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Horsehead Holding (NASDAQ:ZINC)

Q2 2012 Earnings Call

August 06, 2012 11:00 am ET

Executives

Gary R. Whitaker - Vice President, General Counsel and Secretary

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

Frank Vallelunga

Analysts

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

Daniel Moore - CJS Securities, Inc.

Kuni M. Chen - CRT Capital Group LLC, Research Division

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

Carter W. Driscoll - Capstone Investments, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Horsehead Holding Corp. Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Gary Whitaker. Please go ahead.

Gary R. Whitaker

Good morning, everyone, and thank you for joining us on our second quarter 2012 earnings release conference call.

My name is Gary Whitaker and I am 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 am 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 second quarter of 2012. I will review the performance of our operations and markets, while Frank Vallelunga, our Controller, will review the financial results. Bob Scherich, our CFO, who normally joins me on these calls, is unable to be with us today due to a personal matter.

The consolidated net earnings for the quarter were a loss of $1.7 million, or a $0.04 loss per share. This compares to a loss of $3.7 million, or an $0.08 loss per share for the second quarter of 2011. Consolidated net earnings, excluding noncash charges related to hedges and a lower of cost per market adjustment to inventory for the second quarter of 2012, were $1.5 million or $0.03 per share.

For the same period in 2011, on the same basis, consolidated net earnings were $5.5 million or $0.13 per share. The primary change between the quarters was a 14% lower zinc price this year which reduced earnings by an estimated $0.13 per share.

In addition, at INMETCO, lower nickel prices combined with higher maintenance and repair costs due to 2 unplanned equipment outages contributed to a $0.04 per share decline in earnings compared with the second quarter of 2011.

While I'm pleased with the operating levels of our businesses, lower commodity prices had a noticeable effect on our earnings when compared to the same quarter last year. However, when you eliminate the impact of hedge write-offs, mark-to-market adjustments and LCM adjustments, our operating results were positive despite the lower commodity prices compared with the prior year.

And the quarter had many bright spots compared with the same quarter last year. Zinc product shipments were up 29% including the impact of Zochem. EAF dust receipts were up 17%. EAF dust processed was up 11%. Smelter output was up 7.7%, and the realized premium for zinc products on a zinc contained basis was up about $0.07 per pound.

I'd now like to discuss these operating results in more detail. We processed 160,600 tons of EAF dust during the quarter, an 11% increase from the same quarter last year. EAF dust receipts increased from the prior year second quarter from 138,000 tons to 161,700 tons, a 17% increase. The combination of higher steel production levels and new service contracts that started in 2012 were the primary factors leading to this increase. According to industry statistics, domestic steel industry capacity utilization averaged approximately 79% during the second quarter, which is up slightly from 78% during the first quarter of 2012 and up from just shy of 75% in the second quarter of 2011.

We believe dust receipt levels will be slightly lower in the third quarter of 2012 as steel production levels appear to have softened. However, we expect to run our EAF dust recycling plants at full capacity through the end of the third quarter. If this recent softening in steel production persists, we will consider idling one of our kilns prior to the end of 2012.

We continue to pursue additional EAF dust service contracts because processing additional dust provides more low-cost feed for our current zinc production and will be the primary source of feed for our new zinc plant in North Carolina. We are happy to see zinc recovered from EAF dust made up about 77% of the feed mix for the smelter during the most recent quarter, compared to 74.6% for the same quarter last year.

Zinc product shipments increased by 29% to 48,572 tons compared with the prior year second quarter, mainly due to the addition of Zochem, along with another excellent production quarter at Monaca and steady demand for our zinc products. Zinc production on a zinc contained basis was 43,573 tons, inclusive of Monaca and Zochem. Improved operating practices and higher quality raw material sourcing contributed to a 7.7% increase in smelter production for the second quarter of 2012 compared with the second quarter of 2011.

The demand for zinc products from our Monaca location increased by 3% during the quarter, compared with the second quarter of 2011 reflecting slightly stronger demand for our end markets. And we expect to continue to operate our full complement of 6 smelting furnaces in the third quarter. Zinc oxide shipments increased 72% compared with the second quarter of 2011, reflecting primarily the acquisition of Zochem.

Zinc oxide shipments from Monaca increased by 5% compared with the prior year's second quarter, but decreased by 6% over the first quarter of 2012, reflecting outages taken by some customers during the second quarter. Despite the slight decrease, oxide shipments continued to outpace 2011 levels, and the outlook for zinc oxide in the third quarter is expected to be similar to second quarter results.

Total zinc metal shipments increased slightly when compared with the second quarter of 2011 due to continued strong demand in the general galvanizing sector. Shipments of SSHG metal were lower than expected due to the need to curtail production on 1 of the 2 refining columns for this product in May because it had reached our limits for safe operation.

We operated the other column through late July, at which time we started rebuilding both columns. These columns should be back in service in early September.

Metal shipments on a year-to-date basis through the end of the second quarter in 2012 are running 7% ahead of 2011 levels. Third quarter metal shipments are expected to decline due to the SSHG production issue mentioned earlier and because we experienced a lightning strike on July 1 at our zinc smelter, which caused a power interruption and damaged several electrical components. Matters were complicated by the extreme temperatures we experienced in early July. This issue has been resolved, but PW metal production in the third quarter is expected to be approximately 1,000 tons less than during the second quarter. The smelter's currently producing at normal levels.

Moving on to discuss the zinc pricing environment. The LME zinc price averaged $0.87 per pound during the second quarter, which was $0.04 lower than the first quarter at $0.92 per pound and $0.15 lower than the second quarter of 2011 average of $1.02. Zinc prices are currently trading in a fairly narrow band, near $0.83 per pound. Our $0.85 put options paid $154,000 in June.

The realized premiums on zinc metal averaged $0.056 during the second quarter, which is up $0.028 from the second quarter of last year, and was $0.018 higher than the realized premium for the first quarter of 2012. The increase in realized premiums is primarily due to an increase in the transactional premiums on SSHG metal, which went into effect on April 1 of this year, combined with a slight increase in transactional premiums on PW metal and a slight lag effect due to the decline in zinc prices throughout the quarter.

Realized premiums for zinc oxide in the quarter were approximately $0.078 per pound, which is an increase of $0.078 compared to the prior year's second quarter and an increase of $0.058 compared to the first quarter of 2012. The increase versus the prior year's quarter reflect the higher transactional premiums that went into effect on oxide in 2012, along with the impact of Zochem.

The increase in realized premiums on a sequential quarter basis is due primarily to the lag effect related to the decline in zinc prices.

INMETCO continued to operate at full capacity even as tolling receipts were lower than expected. Given the significant decline in nickel prices, some very low nickel content waste streams were landfilled by our customers rather than incurred the cost to process these materials at INMETCO to recover the nickel. As a result, tolling receipts were about 8.5% lower than during the second quarter of 2011.

While this had an impact on tolling revenues, this effect was more than offset by increased revenue from excess metal sales. We expect third quarter 2012 receipts to remain at the same levels as the second quarter.

INMETCO's production output decreased slightly by 1% compared to the second quarter of 2011 as a result of unplanned outages at the rotary hearth furnace and the submerged arc furnace, which curtailed production for several days. These problems have been corrected, and we are pursuing more permanent fixes to address the root cause behind the failures.

Nickel prices declined from $10.96 per pound in the prior year's quarter to $7.78 per pound in the current quarter. Generally, each $1 per pound decrease in the price of nickel impact EBITDA in INMETCO by approximately $1 million per year, all other things being equal. The effect of lower nickel prices have a larger impact during the second quarter due to a higher proportion of excess sales, which are more nickel-price sensitive.

We continue to expect U.S. 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. In anticipation of this increase, and in the hope that we're awarded this business, we continue to make modest investments to increase throughput at INMETCO. We started up an oxygen enrichment system on the rotary hearth furnace in July. The preliminary results are encouraging, and we expect this enhancement to increase productivity and reduce fuel usage.

Zochem made another positive contribution to earnings during the quarter. Last week, we announced that we'd decided to move forward with plans to expand capacity at the Zochem facility in anticipation of the potential idling of the zinc oxide refinery at Monaca. The expansion, which will cost approximately $15 million and include the addition of a new muffle furnace, expansion of 2 existing furnaces, more bag house capacity and a small addition to the building will increase zinc oxide production capacity at Zochem to 72,000 tons per year, a roughly 30,000-ton per year increase over current operating levels. This project is expected to be completed by mid-2013 prior to the shutdown of the Monaca smelter.

Finally, we're pleased to have closed on $175 million senior secured notes offering on July 26, 2012, to provide additional financing for our new zinc production facility in Rutherford County, North Carolina. We've spent approximately $94 million on the North Carolina project since its inception. Construction activity is accelerating, and over 65% of project spending has been committed. We've moved into the stage of erecting buildings, fabricating steel tanks and pouring aboveground concrete structures on the site. We believe that the project is still on schedule for start up in the second half of 2013.

I will now turn it over to Frank Vallelunga to review the financial results.

Frank Vallelunga

Thanks, Jim. My discussion of the financial performance for the quarter excludes the noncash effects related to hedges and inventory impairment charges. I will talk about these items separately a little later.

The adjusted net earnings for the quarter were $1.5 million, or $0.03 per share, or $0.05 per share without the effect of changes in the estimated tax rate for 2012, compared to adjusted earnings of $0.13 per share from the second quarter of 2011. We estimate that the current quarter adjusted earnings would have been $0.13 higher with the same LME price as the prior year quarter.

INMETCO's performance, albeit positive, was approximately $0.04 below the prior year quarter. Details of the quarter's performance versus the same quarter last year reflects an increase in revenue of $9.7 million or 9% to $120 million. The increase includes the effect of higher shipments, including Zochem, partially offset by a decrease in price realization as a result of the lower commodity prices. The average sales price realized for zinc products on a zinc contained basis was $1.05 per pound or $0.18 per pound above the average LME price for the quarter, compared to $1.13 per pound or $0.11 above the average LME price for the prior year's quarter. This reflects the higher margins of the Zochem business as well as the lag effect for some of the zinc oxide shipments.

Sales of zinc metal decreased $4.8 million, or 9.9%, to $43.5 million for the quarter, reflecting a $0.7 million increase in sales volume offset by a $5.5 million decrease in price realization. The sales of zinc oxide increased $18 million to $47.6 million for the quarter, reflecting an increase in sales volume of $21.4 million, primarily related to Zochem, partially offset by $3.4 million of reduced price realization.

EAF dust revenue increased $1.6 million or 16.7% to $10.9 million for the quarter as volume of receipts increased 17.3% as compared to the second quarter of 2011. Cost of EAF dust transportation also increased $2.4 million to $8.6 million for the quarter.

Sales from nickel products and services decreased $1.6 million, or 9.8%, for the quarter to $14.5 million as a $0.7 million effect from higher volume of shipments was more than offset by a $2.2 million effect for the lower price realization, reflecting the decline in the LME nickel price.

Consolidated cost of sales decreased $1.8 million, excluding Zochem cost of sales of $16.5 million and an LCM adjustment charge of $1.2 million to $89.3 million for the quarter. This decrease reflects the increase in EAF-based feed to 77.2% of the feed mix compared to 74.6% for the prior year quarter.

The effective tax rate for the second quarter of 2012 was noticeably impacted as the estimated full year tax rate for 2012 was changed to 38.2% compared to an estimate of 43.9% in the first quarter of 2012. This change for 6 months was recorded in the second quarter and had an unfavorable effect on reported earnings of $0.02 per share.

Noncash hedge charges reduced sales $2.5 million and the LCM adjustment of $1.2 million increased cost of sales for the second quarter. The remaining 2012 zinc put options had a value of $4.3 million and the 2013 put options had a value of $8.2 million as of June 30, 2012.

We did not record in the second quarter any additional asset impairment charges associated with the Monaca facility. We will be assessing the value related to the refinery assets in Monaca during the third quarter, given the completion of financing in July and our announcement to expand capacity at Zochem.

The net book value of the fixed assets of the Monaca facility was $44 million as of June 30, 2012. We expect that a significant portion of this value will be written off over the next year or so if Shell elects to exercise its option to purchase the site under its option agreement.

Cash flow from operating activities was approximately $23 million for the quarter compared to $10 million for the first quarter of this year. Capital spending was $32 million for the quarter. Our cash balance, not including the net proceeds of approximately $165 million from our recent note offering, was $153.7 million at June 30, and we currently have $39 million of availability on our revolver.

In July, we completed the private placement of $175 million in senior secured notes due in 2017 with a coupon of 10.5%. These notes generally are callable by the company in 3 years. A significant portion of the interest expense on these notes, as well as on our convertible notes, will be capitalized during the North Carolina plant construction period. Our current estimate is that approximately $10 million of interest will be capitalized in 2012, and another $18 million in 2013 through completion of construction. These notes have a currency-based covenants and from among other exceptions, expansion of our revolving credit facilities to $80 million and a general debt basket of $40 million.

We believe that our cash on hand, along with our revolving credit facility, provides adequate liquidity for us as we work to complete the construction of the new plant in North Carolina and the capacity expansion of Zochem. We continue to work on adding capacity to our revolving credit arrangements by adding INMETCO and Zochem as borrowers. These credit facilities are expected to handle the working capital and general business needs of the current operations.

With $0.85 per pound price put options in place through June of 2013, even if the LME zinc price were to drop further, we would expect to continue to see some level of cash flow from operations through the end of that period.

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

James M. Hensler

Thanks, Frank. In summary, before we open the call for questions, I'd like to say that I'm pleased that while the second quarter was impacted by lower commodity prices for both zinc and nickel, operating levels remain strong at all of our locations and our operating results were positive when you strip away noncash charges. I'm also pleased we generated over $23 million of cash from operations during the quarter.

The integration of Zochem is also nearly complete, and we've announced that we'll be expanding our Canadian operation. And INMETCO continues to operate at full capacity despite weaker nickel prices and it continues to be a solid investment for us. I'm very pleased that we completed the project financing for our new zinc plant. We have approximately $330 million of cash on hand following our recent private placement of $175 million of senior secured notes, which we believe should be ample liquidity to complete the project.

Project activity and capital spending has accelerated on our new zinc plant in North Carolina, and we believe we continue to be on schedule to complete the construction and start operations in the second half of 2013. Once fully operational, we believe this project should provide us with annual incremental EBITDA of approximately $90 million to $110 million.

Thank you. And we'd now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Paul Forward from Stifel, Nicolaus.

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

On the new zinc plant, just a couple of questions. In your, I think it was in your June, your latest slide deck, you had talked about a $375 million capital cost. And that's at the high end of the range that you'd been giving of $350 million to $375 million. I just want to know, is that conservatism to put the number at the high end of the range? Or could you talk about any factors that might be affecting the cost of the project or, let's say, the timing of the project? It's great that you're reiterating today that you're on schedule for the second half start up. I just wanted to see if there was anything that you've seen over last 3 months that might guide you or cause you to think one way or the other that there might be issues that show up, that could keep you from hitting a third quarter start up.

James M. Hensler

Well, in terms of the capital cost item first, we don't see anything that's changed our view to a great extent. We did do an independent assessment of the capital spending through a company called Global Performance. They're a large EPCM firm, and their independent assessment came in around 382, which is pretty close to the 375 number that we've had. But I would caution that we did about 2/3 of this project. There's still 1/3 left to go. And we haven't gone into the stage of the project where we're looking at the actual installation of the equipment, at which point in time we may want to spend some more money to accelerate the project. But at this point in time, we don't see a reason to change our view of the project. We think that we've got ample liquidity to complete it. In terms of the timing of the project, we -- our target date is still third quarter of 2013. We've said that we think that's a plus or minus 1 quarter type of estimate at this point in time. We can see it -- we could see our -- in the best scenario, maybe starting up as early as June. But unforeseen things could cause it to be delayed. We don't see it being delayed by more than 1 quarter. We're still on track for our target of third quarter of next year.

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

Jim, and the -- I was wondering if you could go over, if you're targeting first zinc production of third quarter 2013, I was just wondering if you could talk a little bit about how you see the ramp. When does -- when do we hit the full run rate at the plant and actually turn it into revenues?

James M. Hensler

Yes. Well, we -- typically, with these kinds of electrolytic smelters, if there aren't significant issues that come up and we don't anticipate it, we should be able to ramp up within 60 to 90 days. So we would expect certainly by the end of the year, if we have first zinc at the end of the third quarter, we would expect by the end of the year to be ramped at the output level of the zinc units we're bringing in. And so that would be the ideal scenario.

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

Okay. And then on Monaca, I think you talked about some share of the potential of the $44 million book value at Monaca being written off if Shell exercises the option. I guess I'd ask what -- any insights on their thinking right now about exercising the option? And I'm also curious, considering the investment in Zochem, if they don't exercise it, would there still be a write-down at Monaca? Or what would Horsehead do in that case?

James M. Hensler

Yes. Well, nothing's really changed in terms of the Shell situation. They haven't given us an indication one way or the other yet whether they're going to exercise the option, but they continue to do their evaluation. They have teams on the ground on a routine basis, and they expect to have their construction people on-site through the whole option period. So we're waiting to hear from them. But we don't expect to hear something until closer to the end of the year. In terms of the write-down of assets, regardless of what Shell's decision would be, we would be writing off the smelter assets over the next year, 1.5 years because we'll be shutting those down when we start up North Carolina. The refinery assets have been a question. And now we've decided to move forward with the capacity expansion in Zochem. So we'll be evaluating the timing of writing off the refinery assets, probably starting now in the third quarter. If Shell doesn't exercise their option, we would still likely run the Larvik furnace assets, which produce zinc oxide from a different process. And Larvik has capacity of about 20,000 tons per year. We would continue to operate that. And there are also some other smaller operations that we will continue to run on that site. And so not all of that $40 million would necessarily get written off if Shell doesn't exercise the option.

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

Okay. And just maybe lastly. On INMETCO, the tolling receipts were a little lower in the quarter. Just wondering if you could talk about -- you talked about customers moving some of the material into landfilling instead of INMETCO. Just wondering, how much flexibility the customers typically have on that to -- under contracts to move the material into a landfill instead? And what would you anticipate the second half outlook would be for volumes at INMETCO?

James M. Hensler

Yes. Well, this actually involved 1 particular customer and the material in question is really sort of spot material, it's not under contract. And it's very low in nickel content on the order of 1%. So for them, when they look at the cost of sending us to recover, the little bit of nickel that's in it versus putting it in a landfill, when the nickel price drops to where it is now, the economics for them favor putting it into a landfill. And I think that's something that will vary depending upon what happens to the price of nickel. If it goes back up, they'll probably opt to send it to us. I think in terms of the volume of tolling receipts in the second half of the year it depends, to a great extent, on what happens with the startup of the ThyssenKrupp facility and to the extent that we are successful in winning that contract. When that facility comes online, it's 1 million ton per year melt shop. So when running at full capacity, it will generate a significant amount of waste products to be processed. And so hopefully, we'd begin to see some of that here before the end of the year.

Operator

Your next question comes from the line of Daniel Moore from CJS Securities.

Daniel Moore - CJS Securities, Inc.

Just a quick clarification. Do you expect to capitalize most of the interest on the $175 million notes on until the product's completed, is that correct?

Frank Vallelunga

That's correct, yes.

Daniel Moore - CJS Securities, Inc.

Okay. And just maybe a little follow-up on the last question regarding INMETCO. Maybe talk about some of the issues with regard to maintenance that impacted Q3 -- Q2 and whether or not you see those continuing into Q3?

James M. Hensler

Yes. We had an issue with a failure of a water-cooled component in the roof of the submerged arc furnace, which essentially caused the roof to cave in. And so we were down for several days making that repair. It turns out this was a repeat of a similar incident we had in January of this year, and it's actually very unusual. We typically have got a very reliable process there. So we made the repairs, but we've now taken a look at the underlying root cause of the problem. And we are evaluating a design change, which hopefully replaces the water-cooled component with a more reliable component. So we don't expect that condition to happen again, but we're also considering redesigning this roof in such a way that it makes it more robust.

Daniel Moore - CJS Securities, Inc.

And then lastly, with regard to Zochem. You were at 72,000 per ton capacity now post the expansion. I guess, do you view this expansion as an incremental step? Or are we likely to be at a capacity that you'd be happy with over the next couple of years?

James M. Hensler

I think that once we go through the transition, we'll be happy with that level of production. The only other change we might make would be, as I mentioned earlier, if Shell doesn't elect to buy the Monaca facility, we would probably also run the larger furnaces.

Operator

Your next question comes from the line of Kuni Chen from CRT Capital Group.

Kuni M. Chen - CRT Capital Group LLC, Research Division

I guess, just to follow-up on INMETCO. As far as the design changes here, can you elaborate on when that may take place? And what sort of costs and downtime might be associated with that?

James M. Hensler

Yes. Downtime will be minimal. We'll do it during normal scheduled maintenance that we have. And the cost of making the change, actually, will be insignificant. What we have are some water-cooled components that we think we can replace potentially with air-cooled ceramic components. And it won't have a significant impact on capital spending or on operating for us.

Kuni M. Chen - CRT Capital Group LLC, Research Division

Okay. Good to know. And as far as the decline in the steel utilization rate for the quarter ahead, where does that take your feed percentage if you look at the sequential change there? If you go from 77% for the second quarter to what type of level in the back half?

James M. Hensler

Yes. I haven't calculated that. But just shooting from the hip, I'd say it's probably going to be in about the 75% range.

Kuni M. Chen - CRT Capital Group LLC, Research Division

Okay. Let's see, and then can you talk about the potential decision to idle a kiln here in the back half of the year? And what sort of costs may go along with that?

James M. Hensler

Yes, we don't anticipate that we'll need to do that until maybe October if we don't see a pick up in the steel production. And it would generally result in a cost savings to us. We would produce one of our kilns. We are actually in the process of doing that analysis right now to see which kiln would be the appropriate kiln to take down. Part of the considerations that we have are that we don't -- probably not looking at enough reduction in business to be able to service our customers in the same way we do with 1 kiln down versus all the kilns operating. And so we would incur some diversion costs to relocate some dust from 1 plant that it's supposed to go to another plant where we have the capacity. And so we're going through that analysis right now, and net-net should be a cost savings to us but we don't have an estimate on that at this point.

Kuni M. Chen - CRT Capital Group LLC, Research Division

Okay. And just one last follow-up. Can you -- it's good to see everything is on schedule and on budget with Rutherford. Can you just talk about, obviously, the main pieces of equipment start to arrive in the spring of next year. But just as far as the third and fourth quarter or the second half of this year, can you talk about maybe the 3 or 4 major construction milestones that you would look to hit?

James M. Hensler

Yes. Well, I mean the major thing that's underway right now is that we're pouring all of the aboveground concrete structure for the cell house. And so that's underway. And you can see some of the pictures on our website, the large structure coming out of the ground is the electrowinning cell house that will be completed between now and November. We're also going to start pouring the concrete for the mixture settlers, which is the solvent extraction part of the facility. That's underway. The steel tanks that were fabricated on-site are being built. There are some pictures there of the electrolyte storage tanks, 4 of the 5 of those have been built. You'll also start to see the leach tanks begin to be built on-site. And then the other thing -- the other activity is the buildings, the administrative offices, the buildings for warehousing, product and shipping, as well as the building associated with the melting and casting area. All of that activity is going to start to take place here in the third and fourth quarter.

Operator

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

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

A quick -- most of my questions are answered. Mostly a couple of housekeeping things remaining. Can you help us get some handle on the second half volumes, both at INMETCO and also on the smelter? How should we think about any planned maintenance outages and those kinds of things?

James M. Hensler

Yes. I think in terms of the smelter, first, we expect to continue to run 6 furnaces for the entire time. We are going to be a little short of production in the third quarter because of the issues I mentioned, probably be 1,000 tons less than what we did in the second quarter in terms of total ZnE out of the smelter. And absent any other issues though, we should be back to normal production for the fourth quarter. At INMETCO, we expect to continue to operate at full capacity through the balance of the year.

Frank Vallelunga

We have the maintenance outage scheduled for the fourth quarter.

James M. Hensler

But we do have a maintenance outage that, on paper, is scheduled for the fourth quarter. Given the fact that we've taken these couple of outages in the second quarter, we may be able to defer that outage into the first quarter of next year. We haven't made that decision. And it will depend upon what the conditions of the furnace is as we exit this quarter.

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

Great. And on Zochem, with the expansion planned, would there be any operational impact or any volume volatility which we should expect in the back half of this year, first half of next year?

James M. Hensler

No, no. We think we should be able to work through those issues without any production impacts.

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

Great. And just one final follow-up on that. Including the Zochem CapEx and what CapEx you have planned for the new plan on the back half of the plus maintenance CapEx, how should we think about CapEx for the back half and the first half of next year?

Frank Vallelunga

It looks like we're targeting to spend about $100 million in the back half of the year in the SX plant, and probably another $5 million or $10 million or so just on general maintenance CapEx.

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

And that's including Zochem, too, right?

Frank Vallelunga

Yes, that's consolidated. That's for the balance of this year.

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

Okay. And I think the first half of next year will be similar to what you have on your June slide there, is that right?

James M. Hensler

It should be. Yes, it should be what we showed in the roadshow presentation.

Operator

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

Carter W. Driscoll - Capstone Investments, Research Division

First question is the information sharing agreement you have with the other entities that have use the ZINCEX process, what have you specifically learned so far? And if I remember correctly, you guys were planning another trip out to the facility in the Glencorse building, and I don't know if that had occurred to you or not. But maybe you could just talk broadly about what you have learned and how that may have changed either the configuration or the way you've actually bid out some of the process.

James M. Hensler

Actually, the trip we made was to the second trip to the Skorpion facility in Namibia, and our team was there in June to revisit that site. And on that team, we included our -- the maintenance manager for the new facility, as well as the -- our Director of Health and Safety. A lot of the focus of that visit was more related to operating information for the facility, maintenance management issues, health and safety management issues -- more related to how we run the facility once we start it up rather than the actual design of the facility per se. And it was very good from that standpoint. We got -- I wasn't with them, but the folks that went on the trip came back, said that there was good information sharing and learned a lot in terms of developing our management systems for this facility when it starts up. But to answer your question, we're generally about the information sharing agreement. If any one of the licensees of Tecnicas Reunidas makes any changes to the basic process flow sheets in the SX part of this facility, then that's the information that could be shared among the parties. What we found useful to do is to sort of benchmark some of the estimates that we've have, both for capital and operating -- but not so much capital because each of the plants are different in sizes. And so the size of the equipment is different. But when we look at, for instance, reagent usage in the solvent extraction section of the plant, it's good to be able to look at what Akita is doing on a per ton of zinc produced standpoint and see how that compares to the estimates that we've got in our models. And by and large, those experiences have confirmed what TR told us and also what we expected.

Carter W. Driscoll - Capstone Investments, Research Division

So that's helpful. On a -- just kind of a clarification on the Zochem expansion. If I heard correctly, did you say 30,000 ton or 30% increase? Because if I do my math, I think on the last call you talked about $7 million to $8 million per 10,000 ton expansion, which would kind of put their capacity around 55 getting to 72. So just a clarification there if you would, please.

James M. Hensler

Yes. The actual amount of the expansion is about 22,000 tons. And they're currently operating with about 10,000 tons of excess capacity. So the total is about 30,000, 32,000 tons.

Carter W. Driscoll - Capstone Investments, Research Division

Okay. And another housekeeping, the actual contribution margin for INMETCO this quarter?

James M. Hensler

Well, I think we show in the earnings release the pretax margin was about $3 million before tax of margin on $14.5 million of sales.

Carter W. Driscoll - Capstone Investments, Research Division

Okay, I missed that. And then just my last question is, again, the assessment of Monaca -- obviously, you talked about the refining issue in terms of the write-down. But why specifically not a write-down for the smelting operation this quarter?

James M. Hensler

Well, I'll let our Controller answer that since that's an accounting question.

Frank Vallelunga

Yes. The way that we've looked at that in the prior 2 quarters, as we did take an adjustment at both December 31 of last year and March 31, was looking at the factors surrounding the events of the smelter itself. And something changed on those factors. The Shell agreement being -- or the Shell agreement being signed, for example, was the last thing that prompted us to take a look at the likelihood that we would be taking a write off there. So we assessed the probabilities related to that at that point in time. And since nothing happened in the second quarter to either say that we're getting closer to Shell, exercising their option or getting further away from Shell exercising their option, the quarter was kind of silent. So we just did not take an additional impairment adjustment. We did take, and we continue to take, additional depreciation expense on the assets that remain for the smelter, and we'll do so until we shut it down.

Carter W. Driscoll - Capstone Investments, Research Division

Right, okay. And then just generically, you talked about demand trend still being relatively healthy. Any surprises at all, either positively or negatively, on what you've seen in the first several weeks of this quarter? Anything correlating to the slowdown and what we've seen on, kind of, the domestic steel industry? Or is it still kind of steady as she goes?

James M. Hensler

Yes, I mean we -- I guess the only area of weakness we've seen really has been what we've seen with the steel mills. I guess, I would say that June was surprisingly weak, but July had come back pretty well. So there are a lot of outages that were taken in your June that don't look like they're repeating themselves here in July. So I think that even though the steel capacity utilization has dropped, I think it's disproportionally affected the integrated, guys. So that's one thing, I think. And I think zinc oxide remains a little uncertain. We're getting some mixed reports from the different tire producers. Some are saying they don't see much of a change in the second half of the year. And we see others that are saying that they may see sales off about 5%. So that could have an impact, but we -- too early to tell.

Carter W. Driscoll - Capstone Investments, Research Division

And then I'm sorry, finally, just I haven't done my calculation yet, but the LME plus that you expect from Zochem's contribution, that's still within that $0.20 to kind of $0.28 band this quarter as well?

James M. Hensler

Yes. Yes, that's -- typically, on a zinc contained basis, that's where we expect it.

Operator

And at this time there are no further questions.

James M. Hensler

Okay. Well, that would wrap it up. And thank you, everybody, and we'll talk to you again at the end of the third quarter. Thank you.

Operator

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

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