Blogvesting

Since my last review of ZINC, zinc commodity price has sunk rapidly from $0.70 per lb to $0.50 today. Even with half of 2008 and 2009’s production capacity hedged at $0.90 per lb, Horsehead probably requires a zinc price of $0.70-$0.80 per lb to break even. With zinc prices at $0.50 and many major zinc mining companies closing their mines, I had expected Horsehead to put their plans for the new South Carolina plant on hold. Instead, I was disappointed to find that Horsehead has moved ahead with construction of the new plant in a climate of over-capacity and when they lose money on every pound of zinc sold. The new plant will cost $90 million, which would more than wipe out the $65 million cash the company has, and draw down on their $60 million credit line. This large capital expenditure, coupled with the fact that both the CEO and CFO have sold all of their shares in May 2008 and now hold no shares in ZINC whatsoever, has given me pause, and I have sold half of my position in ZINC at a price of $2.95, for a 62% loss.

However, the picture is not without hope. Although I would have preferred that management cease all large cap-ex and conserve cash at this juncture, it is still possible that management will see the light and place construction of the new plant on hold. There may be contractual obligations forcing them to break ground on the new plant, and construction may be slowed down dramatically to reduce the rate of cash burn. Finally, zinc prices seem to be edging back up again, probably in response to the surprising news that orders for durable goods increased 0.8% in September, and that almost all zinc mines are being shut down in response to the dramatic drop in zinc prices. Horsehead still has a low cost structure compared to rivals, and if they can survive the lean times, the company should have a bright future. I am keeping my eyes peeled for some insider purchases of the stock (as opposed to more hedge fund purchases), as well as closely monitoring the zinc price, to gauge if I should re-establish a full position.