Horsehead Holding Corp. announces second quarter earnings

“We have successfully renewed all of our key labor contracts. While upfront costs associated with these contracts had an unfavorable effect on earnings for the quarter, these costs will be partially offset going forward by cost savings from the new medical insurance programs negotiated under these labor agreements. In addition, the rising cost of energy, primarily metallurgical coke, further contributed to higher costs during the quarter.”

“We are pleased that with the hedging program we have put in place for 2012 and the first half of 2013 and with our recently completed $100 million convertible notes offering, the Company is now positioned to move forward with the new zinc plant project,” Hensler said.

Second Quarter Highlights

Compared to the same quarter last year:

• Zinc product shipments were 2.3% higher than the prior year’s quarter, with increased zinc metal shipments partially offset by reduced zinc oxide shipments. Zinc oxide shipments remained relatively flat compared to the first quarter of 2011 as we continue to resume commercial relationships with our customers following the restart of the Monaca, Pennsylvania refinery in the fourth quarter of 2010.
• The LME zinc price averaged $1.02/lb for the second quarter of 2011 compared to $0.92/lb for the second quarter of 2010. The LME nickel price averaged $10.96/lb for the second quarter of 2011 compared to $10.15/lb for the second quarter of 2010.
• Net sales increased $12.5 million, or 12.7%, to $111.0 million excluding $15.2 million of noncash hedge charges. Higher average price realization and the effect of higher shipment volume increased zinc product sales $5.7 million and $1.7 million, respectively, while sales from nickel-based products and services increased $4.7 million.

• Cost of sales, excluding depreciation and amortization, increased $11.3 million, or 14.1%, to $91.1 million. This increase reflects the effect of the higher shipment volume and higher recycling volume, partially offset by an increase in EAF-based feedstock. The portion of feed to the smelter derived from EAF dust increased to 74.6% for the current quarter, compared to 60.8% for the second quarter of 2010, reflecting the additional waelz kiln capacity added during the past twelve months. Cost of sales for the second quarter of 2011 included $2.2 million related to settlement of labor contracts and increased energy costs of $3.8 million.
• Cash generated by operating activities was $24.2 million for the quarter ended June 30, 2011, reflecting reduced accounts receivable associated with the insurance claim settled during the first quarter. Investing activities, primarily capital spending, during the quarter used $7.7 million of cash. At June 30, 2011, cash and cash equivalents were $129.5 million, after excluding $23.9 million of restricted cash, with $0.3 million of debt.

Shipments and Production Data

Business Outlook

Hensler added, “Steel industry capacity utilization continues to be in the mid-70 percent level. While we continue to believe there is still considerable upside to these current dust receipt levels, we do not anticipate significant changes in EAF steel production levels in the short-term based on recent public comments by several steel producers. While we have excess EAF dust recycling capacity, we are taking a series of planned major maintenance outages at our recycling plants through early November that will effectively take several kilns out of service during the third and fourth quarters. In addition, we expect to take the annual maintenance outage at INMETCO before the end of this year.

We continue to see strong demand for zinc metal while zinc oxide shipments have flattened out. We expect to continue to operate our full complement of six zinc smelting furnaces for the balance of the year. However, during the month of July, smelting output was approximately 1,500 tons lower than expected due to production difficulties. While these production issues have subsequently improved, it may affect third quarter shipments. INMETCO continues to operate at full capacity even though tolling receipts softened during the quarter as stainless steel producers reduced production as we entered the summer months.

We are continuing with our plans announced earlier this year to construct a new lower-cost, environmentally-friendly zinc production facility. The recently completed hedging program and $100 million convertible notes offering were put in place to support this project. The hedges, which were entered into for zero net premium, provide a minimum zinc price of $.85/lb and a maximum zinc price of $1.20/lb during the anticipated construction period of January 2012 through June 2013 for approximately 75% of our expected output. This hedging strategy reduces the risk of negative cash flow from operations should zinc prices decline during the construction of the new facility while also providing us with potential upside to earnings and cash flow should zinc prices increase from current levels. Going forward, our reported earnings may be subject to increased volatility because changes in quarter ending zinc prices may require further non-cash mark-to-market adjustments until such time that these hedges settle.

We currently estimate that our total capital expenditure for the construction of the new zinc plant will range from $350 to $375 million and once fully operational, should provide us with annual incremental EBITDA of approximately $90 to $110 million. The estimated internal rate of return for the project is 45% to 50%.

The plant will utilize the ZINCEX^TM solvent extraction technology combined with state-of-the-art electro-winning and casting capabilities for production capacity in excess of 150,000 tons of zinc metal per year from recycled sources. The new plant will be capable of producing special high grade (SHG) zinc and continuous galvanizing grade (CGG) in addition to the Prime Western (PW) grade that the Company currently produces and is expected to provide the following benefits:

• Reduced annual operating costs of $60 to $70 million resulting from improved zinc recovery, lower energy usage, higher labor productivity, lower maintenance needs and reduced freight costs; and
• Increased annual margin of $25 to $30 million, primarily from the recovery of value from metals such as silver and lead contained in EAF dust, increased premiums on SHG and CGG zinc and increased metal shipments.

These benefits are independent of the price of zinc.

The project continues to be on schedule as we finalize incentives and complete preliminary permitting activities before we publicly announce the final site selection for the new facility. We expect to begin construction by the end of this year and achieve start-up as early as the third quarter of 2013.”