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Despite Mooresboro Hiccups, Horsehead Holding Corp.'s Results Outperform Expectations

By Matthew DiLallo – Aug 7, 2015 at 10:26AM

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The zinc producer’s new Mooresboro facility continues to ramp up.

Horsehead Holding Corp. (NASDAQ: ZINC) reported its second-quarter results before the market opened on Friday. The zinc producer's results were stronger than expected as its net loss was wasn't as bad as analysts feared. Driving this improvement was the continued ramp-up of production at its Mooresboro facility. That facility, however, did still have its troubles in the quarter, which are rolling into the third quarter.

A look at the numbers
Horsehead reported net sales of $122.8 million in the quarter, which was $3.5 million less than the year-ago quarter, though sales were nearly $21 million better than analysts were expecting. Those sales, however, were positively affected by $10.1 million in unrealized gains due to hedge positions during the quarter. By adjusting for this unrealized gain, net sales were $112.7 million, which was 12.4% lower than adjusted sales in the year-ago quarter.

Driving this adjusted decrease were zinc shipments, which fell 15.7% year over year to 46,418 tons. But that's largely due to a shift in the company's production as it transitioned from its Monaca smelter to its new Mooresboro facility. That new facility produced 10,600 tons of zinc during the quarter, which was a 10% improvement from the first quarter. But the company still ensured a few more start-up hiccups during the quarter, resulting in additions start-up costs.

Despite those additional costs, Horsehead's overall cost of sales declined by $7.9 million year over year to $108.2 million in the second quarter. This resulted in an adjusted net loss of $12.4 million, or $0.22 per share, which beat the consensus estimate by $0.07 per share. That said, the loss did widen from the year-ago quarter when the company turned in an adjusted loss of $3.2 million, or $0.06 per share.

A look at the outlook
Horsehead continues to be a Mooresboro story as that facility is the real key to its future. Production, however, continues to ramp-up in fits and starts. The pace of the ramp-up increased as the quarter ended and the third quarter got off to a strong start with July's production being 7% higher than June despite a planned outage. But production for July was still less than the company expected as it experienced additional production constraints caused by design deficiencies. This is forcing the company to address new problems as they come up, which is adding incremental costs.

Having said that, the company is making continued progress to debottleneck the facility and slowly pick up the production pace. Further, management has reiterated its belief that once fully operational and efficiently operating that the facility will produce $90 million to $110 million in adjusted EBITDA on an annualized basis above what the company was earning at its prior operations in Monaca. But it doesn't yet have a time table as to when it will reach full capacity as the ramp-up continues to be unpredictable.

Investor takeaway
Horsehead's results showed some improvement during the quarter. But the big unknown remains when Mooresboro will be able to deliver on its promised potential as the company seems to be taking two steps forward and one back each quarter. While that is progress, its slow and unsteady with the potential for additional speedbumps ahead as the company will likely have many more kinks to work out before the facility is humming at full capacity.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Horsehead Holding. The Motley Fool owns shares of Horsehead Holding. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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