Horsehead Holding: Transformative Change with 60 Percent UpsideVW Staff
HORSEHEAD HOLDING CORP. (NASDAQ:ZINC) long case via Prescience Investment Group, LLC
HORSEHEAD HOLDING CORP. (NASDAQ:ZINC) (“ZINC” or “the company”) is on schedule to complete a transformational process by Q3 2013, from which the company will emerge as one of the lowest-cost producers of zinc metal products in the world.
The company is only months away from opening a new plant that will increase EBITDA by 300%, independent of the price of zinc. The increase in EBITDA will be driven primarily by cost savings, carrying very little in execution risk. Additionally, 95% of the plant financing is in place and cash flow is materially hedged, as HORSEHEAD HOLDING CORP. (NASDAQ:ZINC) owns zinc put options with a $0.85/lb. strike price through Q4 2013. The new plant will also expand Horsehead’s addressable market, enabling it to enter the market for higher grades of metal that have more applications.
Horsehead under-followed stock is unreasonably cheap
ZINC’s under-followed stock is unreasonably cheap and does not reflect the imminent transformative change that will occur before the end of 2013. Once the new plant opens and begins operations, we expect investors to rerate Horsehead, resulting in material multiple expansion. At a conservative 6.0X 2015E EBITDA of $200mm, HORSEHEAD HOLDING CORP. (NASDAQ:ZINC) should trade at ~$21.00 per share, representing ~72% upside from the current share price. Our blended valuation, using a DCF and an EV/EBITDA multiple of 6x results in a share price of $19.49, ~60% upside from current levels.
Value investing luminary Mohnish Pabrai’s recent purchases of ZINC stock have made him the company’s largest shareholder. He apparently shares our conviction that shares of HORSEHEAD HOLDING CORP. (NASDAQ:ZINC) provide for an incredibly asymmetric risk/reward. At current levels, the stock offers a large margin of safety against zinc price declines and immense upside leverage in the case of zinc price increases. The phrase he has coined – “Heads I win, Tails I Don’t Lose Much!” – would seem readily applicable to this equity.