of customers and market requirements. And so we've shifted, and we're in the process of shifting those orders and production from Monaca to Zochem. And we also found out there are others that were better shifted to the other way. And so we're going through that process. So by and large, we've been pleased, and no major surprises one way or the other.
Operator
Our next question comes from the line of Carter Driscoll with Capstone Investments.
Carter W. Driscoll - Capstone Investments, Research Division
First question is if you could maybe just back out the incremental contribution from Zochem to the fourth quarter results. I'm sure you don't want to do so going forward, but maybe it'd be helpful to know impact for the last 2 months.
Robert Scherich
Well, there's really not an ability to isolate it completely. As Jim said, we're transferring orders, we're doing the facilities and production between the facilities. Some of the acquisition expenses and even the bargain purchase ended up there. But we did end up even when you remove those one-time charges with a slight incremental pretax at Zochem for the first 2 months. It's hard to really nail down again because of we're moving between the 2 facilities. But it, I would say, did not result the operation of Zochem in a detraction from our means.
James M. Hensler
But I would say that what we saw, at least in the 2 months we have owned it in 2011, was consistent with where we saw the numbers in the first 9 months of the year and -- when we're looking at those financials. And I think we've reported on kind of roughly what we thought that EBITDA number was. And basically Zochem stayed in that range for the 2 months we own them.
Carter W. Driscoll - Capstone Investments, Research Division
And it was somewhat instrumental in your price negotiations? Are your price negotiations helpful in terms of the impact in 2012?
James M. Hensler
Yes, well, it certainly was. I think that -- to be able to source materials for multiple locations was a valuable option as we were talking to large customers.
Carter W. Driscoll - Capstone Investments, Research Division
Could you elaborate maybe on the sustainability of the dust receipt run rate you're seeing today and at least with the talk about an annualized basis, obviously, we saw tiers of kind of flat dust receipts, and maybe walk us through to what might be a realistic assumption for the average of the year assuming a certain level of domestic steel and then your anticipation for what Nucor will kick in, in terms of what you negotiated last year?
James M. Hensler
Yes. Well, we came into the year thinking that dust receipt levels would be in the kind of the low-600,000 range, maybe 620,000 or in that neighborhood. Our current run rate is closer to 660,000, 670,000, which -- we don't know if that's sustainable. But we do see steel capacity utilization is up and the electric furnace steel producers are up. What we're seeing right now is the culmination of our investment pieces on the recycling side. We invested in the Barnwell facility because we thought it would be at this point at some time, and we're here. So we're certainly able to handle the additional volume if we actually do continue the whole year at the higher level, but we were all surprised by how strong the year started, even though we knew we were going to be picking up some volumes. So I think we'll see where we're at the end of this quarter and maybe have a little bit better outlook on the year.
Carter W. Driscoll - Capstone Investments, Research Division
Will the potential transition of the kiln from Palmerton to Chicago affect that at all or is that just minimal?
James M. Hensler
No, no. That's something that won't happen until 2013, late 2013, if it happens at all.
Carter W. Driscoll - Capstone Investments, Research Division
Okay. Then maybe just a question for Bob. In terms of how you look at the book value, how you're adjusting the book value versus the new facility being constructed, is that -- I mean, obviously they're linked, but maybe you could help us understand how that -- how Monaca might be written down relative to some of the incremental targets obviously you're pouring foundation now. Just help us from a modeling perspective how that might impact us?
Robert Scherich
Well, it really comes down to how -- what we see as the timeframe of operating the assets at Monaca. If we stay on schedule, as we believe we are today, then we would expect to be shutting that smelter down late in 2013. So the -- we've continued to -- when you get to that point, obviously, at least the smelter assets we would have to 0, either through accelerating depreciation or, in this case, we've taken some of the impairment upfront because the accounting rules really make you step out and reassess and project the cash flows from those assets and compare them to the book value and keep adjusting. And as plans develop for the remaining assets there, and we're looking at various alternatives, that could affect the -- those, the write-off of those assets also. So it's pretty hard to say at this point. We did it based on what we saw in front of it as of 12/31, and we'll continue to work on that each quarter as we go. So I wanted to get the full net book value out there so that you are aware of it, and it's something we'll probably be talking about for the next couple of years.
Carter W. Driscoll - Capstone Investments, Research Division
Helpful. And then just last question, getting back to for either one of you is, anything surprising on the demand front in terms of particular application or end market that either surprising in the fourth quarter or in the start of 2012 so far?
Robert Scherich
Yes, we've been -- we've been pleasantly surprised on most of our markets here. We've seen in the metal sector particularly strong activity out of the agricultural sector, and that's been positive. And we've seen better demand in zinc oxide across the board than we were expecting. And of course, we talked about the EAF dust business. And at INMETCO, we were a little concerned in the fourth quarter because stainless steel production had tapered off. But in the last few weeks, we're beginning to see that come back and the tolling receipts are beginning to pick up. So in general, it's been positive across all fronts.
Operator
Our next question comes from the line of Paul Forward with Stifel, Nicolaus.
Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division
On the question of the sustainability of the dust receipts, I'm just curious if you could give us a little bit of idea of -- if we actually were to sustain this 660,000 or 670,000 rate that you talked about on the dust receipts? Can you estimate kind of what that would then translate into on your share of the zinc supply coming from EAF dust versus the purchase graft, compare that to the 76.9% that you had in the fourth quarter? And then also if you could give a little bit of sense of if you're able to sustain these operating rates, how does the -- how does that just work as far as the potential decrease in your -- in something like convergent cost between 2012 and the fourth quarter 2011?
James M. Hensler
Well, certainly, if we can sustain this, the higher level of dust receipts, we will see more feed to the smelter. And I think it ends up being in the low 80s because our -- coming into the year was closer to 80% for the fee, and we're outperforming that right now.
James M. Hensler
Just a quick calculation if I look at it, and I think we're on track to probably produce in the mid-140,000 tons of zinc units out of the smelter. And if we brought in the amount of EAF dust, we talked about with 20% zinc in it, we'd be looking at an average feed ratio of around 85% coming from the EAF dust, which is higher than the numbers we've seen historically. So that would be a positive. In terms of the effect on conversion cost through the recycling operation, yes, it'll be a significant benefit to us, hard for me to put an estimate on it, just on the top of my head. But we would definitely see some reduction in the unit conversion cost.
Carter W. Driscoll - Capstone Investments, Research Division
Great. And the -- I think you talked a little bit about renegotiating some premiums on the oxide and some higher premiums for SSHG metals. Just wondered if you might be able to give us a little bit of sense of the potential approximate financial impact of that in 2012.
Robert Scherich
Well, I think in the case of the SSHG metal, to some extent, that depends upon what their demand is. But it would be -- potentially a $1.5 million to $2 million improvement on a pretax basis depending on volume. And on the oxide side of things, potentially another $2.5 million to $3 million of improvement. So not as significant.
Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division
Excellent. And maybe lastly, thinking about Zochem, can you give us a little sense of, as you look at 2012 zinc oxide production, what do you think the approximate split is between Zochem and Monaca? And then might you be able to give us a little sense of how you see these operations working in tandem going forward.
James M. Hensler
Yes. Well, we think we'll produce -- I mean, we need about 60 -- the split will be about 60-40, 60% of it in Monaca, 40% in Brampton. And the going-forward question is a good one because we're certainly in the midst of really analyzing that right now. There are a number of different options we're considering. A lot of it depends upon what we decide to do with the Monaca site after the smelter is no longer operating there. And so we could have options ranging from everything moving up to Brampton if we completely exited Monaca to maintaining that 60-40 split kind of on a going-forward basis. But we probably won't know the answer to that until we get closer to the second half of this year.
Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division
Okay. And well, I guess maybe one more, on the -- I think, Jim, you'd said that you had -- you're looking at about $109 million capital spending in 2012, most of that being North Carolina. But I think you'd said that some of the outlays are, they're -- some of the outlook for spending in 2012 might have been a little bit more favorable compared to where you thought it might have been a little -- when you started the North Carolina project. I'm just curious when you see the $350 million the $375 million, the unchanged range on the size of the overall kind of cost of North Carolina project, how much cushion do you think you have in that when you see a number at the high-end like 375? Is there a lot of cushion baked in based on what you know now as far as your -- what you're already committed to spend this year and what you think you'll have to spend through the end of the project?
James M. Hensler
Right, yes. I mean, with all of these, you don't really know what you don't know, when it comes to a project like this, where we are at this stage of the project. I think it's fair to say that everything we've looked at so far on the project, every order we placed, every purchase we've made has been on the low side of the range. But there's such big parts of this that we haven't been in bid yet that I can't say, that we're going to realize a lot of benefit or reduction off that number. And we're going to get a much better handle on what we think the real cost is over the next 3 months because we're going to be bidding a lot of the construction phase of this project during that period of time, and that's really the unknown. We put an estimate together using input that primarily came from European engineering firms that, frankly my bias, was I thought that was a little high for building costs in the U.S. but until we actually get firm quotes in hand, we won't know. So that's -- it's hard to really say for certain.
Robert Scherich
But the other factor, Paul, is if we have any opportunities to accelerate the project, we -- given the benefits of it, we will certainly look at that in comparison to any additional cost that, that might take.
Operator
Our next question comes from the line of Robert Howard with Prospector Partners.
Robert Howard
Just -- I was wondering with the new, or like I said, updated Nucor contract, what was --what were they doing with the dust before? Was it just kind of local landfills or that type of thing? Or is it a relatively big player may go out to -- trying to get some dust from one of your other customers, or where was that dust going originally?
James M. Hensler
It was mostly going to another recycler.
Robert Howard
So is that -- are there now -- I guess, were they going to them before because transportation or transportation costs helped improve moving to your facility or is it just you guys have just been building a better relationship and are continuing to build it and they kind of move to you?
James M. Hensler
Yes, I think that they were looking for a long-term partner that could service multiple sites, and we already had an existing long-term relationship with them at Barnwell. And they felt the time was right to enter a longer-term relationship with us on many of their other mills.
Robert Howard
Okay. And just wondering about your thoughts on the power plant. I know you said you finished the mothballing of it. I've been hearing about, I guess, utilities closing power plants in the area. Are there -- does the outlook for doing something with it looking weaker because of same things like that or have you thought more about trying to sell it or any types of things there?
James M. Hensler
Well, we're pursuing -- trying to sell it. And that's the reason why we've decided to spend the money to mothball it in such a way that it could be restarted eventually if somebody is interested in doing that. A lot of uncertainty with respect to environmental regulations and its impact on costs for coal-fired power plants. And so I think that's one of the factors that sort of weighs in to whether this is an asset that might eventually be of interest to us to restart, or anybody else. And part of what you see being announced, our closures of coal-fired power plants in this region, is really driven by environmental regulations primarily. And there's still a fair amount of uncertainty there with the transport roll, the mercury initiative that's going on, the fly ash regulations that are out there that are causing a lot of concern for marginal coal-fired power plants, and whether it makes sense that put the investment into those plans to comply with these more stringent standards. So that was the major factor that led to our decision not to stay with the plant, also the fact that we're able to buy power cheaper than we can produce it in a short run. And I assume it will be a factor in the decision that a potential buyer might have.
But we do think that the plant is a nice plant for somebody who wants to be in the business of using it as a peaking facility, where they could convert it to natural gas and run it in a -- maybe in peak periods where they could get some benefit out of that. And for companies that are in that business, they may find it as an attractive asset.
Robert Howard
And I think I remember you guys saying in the past that just because, at least the way it's been in the past, serving more industrial load as your sort of like a captive customer that the environmental regulations are slightly different than your standard utility plant, is that correct?
James M. Hensler
Yes, that was true to some extent for the regulations that were in place up until recently. The new regs that are being promulgated would target that facility alone.
Robert Howard
Okay, okay. And then I guess also with Monaca, you guys earlier were talking about potentially us riding down the smelter after the new facility is built, is that -- I guess I was also thinking there is potential for -- or is there potential for the smelter to be used for other things aside from its current production? Or is it really when you're thinking about Monaca, it's kind of the other stuff on site and the smelter really was kind of focused on one purpose?
James M. Hensler
Right. Well, when we think about the smelter, there are 3 or 4 unit operations that make up what we call the smelter. There's a feed preparation process. There's a sintering process. There's the actual smelting process itself, and then there's some casting facilities that go along with that. The smelting process and the casting facilities would be shut down and not used, they really don't have any other purpose, once we start with North Carolina. The feed preparation and the sintering facilities could be used for another purpose. And one of the things we've considered is, and there's some interest in this, is converting that to processing iron-bearing waste streams to produce iron sinter that we would sell back to the steel industry. And so that's one of the alternate uses for those particular assets. Whether that materializes or not requires further study and interest on the part of the steel industry, but that's something we're pursuing. And so when we look at the write-down of those assets, part of the decision-making that goes into that relates back to the probability that we could use those assets for an alternative purpose. The other major source of assets on the facility are the zinc oxide producing assets, and until we reach a decision on what we're going to do with the zinc oxide assets at Monaca, they're going to remain on the books.
Robert Howard
Okay. And again, that $50 million number that you talked about earlier at Monaca is for everything there on site, including the smelter or what you've -- remaining...
James M. Hensler
Right.
Robert Scherich
That's correct.
James M. Hensler
And it also includes -- I guess, the third major area is the power plant, which we have talked about.
Robert Scherich
Yes, it's part of that.
James M. Hensler
So that's also part of that $50 million number.
Robert Howard
Okay, okay. Great. And then just lastly when you guys have been talking about other investments or the need for financing, what do you guys look at for your balance sheet just kind of where you'd like to have it or, I mean, do you have a goal, okay, less than 20% debt, or what kind of -- I guess, less debt is better, but what's sort of your picture of where you like to have your balance sheet at?
James M. Hensler
Well, I mean, in general we're a debt-adverse group. And so we don't really like to take on a lot of debt. And if you look at it historically, we haven't had any. But obviously, with this project in North Carolina, it's been a necessity. So we're interested in getting the lowest cost financing option we can for that project, and then we're interested in paying that off as quickly as we can once we get North Carolina up and running. So that's our basic mode of operation. I think we're comfortable with taking on the amount of debt that's going to be necessary for this particular project and maybe a little bit more for some of these other projects we've alluded to and potential small acquisitions.
Operator
We have a follow-up from the line of Daniel Moore with CJS Securities.
Robert Scherich
It was on the order of about $0.5 million to $0.75 million.
Operator
And at this time, I'm showing no further questions in queue. Please continue.
James M. Hensler
Okay. Well, thank you very much, everybody, and we will talk to you again next quarter. Thank you.
Operator
Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.
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