Common Metal, but an Uncommon Stock

05/01/2013 7:00 am EST

Focus: COMMODITIES

This company is aiming to be the world’s lowest-cost producer of zinc. Its shares are down, presenting a bargain for long-term investors, says Tim Melvin of Money Morning.

Horsehead Holding (ZINC) is the largest US-based producer of zinc. It is also the largest producer of zinc oxide for pigmentation, as well as zinc powder. The stock is highly undervalued and is about to introduce a game-changing development to its business.

As base metals and material stocks have sold off in recent weeks, most of the attention has fallen on the shinier metals like gold and silver. Unnoticed by most traders, zinc has dropped as well, although not as sharply. Prices have dropped about 8% in the past month, and this is setting up a major buying opportunity in Horsehead.
Although rarely discussed with the same fervor or regularity as its metallic brethren, zinc is actually the fourth most used metal in the world, and will see sharp demand pick up when the economy improves.

Over 12 million tons of the metal is produced annually for a range of uses. Zinc is part of several alloys including brass, aluminum solder, and commercial bronze. It’s also the primary metal used in production of the US penny coin, and has been since 1982. Zinc is used in pigments for paints, a catalyst for rubber production, a fire retardant, and a rocket propellant.

Zinc is far more reactive than iron or steel and attracts oxidization, so it is often used as a galvanizing agent with these metals. It’s regularly used in the boating industry to protect propellers and rudders from oxidization caused by seawater.

Horsehead is making huge moves to be the world's lowest cost zinc producer, which should lead to higher earnings and a much higher stock price

The company boasts the only electrothermic smelting furnace in the Western hemisphere, which means it can use a wide range of zinc feedstock in its production. It also recycles electric arc furnace dust (EAF), a hazardous waste produced by steel mini mills that contains zinc.

Horsehead is the largest global recycler of this element, which means it has a low-cost source of zinc feedstock. The company currently has six production or recycling centers in the United States, and one in Canada.

The real potential with Horsehead, however, is its new plant nearing completion in North Carolina. It’s a game-changer. The new facility will use a green technology to extract the metal for zinc feedstock, which uses less energy, leading to higher labor productivity and a much lower cost structure. It will also increase capacity from 140,000 tons per year to 155,000 tons, and is scheduled to begin production in 2013’s third quarter, achieving full capacity in six months.

Along with its EAF facilities, the new plant will put Horsehead among the lowest cost zinc producers in the world. It will produce a wider range of zinc products, adding special high grade and continuous galvanizing grade zinc to its product line.

Management estimates the new facility will increase EBITDA (earnings before interest, taxes, depreciation, and amortization) by $9 million-$110 million annually. Last year the company saw EBITDA decline to less than $50 million. This new plant has the potential to triple that.

If the company does in fact achieve that target, its value will increase at least 100% in a short period of time.
Wall Street is taking its usual short-sighted approach in regards to Horsehead’s stock, not giving consideration to the cost efficiency and production increases of the new plant.

The stock has sold off with the recent decline in metals overall, and the company’s missed earning expectations in the last quarter. The stock is down more than 12% in the past month, and this creates a buying opportunity for patient, long-term investors.

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