Horsehead Holdings: A Failure Of Capital Markets?

The collapse of Horsehead Holdings last year came as a surprise to many, not least the company shareholders who thought they were investing in a very liquid company with the potential to a return equal to multiples of their initial investment.

However, at the beginning of 2016 Horsehead Holdings announced that it had tripped a technical default on its revolving line of credit from Macquarie Bank. This effectively forced the group to file for Chapter 11.

Initially, the bankruptcy was blamed on falling commodity prices and some mistakes by Horsehead Holdings itself. As I wrote at the time:

“Back in 2011 Horsehead decided to transition zinc production from its 80-year old smelter to using a different chemical process to produce zinc. The new plant was expected to cost about $350 million and increase EBITDA by as much as $110 million making the company one of the lowest cost zinc producers on the planet. Unfortunately, the company completely failed to manage this project effectively. Costs spiraled to $500 million and after 18 months of operation, the plant could only manage 25% capacity. The final death blow for the company came when it announced that the new smelter needed another $100 million to cover losses while the plant ramped up to full production.”

Horsehead Holdings: The collapse 

A commodity company that overstretches itself and struggles to cope when the cycle turns is nothing new. But many believed Horsehead was insulated against such an event thanks to its relatively strong balance sheet and support from shareholders. Some of the world’s most respected value investors including Mohnish Pabrai and Guy Spier had invested in the company and met with management increasing the allure of the shares. Pabrai and Spier were willing to finance Horsehead through this difficult time. In a letter to investors of the Aquamarine Fund dated December 12 and reviewed by ValueWalk, Spier writes:

“I was also confident that the company could raise more equity. Indeed, the company had approached me, and I had responded that although I did not have all the requisite capital myself, I was ready to invest more – provided it was alongside other investors – as part of a sum that ensured that the company could get through this period of tight liquidity.”

“Given these insights, I believed the company’s public statements that it had sufficient liquidity to get through its operational difficulties and the low zinc price.”

Rather than engage with shareholders and creditors to achieve the best results for all stakeholders, Horsehead’s management instead went to ground, shutting down all communications with shareholders.

More ValueWalk coverage on the Horsehead debacle:

• Mohnish Pabrai and Horsehead catastrophe
• Pabrai Funds Crushed, Down 20% In 2015 Thanks To Horsehead
• Horsehead Postmortem: Updating Beliefs After A 100% Loss
• Pabrai Funds Springs Back After Horsehead

Then things really got out of control.