Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Horsehead Holding (NASDAQ:ZINC)

Q1 2012 Earnings Call

May 04, 2012 11:00 am ET

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

Carter W. Driscoll - Capstone Investments, Research Division

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

Daniel Moore - CJS Securities, Inc.

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

Robert Howard

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Horsehead Holding Corporation's First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to turn the conference over to our host, Mr. Gary Whitaker. Please go ahead.

Gary R. Whitaker

Good morning, everyone, and thank you for joining us on our first quarter 2012 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, our markets 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 9, 2012, 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 first quarter of 2012. I will review the performance of our operations and markets during the quarter, and Bob Scherich, our CFO, will review the financial results.

The consolidated net earnings for the quarter were a loss of $8.5 million or $0.19 per share, including non-cash charges related to hedges and the accelerated write-off of a portion of the Monaca, PA, facility. This compares to a gain of $14.8 million or $0.33 per diluted share for the first quarter of 2011.

Excluding these non-cash charges, consolidated net earnings for the first quarter of 2012 were $2.1 million or $0.05 per diluted share. For the same period in 2011, excluding an insurance recovery, consolidated net earnings were $8.6 million or $0.19 per diluted share.

The LME zinc price was 15% lower versus the same quarter last year, reducing earnings by an estimated $0.15 per share for the quarter, and a 22% increase in the price of metallurgical coke versus the prior year's quarter also had a $0.035 per share negative impact on the current quarter.

These adverse impacts were offset somewhat by new records for EAF dust receipts, EAF dust processing rates, zinc production and zinc product shipments during the first quarter of 2012. Compared to the prior year's first quarter, EAF dust receipts increased 24% on an annualized rate of 664,000 tons and dust process increased 15% to an annualized rate of 660,000 tons for the quarter, both record levels.

Zinc product shipments, which for the first time include a full quarter of Zochem results, increased 13,813 tons or 38% to 50,273 tons, also a record.

However, the LME zinc price averaged only $0.92 per pound for the first quarter of 2012 compared to $1.09 per pound for the first quarter of 2011, while the nickel price averaged $8.91 per pound for the first quarter of 2012 versus $12.20 per pound for the same period in 2011.

We also took a $15.2 million pretax charge related to the amortization of expiring put option positions and mark-to-market adjustments on open hedge positions. And cost of sales also included a $3.3 million non-cash impairment charge associated with the continued write-down of the Monaca, PA, smelter in anticipation of its eventual closure with the startup of our North Carolina facility and with the potential acquisition of the Monaca site by Shell Chemical.

I am pleased that our operating results were positive despite much lower commodity prices and higher coke prices compared with the prior year when you eliminate these non-cash charges.

The integration of Zochem into our zinc oxide business continued to proceed smoothly during the first quarter, making a positive contribution to our results. And INMETCO contributed solid earnings as a 7% productivity gain outpaced the reduced price of nickel. Also, we're pleased with the progress on construction at the site of our new zinc production facility in Rutherford County, North Carolina. We've placed orders for a significant portion of the equipment, and work at the site is proceeding without delay. I encourage you to follow the progress we're making on the construction of this new plant on our website. We continue to be on schedule and on budget for a startup in the third quarter of 2013.

I'd now like to discuss the operating results in more detail. We processed 166,500 tons of electric arc furnace dust during the quarter, a 15.4% increase from the same quarter last year. EAF dust receipts increased from the prior year's first quarter from 134,000 tons to 166,000 tons, a 23.7% increase.

The strategic investments we've made over the past several years, such as the capacity expansion at our Rockwood, Tennessee, facility, the acquisition of ESOI's EAF dust collection business and the construction of our new plant in Barnwell, South Carolina, have positioned the company to benefit from the increase in steel industry activity, and our expanded and extended contract with Nucor and other steel producers.

According to industry statistics, domestic steel industry capacity utilization averaged approximately 78% during the first quarter of 2012, which was up from 75% during the fourth quarter of 2011, and up from 74% in the first quarter of 2011.

The combination of higher steel production levels and new service contracts, which started on January 1, 2012, resulted in a 29% increase in dust receipt levels compared to the fourth quarter of 2011. We believe dust receipt levels will continue near these high levels during the second quarter of 2012.

I am pleased with our recycling plant's response to the significant increase in dust receipts. We processed a quantity of dust equivalent to our receipts during the quarter.

We estimate our annual dust recycling practical capacity to be about 730,000 tons. Therefore, even after the first quarter's operating level, we continue to have some excess EAF dust recycling capacity, which we hope to utilize in the future as EAF-based fuel production continues to grow and as we pursue additional service contracts. This increased processing of the additional dust provides additional low-cost feed for current zinc production and will be the prime resource of feed for our new zinc plant in North Carolina.

This anticipated ability to obtain increased EAF dust receipts was an important factor in our analysis of the benefits to be realized from the new plant. And we've been able to capitalize on our new investments in EAF dust recycling discussed earlier, to provide a solid foundation for zinc production from the new plant once completed.

Zinc product shipments increased by 38% to 50,273 tons compared with the prior year's first quarter, and increased by 19% compared to the fourth quarter of 2011, mainly due to the combination of an excellent production quarter in the first quarter of 2012, and increased demand for our zinc products.

Zinc production was a record for the quarter at 44,977 tons, inclusive of Monaca and Zochem. Improved operating practices and higher-quality raw material sourcing contributed to improved zinc recoveries and the best production order at the Monaca smelter since the first quarter of 2008. This overall improvement is continuing into the second quarter of 2012.

Zochem also contributed positively to earnings during the quarter.

We are currently assessing the feasibility of expanding capacity at the Zochem facility as we assess alternatives in the event that Shell exercises its option to acquire the Monaca facility and the potential for idling zinc oxide production at Monaca in 2013.

The demand for zinc products from our Monaca location increased by 12% during the first quarter of 2012, compared to the first quarter of 2011. This increase is indicative of stronger demand in our end markets and recovery of market share in zinc oxide that was lost during the refinery outage in the latter half of 2010.

Zinc oxide shipments increased 34% compared with the fourth quarter of 2011, primarily due to the benefit of a full quarter of Zochem shipments being included in the results and a 19% increase in shipments from Monaca over the fourth quarter of 2011. Oxide shipments continued to be strong as we entered the second quarter.

Zinc metal shipments increased 7% compared with the fourth quarter of 2011, due primarily to stronger production in the first quarter of this year. Metal shipments rose by 13% compared to the first quarter of last year. Demand for zinc metal thus far in 2012 continues to outpace 2011 levels.

Moving on to discuss the zinc pricing environment, the LME zinc price averaged $0.92 per pound during the first quarter, which was $0.17 lower than the prior year's first quarter at $1.09 per pound and $0.06 higher than the fourth quarter of 2011 average of $0.86. Zinc prices are currently trading in a fairly narrow band, near $0.90 per pound.

The realized premiums on zinc metal averaged $0.038 during the first quarter, which was up $0.01 from the first quarter of last year and was $0.005 higher than the realized premium in the fourth quarter of 2011. The increase in premiums is primarily due to an increase in the transactional premiums, reflecting the stronger demand for zinc metal.

Realized premiums for zinc oxide in the quarter were approximately $0.02 per pound, which is an increase of $0.08 compared to the prior year's first quarter and a decrease of $0.03 compared to the fourth quarter of 2011. The increase versus the prior year's quarter reflects the higher transactional premiums that went into effect on oxide in 2012 as a result of contract negotiations that took place last quarter.

The decrease in realized premiums on a sequential quarter basis is due to the lag effect on oxide pricing due to the increase in zinc prices from the fourth quarter of 2011 to the first quarter of 2012.

INMETCO continues to operate at full capacity, even as tolling receipts from stainless steel producers remain soft. INMETCO's production output increased by 7% compared with the first quarter of 2011 as a result of productivity improvements.

We were able to achieve this increase despite an unplanned outage due to a premature roof failure in the melting furnace, which occurred in January. While tolling receipts increased slightly on a sequential quarter basis, we expect second quarter 2012 receipts to remain soft because we need -- we see no sign of stainless steel production increasing in the near term. INMETCO had pretax income of $5.3 million during the first quarter, which was higher than the prior year's quarter of $5.1 million, even though nickel prices declined from $12.20 per pound in the prior year's quarter to $8.91 per pound in the current quarter. This improvement is due primarily to productivity gains and lower operating costs.

We expect stainless melting capacity and EAF dust generation to increase in the fourth quarter of 2012, when ThyssenKrupp is expected to start up its new melt shop in Alabama.

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 non-cash effects related to hedges and asset impairment charges, and excludes the insurance income effect in the prior-year quarter. I'll talk about these items separately a little later.

The adjusted net earnings for the quarter were $2.1 million, or $0.05 per share, compared to an adjusted earnings of $0.19 per share for the first quarter of 2011. We estimate that the current quarter adjusted earnings of $0.05 would have been $0.15 higher with the same LME zinc price as the prior year quarter. As Jim noted, the underlying operating performance of the business, after allowing for these items, was good as higher production and shipment levels more than offset energy price pressures. The most noteworthy of the energy price increases was for metallurgical coke, which had an estimated effect of reducing earnings $0.035 for the quarter when compared to the prior year quarter.

The detail of the quarter's performance versus the same quarter last year reflects an increase in revenue of $16.6 million or 15% to $126.5 million. The increase included the effect of higher shipments of $31.8 million, partially offset by a decrease in price realization of $13.4 million. The average sales price realized for zinc products on a zinc-contained basis was $1.06 per pound or $0.14 per pound above the average LME price for the quarter, compared to $1.18 per pound or $0.09 above the average LME price for the prior year's quarter.

Sales of zinc metal decreased $1.3 million or 2.7% to $47.2 million for the quarter, reflecting a $6.4 million increase in sales volume, more than offset by a $7.7 million decrease in price realization.

Sales of zinc oxide increased $18 million to $47.7 million for the quarter, reflecting an increase in sales volume of $22.3 million, partially offset by $4.3 million of reduced price realization. This included 3 months of shipments from the Zochem location.

EAF dust revenue increased $2.2 million or 23.9% to $11.4 million for the quarter, while cost of the EAF transportation also increased $2.2 million to $8.3 million for the quarter.

Sales from nickel products and services increased $0.3 million or 1.9% for the quarter to $15.8 million as higher volume of shipments more than offset the 27% decline in the LME nickel price.

Consolidated cost of sales increased $33.6 million to $110.2 million for the quarter, excluding $3.3 million of impairment charges. This increase reflects the higher shipment level, energy costs and increased purchased feed in the mix of raw materials associated with the Zochem operation. Other factors affecting cost of sales for the quarter included: EAF-based feed to the smelter increased from 71% in the prior year's quarter to 74% for the current quarter, reflecting the higher level of recycling production. Metallurgical coke costs increased $2.7 million versus the prior year quarter. Shipments of zinc products increased 38% versus the prior-year quarter. INMETCO cost of sales were relatively flat.

SG&A increased $0.7 million to $5.9 million, reflecting primarily the inclusion of Zochem. Hedges and charges associated with impairment of the assets at Monaca had a noticeable effect on the earnings for the first quarter. The change in value of hedges had an unfavorable non-cash effect before taxes of $15.2 million in the quarter relating to amortization of expiring positions and mark-to-market changes for open positions, of which $5.3 million was related to 2013 put option mark-to-market adjustments.

The carrying value of -- as of March 31 for the remainder of our 2012 and 2013 put options is $14.3 million.

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 $3.3 million of non-cash asset impairment charges to cost of sales associated with the Monaca facility. This adjustment to our fourth quarter 2011 book was triggered by the signing of the option agreement with Shell. We will reevaluate this when the option is exercised or expires. And that book value of the fixed asset at the Monaca facility was $46 million as of March 31, 2012.

Cash flow from operating activities was $10 million for the quarter compared to $3.8 million for the first quarter last year. Capital spending was $29 million for the quarter and our cash balance was $172.5 million at March 31, and we currently have approximately $40 million of availability on our revolver.

At 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 I'm pleased that while the first quarter was impacted by lower commodity prices for both zinc and nickel, and increased coke prices, our operating results were positive when you strip away the non-cash charges. And we operated at record levels at our recycling facilities, and established new records in zinc production and zinc product shipments.

The integration of Zochem is nearly complete and we're beginning to assess the feasibility of potentially expanding our Canadian operation. INMETCO also performed well, coming in with a 7% increase in nickel remelt alloy production, helping to offset the weaker nickel price. And we began to see the benefits of our recent investments in capacity expansions in our EAF dust recycling business and in securing additional dust receipts for the long-term.

Project activity and capital spending has accelerated on our new zinc plant construction in North Carolina. The foundation excavation and concrete work have started, and we believe we continue to be on schedule to complete the construction and start the operations in the third quarter of 2013. Once fully operational, we believe it should provide us with annual incremental EBITDA of approximately $90 million to $110 million. And we've spent approximately $68 million on the project through March 31, and have committed approximately 40% of the estimated $375 million needed to complete the project.

We will continue to fund the construction from the $172 million of cash on hand at the end of the first quarter of 2012, and continue to explore a number of options to finance the remainder of the project, which we expect to be completed by mid 2012.

Lastly, in March, we announced that we had entered into an agreement with Shell Chemical, whereby Shell obtained an option to purchase our Monaca facility for the potential construction of a petrochemical complex. If Shell elects to exercise the option, we would be required to vacate the plant by no later than April 30, 2014.

We believe this may occur prior to that deadline and would dovetail nicely in relation to the startup of the new North Carolina facility.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Carter Driscoll with Capstone Investments.

Carter W. Driscoll - Capstone Investments, Research Division

I'd first just like to say congratulations on the production, an excellent job. Obviously, in a short period after the tragedy that occurred in 2010, you guys are firing on all cylinders in that perspective. We'd like to drill down a little bit more into the COGS line. I guess, certainly a little bit to figure out one of the comments you said, that you thought Zochem was incrementally positive for the quarter. Obviously, they're purchasing special high-grade zinc. Maybe you could help me with some of the thought process and how you will relate those purchases to using the feedstock as an input. And how that might change over time as you wind down Monaca and move zinc oxide over to the Brampton facility.

James M. Hensler

Yes, well, just looking at Zochem and understanding their process, they're buying special high grade. And obviously, they're paying LME prices plus a premium to feed that. And so zinc oxide is 80% zinc, so they need about that amount of zinc to supply their operation. Our view, going forward, is that even after the North Carolina facility is up and running, we intend to be able to sell all of the zinc metal from that facility to our local markets in the U.S., and we'll probably continue to source metal from other suppliers that are closer to the Zochem facility to feed that operation. Now as it relates to the cost of goods sold line, we have -- we picked that up as a cost now in the consolidated numbers when we're looking at Horsehead.

Robert Scherich

Yes, and Carter, I guess the way that you have to look at Zochem is that we've added sales, we've added considerably higher costs because of that raw material source. Their profile is they operate at a positive margin. They were accretive to earnings bottom line. But it's a relatively thin margin, again, because they're buying that metal. So when you kind of model our business, adding Zochem has added disproportionately to cost of sales from the way the traditional business is operated. Because when you look at the smelter, we operated at very high production rates, our feed mix was about 74% from EAF-based feed. Had we not had the higher productivity level of the smelter, obviously, that feed mix would've been even higher. But the profile of the traditional business, I think, stayed fairly well intact with that feed mix and conversion cost.

Carter W. Driscoll - Capstone Investments, Research Division

Is there anything -- just following up on that, is there anything that -- I know you're not in long-term contracts on met coke and that will roll off in the new facility. But is there anything you can do to mitigate the big increases we've seen for several quarters now?

James M. Hensler

Yes, we're trying. We've got a number of initiatives that we are attempting to do. We're looking at, for example, waste products that contain high levels of carbon in them, where we can use that to substitute a portion of the purchased coke, for example, is one way we're trying to reduce that cost impact. And we think that there's some opportunity to do that. But we believe that, to some extent, it's sort of the nature of where the market is. And when -- it's sort of interesting. You see coal prices have started to come down, but we haven't seen that translate into lower coke prices. And I'd say, eventually, there's going to be an adjustment in that market. But that -- we haven't realized it yet.

Carter W. Driscoll - Capstone Investments, Research Division

The -- could you -- Bob, will you just walk us through the impairment charge to Monaca from the option trigger and how we should think about that going forward? Is that going to be a recurring charge until the option's actually exercised? Can you maybe just talk about the mechanics?

Robert Scherich

Well, what we think happened through -- from now until some -- until that option either expires or is exercised, we were taking the smelting facility and accelerating the depreciation to write that off out over, roughly, a 2-year period this year and next year, because we expect to be shutting that, the smelter down next year. We've been basically, in accordance with the accounting rules, developing a probability assessment on how long we operate the balance of the Monaca facility, which is somewhat dependent, obviously, on Shell either exercising that option or not. So the fact that they -- we entered into the option was a development during the first quarter that we felt increased the probability of a shortened life on the assets. But it's not 100% because they haven't exercised the option to date. If they exercise the option, we would expect those assets to be written off most likely by the end of 2013, and net of whatever we recover and whatever equipment that we move away from the facility. So I think, as I mentioned, the net book value of the facility is $46 million. If that option is exercised, we would expect the majority of that $46 million to get charged off by the end of next year.

Carter W. Driscoll - Capstone Investments, Research Division

And then just moving over quickly before I pass it along, can you talk about, has your thinking changed about the funding options? I know you had talked recently about accelerating it into this calendar year versus -- I think initially, maybe you think it was the last piece of the puzzle as you got closer to completion of the new plant. Has the form changed? Has the amount changed? I think maybe we alluded to bumping up against the higher end of that range rather than the lower end. And maybe you could just comment on that briefly, please.

Robert Scherich

I'd say that we're continuing to look at putting that funding in place by midyear, that I think that's what we've been saying and Jim had commented earlier to the same. And we continue to look at numerous debt financing alternatives because we think there are a lot of good alternatives out there that we've been developing, whether it's through the banking side or private placement or the capital market side. So we think there's good alternatives. We look to put it in place. I'd say versus a year ago or midyear last year, our view is that we've got to now put a little more in place because the commodity price has been down. And we don't see much movement other than sideways here. So it's going to limit our cash flow from operations while we're building this plant from where it would've been at higher zinc prices last summer. So we expect to put the funding in place and continue on schedule with the project.

Carter W. Driscoll - Capstone Investments, Research Division

But in terms of the form, you're still hoping, obviously market permitting, that it would be -- not have necessarily convertibility, free turn equity component. Are you still trying to look for straight debt?

James M. Hensler

Yes, we're looking at debt financing alternatives, is what our focus is.

Operator

Your next question will come from Mitesh Thakkar with FBR Capital Markets.

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

Great job on the production numbers. My question is on the cost side first and following up on the previous question. When you think about Zochem expansion to offset the volumes out of -- to increase the volumes once the whole plant is kind of sold out or something, how should we think about cost shift, given you just mentioned that Zochem is going to be higher cost?

James M. Hensler

Yes, well, I guess I would say Zochem is actually a lower-cost operation when we think about it in terms of the conversion costs of going from metal to oxide than what we currently have in Monaca. And so the -- to put it in perspective, the -- I'd say the conversion costs in Monaca are maybe 25% to 50% higher on a per-pound basis than what we see in Zochem. So moving to Zochem ultimately will be a lower-cost move rather than a higher-cost move. The issue with Monaca in zinc oxide production is that, today, we're producing zinc oxide from PW metal, which requires a refining capacity to be able to do that, to remove the impurities that are in PW metal. And in the future, we'll be moving to a process that will be supplied with high-purity metal to start with, special high grade. So we won't need that refining capability.

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

Okay. And so -- but I think the feed cost is higher when you look at Zochem. So your actual margin is thinner. Is that a fair way to think about it?

James M. Hensler

Well, not really. I mean the feed cost is about the same because we could take that PW metal we feed our current facility and we could sell it in the market at LME price plus a premium. And the same is true in Zochem. We're buying metal that's purchased LME plus a premium. The difference in the premium between PW metal and special high-grade is only about a couple of cents a pound. And that's really the way to look at it from a cost standpoint.

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

Okay. And can you give us some color around this expansion? How much volume are we thinking about? What kind of CapEx you will need to spend? I know it's preliminary, but just some working numbers, if you will?

James M. Hensler

It's still kind of early, but, I mean, we think that, just for example, roughly every 10,000 tons of capacity expansion is about $7 million or $8 million up there at Zochem. So depending upon how much we would expand, that gives you some idea. And the amount of expansion really depends upon what Shell decides to do.

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

Okay, great. And so you will not know on the capacity expansion until later this year or early next year probably, right?

James M. Hensler

Yes.

Robert Scherich

Not probably until Shell makes their decision. But the other thing to think about, Mitesh, is that we're producing 140,000 to 150,000 tons of zinc off the smelter today, and selling it either is metal or oxide. We expect when we start up the new plant to be producing 150,000 tons, actually maybe a little bit more, but selling it all as metal. So when going forward, the oxide business, in a sense, becomes incremental business. We'll sell the 150,000 tons of zinc and we will also have the oxide business. So it's actually a growth opportunity to the business.

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

Yes, absolutely. And I get that and that's a good thing. But I just wanted to see -- I mean, the point which I was trying to get some color on is when do you have to make this decision of expansion? And I was just thinking about the magnitude of expansion.

James M. Hensler

Yes. I think that's within the next year, obviously.

Robert Scherich

Yes, it's probably going to be -- it's definitely going to be in the second half of this year.

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

Okay, great. One final question on the financing side is, you have previously mentioned about equipment financing, and I didn't hear it -- I might have missed it, maybe. I didn't hear it on the prepared remarks. Is that something still which is being evaluated or is that off the table? Any update on that?

James M. Hensler

No, that continues to be one of the alternatives, basically, under my category of bank debt financing that would come through with some of the equipment, along with other forms of debt financing.

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

Are you seeing momentum building on that side? Or it's kind of where it was like 3 months ago?

James M. Hensler

I'd say, overall, we're very pleased with the alternatives in front of us across the financing market. So I'd say it's probably the same. If not, we're getting more interest maybe from additional parties here as we're moving towards that.

Operator

Our next question will come from Daniel Moore with CJS Securities.

Daniel Moore - CJS Securities, Inc.

To the extent that you can talk about it, what, if anything, can you tell us about some of the remaining factors that Shell might be evaluating? You alluded to a decision being made sometime over the next year. Can you kind of handicap, would that likely be in 2012? Or there's just no way to tell at the moment?

James M. Hensler

Well, I mean, I think that they're, from what we know, evaluating a number of factors. And at least in terms of our site, they're doing an environmental assessment on it to assess what the demolition and remediation costs would be, should they decide to exercise the option and build this plant. But I think kind of overarching their analysis is just the basic business analysis of whether it ultimately makes sense to build a plant in the first place, regardless of the site. And I think they're weighing all those factors to make a decision. And I would suspect that they're going to get most of this site work analysis done in a relatively short period of time, a few months, but the overall decision on the project could take longer. And so I don't think they'll exercise the option unless the business case is solid. And I think that may be as much of a factor when they decide as anything.

Daniel Moore - CJS Securities, Inc.

Okay, that's helpful. And you mentioned, obviously, the North Carolina facility remains on budget. In the last call, you talked about some incremental cost savings from procuring metals at lower than budgeted prices. Are you still -- are we sort of on the same track as we were 3 months ago? Or back to the original $350 million, $375 million?

James M. Hensler

Yes. No, I think we're still in that same range. And we're now at a point where we've bid about 40% on the project. And so we're getting a better handle on what we think those numbers are going to be. But we still have 60% left to bid. So there's still the potential for some ups and downs from our original numbers. But we think that, that range is still the appropriate range.

Operator

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

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

On the North Carolina project, the number is still $90 million to $110 million of benefits from the new plant. And when you had first talked about this, there were several buckets that kind of drove that $90 million to $110 million mix, and the buckets being lower labor and energy costs; a big driver was the byproduct metal recovery; the improved zinc metal product quality; and then the improved recovery rates for zinc. We have seen -- there've been -- since then, there's been changes in the markets in the -- like the price for the various metals that you might be able to recover and definitely, changes in energy markets. I was just wondering if you could talk through those benefits that you see from the project? And whether there might have been some kind of shift in where you see those benefits being derived from, when you think about how energy markets and metal markets have changed over the last year?

James M. Hensler

Well, I would say, I think that range probably still applies, although we don't make an effort to really re-update kind of what we think the benefit of the project is on a regular basis. But just to talk about kind of relatively where things are moving, the same buckets apply. I would say that, on the conversion cost side of things, in the new plant it's probably looking better than it did because coke prices continue to go up. And to put in perspective, in the first quarter of 2012, we spent about $6.5 million for metallurgical coke to feed the Monaca plant. That's $26 million a year if it keeps at that same rate, and we won't spend $0.01 for metallurgical coke in the North Carolina facility. So that'll be huge energy benefits there, and I think probably higher than we originally estimated. On the flip side, we were getting a -- we're looking at some credit for lead and silver concentrate sales. And our implied assumption in the numbers that we had quoted was that silver was around $30 an ounce and lead was at about $1 a pound. Well silver is still at about $30 an ounce, but lead's moved down to about $0.90...

Robert Scherich

About $0.90.

James M. Hensler

$0.92, $0.93 a pound. So maybe a little bit less there. But most of the value was on the silver side rather than the lead side. So, I mean, a few pluses and minuses, but I'd say, by and large, that range is probably still good.

Robert Scherich

Yes, because a big part of that movement of the range from $90 million to $110 million is related to price fluctuations on the metals recovered.

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

Okay, great. On the EAF dust receipts, the quarter was a really nice quarter, 166,000 tons of receipts. That was at an average capacity utilization rate of 78% for the steel industry in the first quarter. We're now about 81%. I was just wondering if you could talk about the potential that you actually could track toward even a little bit of an uptick in the second quarter. And then also, if you look at that 166,000 ton figure, that's a run rate of about 664,000 tons a year. You've still got plenty of spare capacity to think about 730,000 tons of processing capacity that -- if we maintain a higher rate of capacity utilization. What's your ability in the short run, let's say, to operate at levels -- maybe we look at 2013 or later, but at levels that might be at or above that nameplate capacity rate?

James M. Hensler

I think we can run in the -- at the 730,000-ton rate. And if the steel industry capacity utilization moves up, we secure some more contracts, that's well within our capability. And -- but we're also looking at the potential to expand capacity. Because part of the challenge you get into is that the capacity utilization might be going up, but it might be in a part of the country that doesn't really match where you have excess capacity. And so we're looking at that right now and the potential to maybe add some capacity in the Midwest, where there are a lot of steel companies. And we're running at full capacity, for instance, in our Chicago plant. Now we can still take business from the Midwest, but we end up incurring some freight penalty to move it to the South or to the East. And so we're trying to avoid that. And so one of the plans that we have that's in the developing stage is that one of the kilns at Palmerton that we use for calcining is not going to be needed any longer whenever North Carolina is up and running. And we're looking at the possibility of relocating that to the Midwest. So there are some other things we're looking at that can get us even above the 730,000 level, but it might involve relocating some assets.

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

And as far as in the short run, can we step up from the 166,000 number in the first quarter? Or is that a pretty good number as -- if you think about...

James M. Hensler

I think we can if the steel output moves up. And as you point out, it has a little bit since the first quarter. And so we may see the effect of that. And there are some contracts that are in play that we're in discussion stages on that could bring in some more share, that could impact 2012.

Operator

[Operator Instructions] Our next question will come from Robert Howard with Prospector Partners.

Robert Howard

I just wanted to check on the Shell agreement. I guess, is that put option just for the smelter specifically? Or I mean, so would you still own the other facilities like the power plant and everything else that's at that site? Is that...

James M. Hensler

No. They would -- their option is on the entire piece of property there, so -- including the land that the power plant sits on.

Robert Howard

Okay. And so then -- so would that mean that your headquarters would need to move or what would be happening with that?

James M. Hensler

Our headquarters isn't at the plant.

Robert Howard

Okay. It's not right there. Okay.

James M. Hensler

It's closer to Pittsburgh.

Robert Howard

All right. And just in terms of understanding the benefit that they could be getting from it, is there much natural gas, I mean, that's kind of pipelines and things going right to the site as is, or currently, that they can easily tap into? Or is that -- is it just a good location to have a pipeline extended to them? Or what's that situation like there?

James M. Hensler

It's not my area of expertise, so I really can't comment. But I mean, they're obviously interested in the Marcellus Shale region, which is near where we're located, and the Utica Shale region. And there are all sorts of activities going on and pipelines being constructed. So I think that's part of this overall business analysis that I mentioned that they're looking at.

Robert Scherich

But we do have a lot of infrastructure at that plant today with current natural gas suppliers, distributors coming into the plant. We've got rail access. We're on the river. So it's very attractive from an infrastructure standpoint.

Robert Howard

Because you had also said, I think, in the past, that when you were looking at the power plant, the potential may be to convert it over to natural gas or something. That there was enough gas, obviously, to do that. So am I remembering that right?

James M. Hensler

Yes. Certainly, there's -- there are gas pipelines coming in. This Shell plant, I think, is more interested in the -- not the natural gas, but the wet gas that comes out of this Marcellus Shale region.

Robert Howard

And if they do exercise that option, how does that -- does that have a significant impact? Or I guess, you're saying you're going to get -- your financing decision for the new plant to sort of going to be made before you know whether Shell is going to exercise the option or not. So are you kind of -- how do you kind of weigh that potential for getting a chunk of cash from them versus needing to -- saying you're going to borrow more money in the third quarter or something?

James M. Hensler

Yes, they're totally independent. We're going to finance the North Carolina project independent of what Shell does. We're not going to rely on any proceeds that we may get from the sale of the Monaca site. I think the only issue that hangs in the balance of the Shell decision is what do we do in the zinc oxide business, which is located in Monaca. And we talk about some of the options we're considering there.

Operator

And we'll move on to our last question in the queue, Carter Driscoll with Capstone Investments.

Carter W. Driscoll - Capstone Investments, Research Division

Just a quick follow-up, guys. Did the roof problem at INMETCO at all impact the adjustments you were making to the rotary hearth furnace that you were, I think, hoping to complete in the second quarter? Did that impact it at all, or is that 10% to 15% expansion still on track?

James M. Hensler

Yes, that's -- it didn't impact that. Although I think that project is being impacted a little bit by some later equipment deliveries than we'd hoped for. We're probably still looking at starting that up in -- either sometime in June or early third quarter.

Operator

And currently, we have no further questions from the phone lines.

James M. Hensler

Okay. Well then, thank you very much and we will talk to you again at the end of next quarter.

Operator

And that does conclude our conference for today. Thanks for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Horsehead Holding's CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts