Horsehead Holding (NASDAQOTH:ZINCQ) reported its first-quarter results Friday morning. The zinc producer missed analysts' earnings consensus estimates as it again ran into trouble in ramping up production at its Mooresboro,North Carolina, facility. The company is struggling to work out the kinks of this crucial project, but it believes the problems will ultimately be resolved.
A look at the numbers
Net sales for the first quarter were $102.4 million, down $4.5 million, or 4.2%, from the prior year. Sales were affected by both a planned production outage at INMETCO and lower shipment volumes of finished zinc products due to the Mooresboro challenges. However, the company partially offset these weaknesses via stronger zinc calcine shipments and a 2.5% higher zinc price.
Still, the company lost money again during the quarter as costs of sales ballooned $6.1 million to $106.1 million. This was partially due to additional start-up costs at Mooresboro. This resulted in a net loss of $18.5 million, or $0.34 per share, which was $0.09 worse than analysts had expected. The loss was a complete reversal of the $0.7 million in net income, or $0.01 per share, the company earned in last year's first quarter.
Mooresboro issues continue
In the earnings press release, CEO Jim Hensler said the company's "primary focus during the quarter was the continued ramp-up of the Mooresboro facility." However, the facility only produced 10,000 tons of zinc metal during the three-month period, which was less than the 12,000 it produced in the prior quarter. The lower production was the result of a previously planned outage to install a bypass to resolve a problem. The company was able to eventually address the root cause.
However, in April the facility only produced 2,800 tons of zinc, which was far lower than expected. This was after heavy rains filled its containment and holding ponds, requiring the company to process the water instead of producing zinc, which highlighted the limitations of its storm water processing capacity. As a result, Horsehead has engaged a third-party water management company to help address this issue.
This project is absolutely critical to Horsehead's future. The company projects that once the facility is operating at full capacity it will add $90 million to $110 million of incremental EBITDA to the company's bottom line, which is why Hensler has called Mooresboro a "transformative project." That said, the company isn't sure when the site will reach full production capacity.
For Horsehead Holding, much is riding on its ability to get Mooresboro up to full capacity. Until that happens, the company continues to burn through cash. However, it believes it has more than enough liquidity to meet the needs of the business -- it raised cash in the quarter via an equity offering to tide it over for at least the next several quarters.