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Executives

Ali Alavi – VP Corporate Administration, General Counsel, and Secretary

Jim Hensler – President & CEO

Bob Scherich – VP and CFO

Analysts

Adam Adelman – Capstone Investments

Amir Arif – FBR Capital Markets

Peter Park – Park West Asset Management

Chris Dudko – JDA Capital

Harrison Wascher [ph] – Agamas Capital

Simon Solitario [ph] – Harbor Side Capital

David Shapiro – Aegis Financial

Cliff Hale-Sanders – CIBC World Markets

Horsehead Holding Corp. (ZINC) Q2 2008 Earnings Call Transcript August 12, 2008 11:00 AM ET

Operator

Ladies and gentlemen, we would like to thank you for standing by and welcome to the Horsehead Holding Corporation's second quarter 2008 earnings results teleconference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (Operator instructions) As a reminder, today’s conference call will be recorded.

I would now like to turn the conference over to your host Mr. Ali Alavi. Please go ahead sir.

Ali Alavi

Thank you. Good morning everyone and thank you for joining us on our second quarter 2008 earnings release conference call. My name is Ali Alavi and I’m Horsehead’s Vice President of Corporate Administration, General Counsel, and Secretary. Before I turn the call over to Jim Hensler, I would like to quickly remind everyone that this communication may include forward-looking statements about our company, our 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 forwardlooking 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 31, 2008 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?

Jim Hensler

Thanks, Ali. It’s my pleasure to welcome you to this conference call to discuss the second quarter 2008 results. I will review the performance of our operations and markets then turn it over to Bob Scherich, our CFO, who will review the financial results.

We are pleased with the continued strong market demand for our products and services as we achieve higher production levels. In particular, our EAF dust recycling business has continued to exhibit strong growth. Receipts of EAF dust increased by 25% compared against the second quarter 2007 to an annualized rate of 580,000 tons per year. Dust receipts also increased by 4% versus the previous quarter. We are now receiving EAF dust at our effective capacity rate and we will expect to continue to receive dust at approximately this rate until we start up our new facility in South Carolina in the second half of 2009. We have begun clearing and grading the site of our new dust recycling facility in Barnwell, South Carolina. The project is on track for the first kiln startup by mid-year 2009 with the second kiln starting up few months later. This new facility will have a total capacity of 160,000 tons per year.

Our zinc smelting operations in Monaca continue to demonstrate strong productivity gains. The zinc smelter produced 36,186 tons of zinc in the second quarter, a 12% increase compared to the prior year quarter. We took an 11-day planned outage in June to replace a pan conveyor which required us to operate at about 50% of the normal production rate, while this work was being performed. The last time this conveyor was replaced was 10 years ago, so we should not be repeating this work for a while.

In addition, I am pleased to report that zinc recovery in our smelting operation increased to 95% from 90% in the prior year quarter. This is a key area we have been targeting for cost reduction.

Furthermore, the planned zinc oxide expansion came online as scheduled at our Monaca plant during the quarter and has started up with minimal problems. Through the first six months of this year, we are on track to meet our annual shipment plan of 85,000 tons of oxide.

Strong market demand for our products is supporting higher shipment levels. And market demand for our products was strong during the quarter as zinc product shipments increased by 12% compared with the second quarter of 2007 to about 43,000 tons. Shipments increased by about 5% compared with the first quarter of 2008.

Demand in the general galvanizing market continues to be solid as infrastructure related spending continues to be strong and oxide demand has also been steady. These operational improvements that we have seen during the quarter were overshadowed by a 42% decline in the LME zinc price, and higher costs associated with rising energy prices particularly metallurgical coke and maintenance in our operating facilities.

Given the lower zinc price and higher energy price environment that we are facing, we have increased our focus on cost reduction. We have identified and are implementing $35 million in potential cost savings which target a wide range of opportunities throughout the business. In particular, we are focusing on reducing the price of galvanizer skimmings and drosses the primary source of purchased feed materials which are priced on a percent of LME price zinc contained basis.

Last year, we entered into annual supply contracts for skimmings during a much higher LME price environment, which are simply too expensive at these lower prices. The price of galvanizer skimmings and drosses needs to adjust to the new reality of the market with an excess supply of zinc units.

We are currently re-negotiating spot prices downward with some success and we will be re-negotiating new contracts over the next six months which will primarily affect our cost in 2009 and to a limited extent the second half of this year. We may reduce the intake of purchased feeds over the next 6 to 12 months in response to these price negotiations and this could reduce the output from our zinc smelter in the short run.

We expect to continue to increase the proportion of low cost EAF dust feed for our smelting operation. Our South Carolina project is underway, but as I mentioned earlier, we do not expect to realize the benefit of this increased EAF dust process capacity until some time during the second half of next year.

With respect to higher energy prices, we have begun to reduce energy consumption as part of our cost reduction efforts, and we announced an energy surcharge on our zinc oxide product line tied to the movement in natural gas prices. The surcharge became effective on August 1. We experienced slightly higher maintenance cost during the quarter due to the timing of rebuilds for columns and furnaces. We expect slightly more rebuilds this year than last year, but now that many of the rebuilds are behind us, we should see fewer rebuilds in the second half of this year.

Moving on to discuss the pricing environment, the realized premiums on metal averaged about $0.08 during the quarter equivalent to the prior year quarter and up slightly from the first quarter reflecting some lag effect with a declining LME price. Transactional premiums are facing downward pressure from additional supply in the market. Transactional premiums for zinc oxide remained steady while realized premiums increased, reflecting the lag effect as LME prices declined from the first quarter. Finally, we believe there is an opportunity to realize higher value from the iron units recovered from electric arc furnace dust.

In today’s commodity market, the value of the iron contained in EAF dust is potentially worth more than the value of the zinc units. We currently recycle approximately 350,000 tons of iron-rich material or IRM containing about 175,000 tons of iron. We sell this product into the aggregate market, a market which does not value the contained iron. IRM is a co-product of our dust recycling process. We are targeting the higher value iron and steel markets, which have been experiencing a significant increase in the price of pig iron, steel scrap, and scrap substitutes.

We have been successful with upgrading the quality of IRM for some steel mill applications and plan to conduct mill trials in the coming months.

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

Bob Scherich

Thanks, Jim. For the second quarter, earnings per share were $0.39. I’d like to provide a summary bridge of these earnings to the prior year second quarter earnings per share of $0.75. As a starting point, the prior year earnings adjusted to the same share base and tax rates as the current quarter were $0.62 or $0.23 higher than the current quarter. The lower average LME price resulted in reduced sales of $0.92 per share which was partially offset by a $0.04 effect from settlement of hedges.

Growth in volume of shipments added $0.09. Reduced feed costs, primarily reflecting the lower LME and improved recovery at the smelter, increased earnings $0.25 with changes in other costs contributing $0.01, and finally the effect of mark-to market adjustments for open hedge position added $0.30 to the quarter. I will talk about hedge account in a little later.

In summary, after adjusting for the change in the share base and tax rate, a $0.23 per share reduction in earnings resulted from a $0.88 reduction in sales price realization, partially offset by a $0.35 reduction in costs and $0.30 effect of the mark-to-market adjustments. Detail of the quarter’s performance reflects a decrease in sales of $14.1 million or 9.7% to $130.5 million compared to the prior year quarter.

The decreased was a result of a $49.9 million decrease in price realization due primarily to the lower average LME zinc price. Partially offsetting our decrease in that sales was a sales volume increase of $18.3 million reflecting increases in shipments in our zinc metal and zinc oxide product lines and increases of the EAF dust receipts.

The average sales price realization for zinc products on a zinc-contained basis was $1.18 per pound or $0.22 per pound above the average LME for the quarter compared to $1.84 per pound or $0.18 above the average LME for the prior year quarter. Our hedging positions partially mitigated a reduction in revenues caused by the changing LME prices as settlement of put options added $2.3 million in sales.

A favorable non-cash mark-to-market adjustment of $16.7 million on our open hedge position was recorded to sales during the quarter. Sales on zinc metal decreased $16 million or 26.1% to $45.4 million for the quarter compared to $61.4 million for the prior year quarter. The decrease was attributable primarily to a $30.6 million decrease in price realization partially offset by a $14.5 million increase in sales volume.

Sales of zinc oxide decreased $18 million or 28.2% to $45.8 million for the quarter compared to $63.8 million for the prior year. The decrease was attributable to a $19.6 million decrease in price realization partially offset by a $1.6 million increase in sales volume.

Sales from EAF dust recycling increased $2.6 million or 23.2% to $13.8 million for the quarter compared to $11.2 million for the prior year. Of this increase, $2.8 million was from higher volume of receipt, partially offset by $0.2 million reduction due to a 1% decrease in price realization. Net sales from EAF dust receipts for the quarter were based on 144,614 tons versus 115,653 tons for the prior year quarter.

Cost of sales was flat at $100.1 million. Reduced purchase feed cost as a result of the decline in the average LME were offset by the effect of higher volume of shipments, increased energy, and maintenance cost and the lag effect of cost flowing out of inventory. With inventory carried at weighted average actual cost, higher cost from prior months flows through to the current period resulting in a lag in realized reduced cost as the LME decline.

The purchase feeds consumed in the current period had been purchased at the current period LME price. Cost of sales would have been $6.3 million lower. This lag effect due to the inventory method takes approximately four months to flow completely through cost of sales assuming the LME remains constant.

For the quarter, cost of sales decreased $14.6 million due to this reduced feed cost and $4.6 million due to the decrease in brokered metal shipped. These decreases were partially offset by $12.6 million increase in shipment volume and a $3.3 million increase in our recycling and other costs. Energy costs increased $3 million versus the prior year quarter, $0.7 million of which was due to higher volume of production. Maintenance costs increased during the quarter primarily related to the higher number of rebuilds occurring in the quarter.

Selling, general, and administrative expenses increased $0.5 million to $5.1 million for the quarter compared to $4.6 million for the prior year quarter. The increase reflects primarily increased legal and audit expenses and public company filing fees not incurred in the prior year. Non-cash compensation expense included in SG&A expenses was $0.5 million and $0.3 million for the current and prior quarter, respectively.

Interest expense of $0.4 million was a decrease of $2.6 million when compared to the prior year quarter. The decrease is attributable primarily to lower debt levels in 2008.

Our effective tax rate was 38.1% for the current quarter and 36.5% for the prior year quarter. The effective tax rate for the six months of 2008 was 37.3%, which is our current estimate for 2008.

Weighted average shares outstanding were 35,279,614 for the quarter compared to 29,937,823 for the prior year quarter, reflecting the equity offering completed during the last 12 months.

Cash flow from operating activities was $4.4 million for the quarter excluding $7 million for the purchase of put options for 2009. Capital spending was $16.6 million for the first six months of 2008, and our current CapEx plan is $56 million for 2008, $95 million for 2009, and $39 million for 2010, as spending on certain projects has been shifted out. Availability on our revolver remains at $60 million.

As mentioned earlier, earnings for the quarter were $0.39 per share. Our look at the quarter on a more normalized basis, assuming a constant LME price with no lag effect is to remove the $0.30 favorable effect of the hedged mark-to-market adjustment, and then to add back approximately $0.11 for the lag effect on purchase feeds, partially offset by removing approximately $0.07 associated with the lag in oxide price realization to the current LME.

Timing of maintenance and other costs not expected to repeat add back about $0.07, resulting in a normalized quarter of approximately $0.20 per share with our hedging in place.

I’d like to talk a little more about our accounting for hedges, as it becomes increasingly important as to the expected effect going forward. During the second quarter, we recorded a favorable unrealized gain on mark-to-market adjustments for our open hedges as of June 30. These open positions are primarily the $1 puts for the balance of the year as well as the $0.90 puts for 2009. The LME cash price for zinc was $0.85 on June 30 with the forward slightly higher.

The effect of this hedge accounting is that we have taken the profit in the current quarter for the open put option positions for the next six quarters at the market value on June 30. If the actual LME price matches the June 30 value over the next 18 months, we will have no P&L impact as these hedges settle on a monthly basis, although we will be receiving the cash settlement on a monthly basis.

Market values on each future quarter-end reporting date that are different from the June 30th value will result in additional up or down adjustment. More importantly, the cash flow upon settlement of monthly hedges will occur during the future months. At the $0.85 LME level, we would receive $2.3 million for each of the remaining months of 2008 and $750,000 per month in 2009.

Our primary objective in having these hedges was to provide cash flow to support our investment program in the event that the commodity price fell below the strike price, recognizing that hedge accounting may cause volatility in reported earnings.

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

Jim Hensler

Thanks Bob. In summary, before we open the call for questions, I would like to say that while we continue to be pleased with the progress we’re making on our growth strategies and by the strong demand we see in our markets, falling zinc prices and rising energy prices are overshadowing these gains. And while our hedging strategy will support cash flow in the near term and we continue to remain bullish on the zinc market fundamentals in the long run; our focus is shifting toward cost reduction and revenue enhancement.

We are working on and evaluating numerous projects which we hope to implement over the next several months as part of a $35 million cost reduction program. We may also defer some capital projects related to the expansion of output from the zinc smelter. It is also worth noting that the new South Carolina dust recycling plant takes on new importance in this period of higher priced galvanizer residues.

In addition, we expect to realize benefits from cost reduction related capital investments such as our pelletizer projects in our Calumet and Palmerton plants and the crude zinc oxide washing circuit at our Monaca plant. Finally, we believe there is an opportunity to enhance earnings by upgrading our IRM product for use in the iron and steel markets.

With that, I will say thank you and we’d now like to take your questions.

Question-and-Answer Session

Operator

Ladies and gentleman, we will now begin the question-and-answer session of our conference. (Operator instructions) Our first question comes from the line of Adam Adelman of Capstone Investments. Please go ahead.

Adam Adelman – Capstone Investments

Hi guys, thanks for taking my call. I just had a quick question on the premiums that you are able to receive over LME and I see that it is $ 0.08 in general. I am wondering if you could give any color in the premiums that you are able to get for the PW versus the zinc oxide and any kind of trend you’ve been seeing in this declining environment.

Jim Hensler

We are seeing some pressure on the transactional premiums, typical transactional premiums on PW are down in $0.03 to $0.05 range right now. Oxide premiums have remained fairly steady and we are seeing premiums that are at about $0.01 to $0.02 premium over the LME price on a zinc oxide basis.

Adam Adelman – Capstone Investments

Okay, thanks. And just one quick follow-up with the iron opportunity, could you tell us just a little bit in terms of timing and the capital CapEx it might require to get that moving into more of – to explore the pig iron opportunity for example?

Jim Hensler

Our focus really is to try to sell IRM that we generate of the kilns directly to steel mills and so there really isn’t any capital investment involved in that; we’ve already got the capital investment. But what we are finding is that the investment we made in the pelletizer projects at our Calumet plant and eventually at our Palmerton plant is allowing us to generate a quality of IRM which is better than we have in the past and we think is more suitable for the steel mill application, so one of the things that we have run up against in the past is that the residual zinc content in the IRM has made it unattractive for feed to our blast furnace operation and what we are finding out is we are able to get the residual zinc content very low and so we believe that now we can sell that directly to iron makers, and so we are working to line up production trials with iron makers here over the next several months to demonstrate how it actually works and we believe if that is successful, we will be able to move some of this product into that market at much higher prices than we are getting in the aggregate market.

Adam Adelman – Capstone Investments

Great, thanks very much.

Operator

Our next question in queue comes from the line of Amir Arif of FBR Capital Markets. Please go ahead, Mr. Arif.

Amir Arif – FBR Capital Markets

Good morning, guys. Just a follow-up question on iron units. Jim, is your iron content up to 50% there and it is just an issue of removing some more impurities from that IRM or is it (inaudible) the content there?

Jim Hensler

Yes, the main issue is impurities, it is about 50% iron, the IRM, and we've run into problems in the past with this residual zinc content, and we have also seen some cases were the sulfur levels have been too high. The sulfur level was something we can take care of very easily by adjusting the type of coke we use because that’s where the source of sulfur is coming from. But what we are finding is that we have been successful in getting the zinc content down and so we feel now that we are able to produce a product for iron making which could be an attractive substitute material to the kinds of material we are using today.

The other area we are focusing on is steel makers and looking at trying to sell this stuff to electric furnace producers. The key thing we are looking at there is to drive the metallic portion of the iron up as much as possible. The iron that’s present there is mostly there as an oxide, which is great for blast furnaces because that is their feed material, but steel makers prefer metallic iron over iron oxides and we’ve been successful at getting the metallic portion of the iron up to in excess of 80%, so we are hoping that we'll also have another outlet to electric furnace steel makers, who of course we have got good relationships with through our dust recycling business.

Amir Arif – FBR Capital Markets

Okay, sounds good. Second question is on the cost reduction side of the $35 million; you guys have already been doing a lot of cost reduction project. How much of this is incremental? And what is the kind of time frame are you guys targeting to achieve that $35 million number?

Jim Hensler

This $35 million is a number of projects, biggest portion of which is the reduction in the purchase price of galvanizer residues. I'd say the single biggest drag we have right now on the business is that what we are paying as a percentage of LME for purchase feeds is just too high, and we have got these contracts that will wind out by the end of this year. And just to put it in perspective, we are paying roughly, for skimmings, we are paying roughly 65% to 66% of LME, which was a fine price last year when LME prices were at $1.40, but at $0.75 zinc like we have today, that is just too high of a price. We think the market price should be down in the 50% range right now, which is when you looked at alternative zinc units, it is about where that price should be. That savings alone is on the order of about $10 million to $12 million for us but we probably won’t realize most of that until next year. The other projects focus in a wide range of areas from improving zinc recoveries to reducing energy consumption, to reducing labor content in some of our work. We have been looking at some alternative ways to deal with the lead chloride material that we process at our (inaudible) facility and so we are looking at probably a six to 12-month time period to really realize most of those benefits.

Amir Arif – FBR Capital Markets

And just one final question. I know you guys were also looking at EAF dust recycling fund in the Midwest, any update on that?

Jim Hensler

We’re going to focus right now on the South Carolina site. We do have a search process going on to look at alternate sites. We want to wait and see what’s happening with some of these potential new entrants. We don’t want to bring in too much capacity into the market if those projects do come to fruition, so I would say we’re still in the search mode but we’re also in the wait and see mode on another facility.

Amir Arif – FBR Capital Markets

Sounds good. Thanks.

Operator

Our next question in queue comes from the line of Peter Park of Park West Asset Management. Please go ahead.

Peter Park – Park West Asset Management

Hi. Can you give us the sense of what prices you are thinking of getting for IRM versus what you are getting now as you sell into aggregate market?

Jim Hensler

Today, we net about $1 a ton for the IRM, so it’s – basically it covers our shipping cost and a little bit more. I think conservatively, we think that this material could sell for something in the $50 to $100 a ton range in this kind of uneven [ph] market.

Peter Park – Park West Asset Management

Okay. So that times, did you say 160,000 tons a year?

Jim Hensler

Well, we actually generate 350,000 tons of the IRM, so it would be that number now. Whether we can get 100% of that, I not am saying, but I think we can certainly make some significant in roads into that market.

Peter Park – Park West Asset Management

So just to do some arithmetic, that would be, if you got $50 a ton, that would be $17 million that you are seeing that you are not seeing now?

Jim Hensler

That’s correct.

Peter Park – Park West Asset Management

Okay. And then on the energy increase, you mentioned $3 million of increase in the second quarter, can you break out the components of that – the met coke versus the natural gas, et cetera?

Bob Scherich

I don’t have, Peter, the breakdown of that readily available, but we know for instance that the three components of energy. Our electricity costs have stayed stable because of our coal positions that go out through 2010. Predominantly, we’ve seen our average cost through the second quarter on met coke probably on average go up $20 to $30 a ton. We’re seeing continued cost pressure on met coke going forward. And we purchase annually close to 200,000 tons of met coke. Natural gas for the second quarter, we actually had the ability to not increase and actually reduce consumption at the smelting operation as we were substituting more carbon monoxide to displace natural gas usage. But we did have an increase due to the price on the recycling side. I would say that increasing cost was probably about 50/50 between those two.

Peter Park – Park West Asset Management

Between the coke and electricity?

Bob Scherich

No, between coke and natural gas.

Peter Park – Park West Asset Management

Got it. I know you are trying to recover some on the natural gas. In terms of met coke, what types do you use and what was the price per ton realized during the second quarter?

Bob Scherich

We use basically two different size fractions of metallurgical coke. The first size that is below blast furnace coke size ranges from may be an-inch-and-a-quarter down to three-eighths-inch size. It’s what we use at Monaca in the smelting operation. And for that, we are using 90,000 tons to 100,000 tons a year. Our second quarter cost was up about $20 from where it was the year before. And on the recycling side, we are using a much smaller fraction underneath this three-eighth size, typically referred to as coke breeze. It’s the smaller fraction once they screen all that coke out. And again, we use probably a little over 100,000 tons a year and we’ve seen basically the same about $20 price increase per ton during the second quarter. And based on that market outlook, we expect to continue to see some upward pressure on that cost for the balance of the year.

Peter Park – Park West Asset Management

I know that, in following coke companies, some of these things cost for future delivery in ’09 or ‘10, they’ve got $300 a ton prices for these things. How do the types of coke and coal that we use compare to those coals?

Bob Scherich

Well, I think the – what you see in the marketplace on metallurgical coal does translate down through the production of metallurgical coke, so we are buying coke that is produced from increasing cost of metallurgical coal itself. So I think to a degree, they are one and the same, although generally we see spot prices out there and they study [ph] coke plant productions are not running just off of spot price and in many cases have long term coal contracts in place.

Jim Hensler

What we intend to see, Peter, on these smaller sized fraction is they sell at a discount to the, I’d say, that the type of coke that iron makers are using in their furnaces. So, when you may hear prices at $300 a ton for coking coals, which might translate into higher numbers for the coke, the size fractions we buy are selling at a fairly substantial discount to those numbers. For instance, the coke breeze that Bob mentioned sells in the $60 to $100 a ton range. But, as the underlying coal price goes up, those size fraction prices go up as well.

Peter Park – Park West Asset Management

Okay, thank you.

Operator

This next question in queue comes from the line of Chris Dudko of JDA Capital. Please go ahead.

Chris Dudko – JDA Capital

Actually my question has been answered, thanks.

Operator

Thank you, sir. And the last question in queue at this time comes from the line of Harrison Wascher [ph] of Agamas Capital. Please go ahead.

Harrison WascherAgamas Capital

Hi there. My question is actually – few of them, in terms of the potential cost savings, since most of it sounds like it is around supply agreements, I’m assuming there are no cost or termination fees around that. I mean, what kind of cost would it take to implement all of these cost savings, labor savings, et cetera?

Jim Hensler

Yes, some of them are tied into a capital spending and I can’t quote you a figure off of – for that number right off the top of my head, but most of them do not have an investment cost associated with them. In most cases, they are process improvements or as you point out, supply contract negotiations.

Harrison WascherAgamas Capital

So they are tied in with their capital expense, so it seems your CapEx, you were talking about the $56 million in 2008?

Bob Scherich

Right, some of those are tied into the capital spending.

Harrison WascherAgamas Capital

You would assume constant pricing now for zinc, et cetera. Do you still anticipate being able to fund internally the rest of these CapEx projects?

Bob Scherich

We believe so. As we have the hedging in place this year, next year, and continue to generate operating cash flow as we have modeled out even at the – not at the current LME but kind of where things were a month or so ago in the mid-80s. We still believe that out over the three years spending plan of 2008, 2009, and 2010, the combination of cash that we have and the operating cash flow generation supports that investment program.

Harrison WascherAgamas Capital

Okay. And the internal replacement again of, I guess, the zinc that you have purchased to zinc that you create of your kilns is not included in that $35 million, the new kiln that you plan on opening up?

Bob Scherich

No.

Harrison WascherAgamas Capital

Okay. All right, thank you very much.

Operator

Our next question comes from the line of Simon Solitario [ph] of Harbor Side Capital. Please go ahead.

Simon Solitario – Harbor Side Capital

Thank you. Hey Bob, how is it going?

Bob Scherich

Good. Hi Simon.

Simon Solitario – Harbor Side Capital

I just have a quick question on the buckwheat coke and on the breeze coke. Is there a way to sort of hedge that out going forward, I mean I know that it is not supposed to increase as much in price but given the expectations those may go up more in the future, do you have a way of hedging that out somewhat?

Bob Scherich

We haven't identified anything yet, but I’m sure we could probably hedge the underlying metallurgical coal price itself, which has seen a fairly significant increase to date.

Simon Solitario – Harbor Side Capital

Right. Okay. Do you guys have any plans to do that or not at this point?

Bob Scherich

We are continuing to have discussions with buyers of blast furnace coke that have the agreements with coke producers and we are approaching coke producers itself. We think it makes sense to look at kind of a long-term supply arrangement with either the producer itself or, in many cases, some of the steel companies have their rights to 100% of production off of a coke plant even though they are primarily using just the blast furnace coke. We’re targeting to try to develop that relationship and get into longterm steady supply agreements.

Simon Solitario – Harbor Side Capital

Okay, that was it. That’s my last question.

Bob Scherich

Okay, thanks.

Simon Solitario – Harbor Side Capital

Thanks Bob.

Operator

Our next question comes from the line of David Shapiro of Aegis Financial. Please go ahead.

David Shapiro – Aegis Financial

Hi. On the dust process for the three and six months, does that approximate your dust receipts number or what would be the difference there?

Jim Hensler

We received slightly more than we processed during the quarter. I think our ramp up lagged receipts a bit which we expect to be more in balance as we go forward in third and fourth quarter.

David Shapiro – Aegis Financial

Okay, so maybe 5% more or so on the receipts?

Bob Scherich

I know for the first quarter, we’d lagged behind as we were ramping up the new capacity at Rockwood and we were bringing dust in at a pace higher. I think, second quarter, we closed that gap significantly but trying to look at it, it still looks like we brought probably 9,000 tons in more than we processed. But again, with some scheduled outages, we see that being fairly well in balance I think for the remainder of the year.

David Shapiro – Aegis Financial

That was 9,000 tons for 2Q – for the second quarter?

Bob Scherich

Second quarter, yes.

David Shapiro – Aegis Financial

Okay. That’s helpful. And I didn’t catch it earlier; can you review where the hedge book stands at this point in time for ’08 and ’09?

Bob Scherich

Well, I mean we continue to have the put options in place which is 90,000 tons annually. They actually settle on a monthly basis and that’s with strike prices for 2008 at $1 LME zinc and for 2009 at $0.90. So those positions continue to stay open through the balance of this year and all of next year. Achieving the hedge accounting, we’ve basically taken the profit at least to that $0.85 level as of June 30 and it’s unrealized gain.

David Shapiro – Aegis Financial

So you were lower than the 90,000 tons before this quarter? I am trying to understand I guess the options that were purchased this quarter and where that brought you up to.

Bob Scherich

Well, during the second quarter, we completed the purchase of the 2009 put options. We got about $7 million to buy the balance of what we have in place now for 2009. That was to get us to this 90,000 level for 2009 – 90,000 tons at $0.90 strike price.

David Shapiro – Aegis Financial

Okay. That’s helpful. And then on your recovery rates, where were you in the first quarter? I understand you averaged about 95% in the second quarter. Where were you in the first quarter and where do you see that going for the rest of 2008 and into 2009?

Bob Scherich

We came into the year looking to average 91%, 92%. We were at 91% first quarter and as Jim mentioned earlier in the call, 95% second quarter. We don’t think 95% is the number that’s going to be sustained at this point, but we expect to be in that 91%, 92% range for the balance of the year or so. For the year as a whole, we are still targeting to be at 92% which is a significant improvement over the last couple of years and effectively becomes a cost reduction as we recover more zinc units out of the same amount of feed.

David Shapiro – Aegis Financial

Do you expect the 92% to hold thereafter, give or take?

Bob Scherich

Our long term – with the projects in line, was to get that to 93% or 94% by 2010, kind of as a sustained rate. We had the opportunity during the second quarter to simply put more focus into recovering some of the zinc units out of the process.

David Shapiro – Aegis Financial

Okay. And then on your energy costs on a percentage basis, what did that increase? I didn't catch that earlier.

Bob Scherich

From prior year second quarter, we had a $3 million increase in total energy costs and I don’t know what that was as a percentage off hand. I know we’re spending probably $50 million, $60 million a year on energy when we combine the electricity coke and natural gas, but of that year-over-year increase about $700,000 of that simply came from higher production levels requiring higher volume of energy consumption. There was about $2.3 million of price increase.

David Shapiro – Aegis Financial

So you’re about $60 million you think or almost $60 million for energy at this point?

Jim Hensler

Yes. It’s approximately. So the price inflation was about 5% but most of that was related to coke and natural gas because electricity component, which is roughly 40% to 45% of our total is hedged and it’s relatively fixed.

David Shapiro – Aegis Financial

Okay. That’s helpful. Thanks guys.

Operator

Our next question in queue comes from the line of Cliff Hale-Sanders of CIBC World Markets. Please go ahead.

Cliff Hale-Sanders – CIBC World Markets

Hi. Good morning everyone. Most of my operating questions have been answered but I would like to ask question that's kind of a little bit out of your control, but going on in the zinc market per se. You alluded to demand remaining fairly firm for your products in the domestic US. Just wondered if you could talk about any new sources of supply that you see coming into your market and also just bigger picture, given the amount of shutdowns you are seeing off late, can we expect them to continue going forward? Given the new cost dynamics that you’ve shown us here, if you could highlight your current sensitivity to say a $0.05 move into that credit?

Jim Hensler

Now, let me take the first part of that. We don’t really see much in terms of new supply coming into our markets, although as I mentioned earlier, there is some excess metal being produced, and that’s having – by current producers in the special high-grade market, and people like Teck Cominco, Xstrata, and Peñoles and so on who are already in the market. That excess supply is having some effect on the general galvanizing market because some people are buying special high grade in those markets and that’s causing some downward pressure on transactional premiums in the PW market. In terms of the price sensitivity, I will pass that over to Bob.

Bob Scherich

And I think the profile that this gives us, the price sensitivity, still comes off of purchase feeds. It’s very difficult to put this lag effect into that sensitivity. So, we generally look at it without a lag effect. All other things being equal, you get a flat LME price environment. I think we are still on the same type of profile that we’ve had that says a $0.01 does about close to $2 million at the EBITDA level or right around $0.035 to $0.04 per share on an annualized basis. So $0.05 is going to be in that $0.15 to$0.20 on the EPS basis. And obviously that works in both directions as we move (inaudible) after that low cost feed position.

Cliff Hale Sanders – CIBC World Markets

Okay. And I guess just one final question then, your current – the new kiln that you’ve put in place this year, has the ramp up there gone smoothly, obviously anything to update us on that one?

Jim Hensler

No, we had some initial startup learning curve processes we’re going through which is sort of typical when you are starting up a large scale facility like that. We have wrung out most of the things on our checklist. There’s still a couple of remaining issues that we’re dealing with. One of them, the main obstacles we had when we first started up was this new kiln is completely fed by pneumatic cars, so we found a bottleneck with basically how long it was taking us to unload these pneumatic railcars and we worked through that fairly well. The kiln itself has been running reasonably well. We are still learning a bit from it. We think that there is – we had nominally felt that this kiln had a capacity of about 80,000 tons a year. We are beginning to believe that it actually has more capacity than anything that we could probably get 90,000 to 100,000 tons a year out of a kiln with few minor modifications, and so we are working toward that.

Cliff Hale Sanders – CIBC World Markets

Okay, thanks.

Jim Hensler

Thanks.

Operator

Our last question in queue at this time is a follow up from Peter Park of Park West Asset Management. Please go ahead.

Peter Park – Park West Asset Management

Hi, I was wondering about your current asset build. I presume most of that comes from the value of the derivative asset. Can you give me what number that was or what the delta was between Q1 and Q2? Thanks.

Bob Scherich

On the change in the assets on the balance sheet, Peter?

Peter Park – Park West Asset Management

Yes.

Bob Scherich

Yes, I mean, we record to the prepaid expenses and the assets, the carrying value of these open hedge position. And as we indicated earlier, we mark those to market about $17 million during the quarter, which was an addition to the balance sheet. I think all of those are open positions we are setting in the balance sheet at close to $40 million now, which also includes any other hedges in place.

Peter Park – Park West Asset Management

So, that is a $40 million net asset that is sitting on the balance sheet?

Bob Scherich

Yes.

Peter Park – Park West Asset Management

And that is a net of tax number?

Bob Scherich

No, it is not net of tax. It is the market value of those derivatives.

Peter Park – Park West Asset Management

Got it, thank you.

Bob Scherich

Thank you. You’re welcome.

Operator

We got no further questions in queue at this time.

Jim Hensler

Okay, well, that completes our call then. Thank you very much and we will talk to you again at the end of next quarter.

Operator

Ladies and gentlemen that does conclude our conference call, which will be available for replay from August 12, 2008 at 2 P.M. Eastern Time until August 19, midnight of that day. You may access the conference by dialing 1-800-475-6701 and entering the access code 954930. If you are dialing from an international location, please dial 320-365-3844 and the same access code, 954930. Those numbers once again are 1-800-475-6701 and 320-365-3844, and the same access code is 954930. On behalf of today’s panel, I would like to thank you for your participation and thank you for using AT&T. Have a good day, you may now disconnect.

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