Mohnish Pabrai and the Horsehead Holdings catastrophe

Last Friday shares in Horsehead Holdings Corp crashed by more than 91% after a judge approved the company’s Chapter 11 bankruptcy restructuring, bringing an end to months of uncertainty for the business and shareholders.

Horsehead filed for Chapter 11 protection in February, listing $421 million in secured and unsecured debt obligations and ever since the filing the producer of zinc and nickel products has faced a barrage of criticism and accusations of foul play from its shareholders. Shareholders now claim that Horsehead is lowballing the value of its assets to let creditors gain control of the company at a bargain price.

According to Gretchen Morgenson of The  New York Times, at the beginning of 2016 Horsehead was valuing its assets at around $1 billion, six months after this valuation the company was estimating the value of its assets to be around $300 million — even for a commodity company this drop in value a staggering. As explained in the article and the company published in the New York Times at the end of August:

“Horsehead’s valuation history certainly seems odd. Its audited financial statements for the September 2015 quarter show assets worth $1 billion. An unaudited report from early February valued the assets at roughly the same. A KPMG report commissioned by Horsehead shareholders values the company at over $1.1 billion.”
“But in a July filing with the court, Horsehead’s financial adviser said the company’s assets were worth an estimated $280 million to $375 million. The main reason for the decline? The company’s decision to write down to almost zero the new zinc plant in Mooresboro it built for $550 million.”