By Christopher Collins
Horsehead Holding (OTCPK:ZINCQ): Egregious Disregard for the Rights of Small Individual Investors and an Unnecessary Casualty in the U.S. Green Economy
An open letter to all parties involved in the Horsehead Holding Chapter 11 case, including (1) the creditors, (2) the company's management, the Board of Directors and their advisors, (3) the U.S. Trustee and Bankruptcy Court and the SEC, (4) business and political leaders in North Carolina and Pennsylvania, and (5) potential Horsehead investors and companies in the mining and metals industry.
Horsehead Holding and its predecessors have been around for over 100 years. The Company provides a critical environmental service to the steel industry. It takes EAF dust, an EPA-listed hazardous waste generated by the U.S. steel mills and converts it into high-quality zinc that is used in everything from automobiles to paints and pharmaceuticals. Horsehead is a real company with over $1 billion of assets, recycling plants in six states and Canada and over 750 employees, the vast majority of which are hourly plant workers in the Southeast and Pennsylvania. The company was helping drive the U.S. economic recovery and transition to a greener future, having invested over $500 million in a new green zinc processing plant in Mooresboro, North Carolina, a rural town of 300 and creating over 200 blue-collar jobs.
The plant was ramping up in 2015, and the Company and the more than 200 plant employees were working hard to solve the engineering challenges to reach full capacity, which would have led to further investment and employment at the plant. Zinc prices temporarily fell (they have since recovered) in Q4-15, and the Company's debt was acquired by a group of new creditors, primarily consisting of aggressive Wall Street hedge funds. Despite the drop in zinc prices, the Company had over $30 million of cash and adequate liquidity to continue the plant ramp up in 2016 and had successfully raised equity capital. The Company's Creditors took advantage of a technical default on a $30 million line of credit (reminder, it has $1 billion of real assets). This froze the Company's bank accounts forcing it to (1) file for Chapter 11 bankruptcy, (2) idle the Mooresboro plant and (3) layoff more than 200 workers in rural Mooresboro without notice.
The court and the U.S. Trustee have allowed the creditors to take advantage of the situation by (1) approving a debtor-in-possession loan that burdens the Company with excessive interest and advisor costs and gives them nearly complete control of the proceedings and (2) denying a petition of nearly 1,000 small individual shareholders to form an Equity Committee despite detailed support of $1.1 billion valuation of Horsehead.
The case is proceeding at lightning speed - the Company's creditors are not new to this game, have deep pockets and an army of advisors, but there is still hope to change the course of the proceedings. I write this letter as a long-term Horsehead investor, supporter of the Company's mission, employee of the U.S. green economy and former North Carolina resident. I ask readers to consider which of these very different outcomes is the most equitable given the events leading up to the bankruptcy:
· Outcome 1: The Court continues to allow the creditors to race through the Chapter 11 bankruptcy process, take control of the Company for $300 million (a fraction of the intrinsic value), and flip it back to the public markets in 18 months pocketing over $1 billion from small individual investors and contractors who helped build the Mooresboro facility (classified as unsecured creditors), after having put more than 200 plant employees out of work and halting productive investment in the U.S. economy. This will erode the trust in the financial and legal system of small individual investors that it is designed to protect and only further promote this type of behavior in the financial markets.
· Outcome 2: The U.S. Trustee, the Court and the SEC recognize that the creditors are trying to take advantage of Company's situation with no regard for the casualties of their behavior and the Court slows down the Chapter 11 proceedings. This will allow unsecured creditors, including small contractors that helped build the Mooresboro facility and the thousands of individual shareholders to preserve their hard-earned capital by reorganizing the Company in manner that reflects the intrinsic value of the assets (between $1 billion and $2 billion) or finding a purchaser of the assets which will do the same.
To The Creditors:
You forced an otherwise healthy company into Chapter 11 bankruptcy, resulting in the firing of 200 plant workers and the idling of a productive green processing facility in a small rural town. The Horsehead plant workers and contractors in Mooresboro, myself and the rest of the America are working long hours to rebuild the economy and transition to a greener future. In my opinion, your actions are only working against those goals while lining the pockets of your advisors and stealing millions from small individual shareholders and unsecured creditors. Your actions have created a massive distraction for management and a drain on the Company's resources at a critical time when they needed to be focused on operating the business and supporting their employees.
To Horsehead Management, The Board of Directors And Their Advisors:
Management: Jim Hensler, Chief Executive Officer; Bob Scherich, Chief Financial Officer; and Gary Whitaker, General Counsel
Board of Directors: Jack Shilling, T. Grant John, George Schreiber, and John Van Roden
Advisors: Andrew Targrove, Lazard and Ryan Dahl, Kirkland and Ellis
As shareholders, we have given you our extreme patience over the last two years. We provided you with $70 million of additional capital to invest in the plant in January 2015 when there were cost overruns and you communicated that the plant would be at 75% capacity and profitable by September 2015. In November 2015, you told us the Company had adequate liquidity for 2016, and we gave you another $8 million in December 2015 based on those statements. The Company missed a debt payment in January 2016 and filed for Chapter 11 bankruptcy a few weeks later.
"Given our current liquidity, and expected cash flow from operations, at current commodity prices we believe that we have adequate liquidity and availability of capital resources including the ATM program to support the business for the next 12 months" - Bob Scherich, Horsehead Chief Financial Officer, Q3-15 Earnings Call (November 9th, 2015)
There have been discussions about a shareholder class action lawsuit, but I don't believe that would be productive at this time. I expect the entire Horsehead management team, the Board of Directors and their Advisors to be working seven days a week to carry out their fiduciary duties to remediate the situation, preserve the value for the shareholders and the unsecured creditors and get the Company back on track to achieving its mission of advancing the U.S. green economy. I, along with thousands of individual shareholders, contractors and plant workers have been doing the same with the looming threat of losing our investments and extended loss of employment.
To The Bankruptcy Court, The U.S. Trustee, And The SEC:
Honorable Judge Christopher Sontchi, United States Bankruptcy Judge; Timothy Fox, U.S. Trustee and Mary Jo White; Chairwoman of the Securities and Exchange Commission.
As protectors of all stakeholders in the financial system, I respectfully ask your special attention to the Horsehead case and the ramifications it could have on the rights of small individual investors, unsecured creditors, including small contractors and trade vendors, and productive companies such as Horsehead and (ii) the rules of the game for aggressive hedge funds such as the creditors. Only a few years ago, Wall Street funds and negligent management teams and Boards were allowed to get away with robbing billions from small individual investors. Let's not make that same mistake again by protecting the rights of individual investors in the Horsehead case.
I am a student of Warren Buffett's investing principles and believe he would agree with my statement that a business with (1) over $1 billion in real tangible assets, (2) two subsidiaries that generate $30 million of cash flow a year are clear leaders in their respective markets and have durable business moats and (3) a one-of-a-kind +$500 million facility that could generate over $150 million in cash flow a year with $50-80 million of additional capital in 12‑18 months, is supported by decade-long contracts, and will be one of the lowest-cost producers of zinc in the world, is worth more than $300 million. I believe he would agree with me that this business is worth at least $1 billion and potentially $2 billion and could be held for decades and generate attractive returns.
The creditors know the enormous value of these assets, which is why several of them owned the equity before pushing the Horsehead into bankruptcy and are trying to race through the proceedings to steal the Company from small individual investors at a fraction of intrinsic value and then flip it back to the same small individual investors via the public markets shortly after. I ask that you give equity holders and unsecured creditors a fair proceeding that recognizes the value of these assets.
To Business Leaders And Politicians In The States That Horsehead Operates:
Pat McCrory, Governor of North Carolina; Tom Wolf, Governor of Pennsylvania; Richard Burr, North Carolina Senator; Thom Tillis, North Carolina Senator; Pat Toomey, Pennsylvania Senator and Bob Casey, Jr., Pennsylvania Senator.
As business leaders, I ask you to support our efforts to stop the creditors from executing their plan, which has left more than 200 plant employees out work, halted investment in your states and could result in the loss of hard-earned dollars of small contractors, trade vendors and individual shareholders. Many of Horsehead's shareholders are former employees of the Company and reside in your states. The Company has invested millions of dollars in your respective states to support job growth and drive the green economy and would have continued to do so if not for the creditors' actions.
To Potential Private Equity And Strategic Buyers:
For the vast majority of hedge funds and private equity investors that are net job creators and support the U.S. economy, I ask you to consider competing with the creditors for these assets. As detailed above and in a valuation from KPMG that was submitted to the Court, Horsehead has massive potential and could generate multi-bagger returns in less than two years even at a $1 billion purchase price. Zinc prices have already recovered to $0.85 and market experts Wood Mackenzie expect a supply shortage to start in late 2016 and prices could reach ~$1.50 after that (they reached $2.00 in 2008 in a similar supply shortage). Horsehead's facility will be one of the lowest-cost producers of zinc in the world. This business has the characteristics of a classic long-term compounding investment (high return investment opportunities, long-term customer contracts, capital barriers to entry, low-cost producer advantages, limited substitutes, brand value, etc.).
To large mining and metals companies, the industry is on its heels in the current commodity environment, but prices will recover and Horsehead has a long runway. I ask you to come to the bidding table and send a message to hedge funds like the creditors that they can't take advantage of companies and management teams in your industry. Keep this incredibly valuable historic company in the hands of the industry.
Disclosure: I am/we are long ZINCQ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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