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Article by DailyStocks_admin    (06-25-08 09:06 AM)

The Daily Magic Formula Stock for 06/25/2008 is Horsehead Holding Corp. According to the Magic Formula Investing Web Site, the ebit yield is 31% and the EBIT ROIC is 50-75%.

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BUSINESS OVERVIEW

We are a leading U.S. producer of zinc and zinc-based products with production and/or recycling operations at six facilities in five states. We also own and operate on our premises a 110 megawatt coal-fired power plant that provides us with a cost-competitive source of electricity and allows us to sell approximately one-fifth of its capacity. Our products are used in a wide variety of applications, including in the galvanizing of fabricated steel products and as components in rubber tires, alkaline batteries, paint, chemicals and pharmaceuticals. We believe that we are the largest refiner of zinc oxide and Prime Western (“PW”) zinc metal, a grade of zinc containing a minimum of 98.5% zinc, in North America. We believe we are also the largest North American recycler of electric arc furnace (“EAF”) dust, a hazardous waste produced by the steel mini-mill manufacturing process. We, together with our predecessors, have been operating in the zinc industry for more than 150 years.

While we vary our raw material inputs, or feedstocks, based on cost and availability, we generally produce our zinc products using 100% recycled zinc, including zinc recovered from our four EAF dust recycling operations located in four states. We believe that our ability to convert recycled zinc into finished products results in lower feed costs than for smelters that rely primarily on zinc concentrates. Our four EAF dust recycling facilities also generate service fee revenue from steel mini-mills by providing a convenient and safe means for recycling their EAF dust.

During 2007, we sold approximately 305.5 million pounds of zinc products, generally priced at amounts based on premiums to zinc prices on the London Metals Exchange (“LME”). For the year ended December 31, 2007, we generated sales and net income of $545.6 million and $90.7 million, respectively.

Competitive Strengths

Leading Market Positions and Strategically Located Recycling Facilities

We believe that we are the largest refiner of zinc oxide and PW zinc metal in North America, based on volume. We also believe that we are the largest North American recycler of EAF dust and that we currently recycle more than half of all EAF dust generated in the United States. In addition, our four company-owned EAF dust recycling facilities are strategically located near major EAF operators, reducing transportation costs and enhancing our ability to compete effectively with other means of EAF dust disposal. We believe that the location of our facilities, together with our competitive cost position, extensive zinc distribution network and proprietary market knowledge, will enable us to maintain our leading market positions and continue to capture market share in zinc products and zinc recycling.

Strong Relationships with Diverse Customer Base

We believe that our product quality, reputation for on-time delivery and competitive pricing enable us to maintain strong relationships with a broad base of customers in each of our end markets. For example, we are the leading supplier of zinc metal to the after-fabrication hot-dip segment of the North American galvanizing industry. We also sell zinc oxide to over 200 producers of tire and rubber products, chemicals, paints, plastics and pharmaceuticals. We have supplied zinc oxide to eight of our current ten largest zinc oxide customers for over ten years, and we believe that we are the sole or primary supplier of zinc to most of our customers. In addition, the U.S. Environmental Protection Agency (“EPA”) has designated our recycling process as a “Best Demonstrated Available Technology” in the area of high-temperature metals recovery related to the processing of EAF dust. We are the largest recycler of EAF dust in the U.S., and we now recycle EAF dust for seven of North America’s ten largest EAF operators based on 2007 production volume. We are working to expand our recycling capacity further in order to better service these and other customers.

Low-Cost Feedstock Sources

We believe that we are the only zinc smelter in North America with the proven ability to refine zinc metal and zinc oxide using 100% recycled zinc feedstocks. Our use of large amounts of recycled feedstock reduces our exposure to increases in LME zinc prices and increases our operating margins during periods of high LME zinc prices. In addition, our EAF dust recycling operations provide us with a reliable, cost-effective source of recycled zinc without relying on third-party sellers.

Proven, Proprietary Technology with Flexible Processes

Since our recycling process converts EAF dust into saleable products, our customers generally face less exposure to environmental liabilities from EAF dust, which the EPA classifies as a listed hazardous waste, than if they disposed of their EAF dust in landfills. In addition, we believe our zinc smelter and refinery in Monaca, Pennsylvania is unique in its ability to refine zinc using almost any form of zinc-bearing feedstock. This flexibility allows us to modify our feedstock mix based on cost and availability, as well as to use 100% recycled zinc feedstock, whether purchased from third parties at a discount to the LME zinc price or generated by our EAF dust recycling operations.

Favorable Market Trends

The LME price of zinc averaged $1.47 per pound in 2007 and $1.49 per pound in 2006 compared to $0.49 per pound for the 2003-2005 time period. The rising prices have been due primarily to strong growth in demand, fueled by increased global steel consumption, and declines in global production due to closed or permanently idled zinc mining and smelting capacity. The growth in global demand for zinc has also resulted in the depletion of LME zinc inventory levels, from a recent high of approximately 790,000 tonnes in April 2004 to approximately 89,000 tonnes in December 2007. Current industry analysts forecast that global demand will continue to grow. Historically low zinc inventories are expected to increase moderately as zinc production is expected to increase in 2008 and 2009. In addition, we believe that steel mini-mill production, the principal source of EAF dust used in our recycling operations, will continue to grow by approximately 2-3% per year through 2010, further increasing both the market for our EAF dust recycling operations and our potential access to low-cost zinc feedstock. For example, Nucor Corporation, Severcorr Corporation and Steel Dynamics, Inc., three major steel mini-mill operators , announced expected future expansion in their EAF production capacity.

Strong, Experienced Management Team

Our seven-member senior management team collectively has over 180 years of experience in zinc- and metal-related industries. James M. Hensler, our Chief Executive Officer, joined us in early 2004 and has since established a culture of continuous improvement in safety and operational excellence, which has led to significant cost reductions and productivity improvements.

Business Strategy

Continue to Focus on Production Efficiencies and Operating Cost Reductions

We have reduced our manufacturing costs by increasing our usage of low-cost feedstock, streamlining our organizational structure and implementing “Six Sigma” (a business process improvement methodology) initiatives, and we intend to continue to focus on these and similar initiatives in the future. As part of our “Six Sigma” initiatives, we made a series of operating improvements at certain facilities. For example, at our Calumet plant we have reduced the amount of non-zinc materials fed to our smelter, thereby reducing operating costs by approximately $1.4 million on an annual basis without significant capital expenditures. At our Monaca facility we implemented the use of larger coke in our furnaces in 2007 resulting in savings in excess of $1.5 million. We also improved the performance of the Monaca facility’s furnace preheaters by increasing the preheat temperature of the charge to our electrothermic furnaces resulting in savings in excess of $0.5 million in 2007. In 2005, we converted our power plant to the burning of Powder River Basin Coal (“PRB”) coal, avoiding an increase in operating costs of approximately $10 million per year with a one-time investment of approximately $3.5 million. We have recently entered into a PRB coal supply agreement through 2010.

Expand EAF Dust Recycling Capacity

We believe that there are significant opportunities for us to recycle more EAF dust. We estimate that in 2007 approximately one-third of the EAF dust generated per year was deposited in landfills in the United States, including by existing customers. In addition, several new EAF steel plant projects are either under construction or were recently announced, further increasing EAF dust generation in the United States. Due to productivity, capital and operating cost efficiencies relative to integrated steel mills, the mini-mill share of the U.S. steel market has doubled in the last ten years and is expected to account for over 70% of U.S. steel produced by 2017, according to the Steel Manufacturers Association. We estimate that EAF dust generated by steel mini-mill producers will increase by approximately 2 — 3% annually through 2010, and we believe that steel mini-mill operators increasingly will rely on recyclers rather than landfills to manage this increased output. In order to meet this expected growth, we placed a new kiln with an annual EAF dust recycling capacity of 80,000 tons into production in early January 2008. We are also planning to build an additional kiln facility that would further increase our recycling capacity near one of our current customer’s facilities, a major U.S. steel mini-mill producer. In addition to generating additional service fees, we expect that our new kilns will provide us with additional low-cost recycled zinc that we can use in our own smelting process or that we can sell as feed to other zinc smelters.

Expand Production Capacity for Existing Zinc Products

We expect to increase our levels of zinc smelter production output on an annual basis from approximately 140,000 tons in 2007 to 175,000 tons by the end of 2009 through a series of operational enhancements that involve capital expenditures of approximately $40 million in the aggregate. We also are expanding our capacity to produce zinc oxide by converting existing refining capacity at our Monaca facility. Our additional production capacity will allow us to increase our service to the zinc oxide market.

Continue to Reduce Exposure to Commodity Price Fluctuations

We sourced approximately 59% of our zinc feedstock in 2007 from our EAF dust recycling operations, which feedstock is not impacted by changes in LME zinc prices. We will continue to evaluate our zinc price hedging alternatives considering the costs and benefits in light of the commodity price environment, hedging transaction costs and the extent to which we are able to increase the percentage of zinc we acquire from our recycling operations. We have hedged approximately 60% of our expected production of zinc in 2008 through the purchase of put options whereby we would receive a minimum of $1.00 per pound for the quantity hedged. The remainder of our zinc feedstock costs are derived primarily from zinc secondaries which use LME-based pricing, and therefore are somewhat naturally hedged against changes in the LME price. We have also entered into forward contracts for the purchase of coal for a fixed price through 2010. We believe that locking in a price for coal, which comprised approximately 27% of our energy costs in 2007, will stabilize our production costs and reduce the risk of coal supply interruptions.

Pursue New Markets, Applications and Acquisition Opportunities

We intend to continue to leverage our technical expertise, culture of innovation and close customer relationships in order to identify and pursue new markets and applications for our products. For example, we are currently testing new, higher-margin applications for iron-rich material, a co-product of EAF dust recycling, such as its potential use as a passive water-treatment medium at coal mining sites that have acidic mine drainage and as a daily cover or base material for municipal landfills to reduce ground water contamination. We are also evaluating new markets for our zinc powder, and we expect that our expanded EAF dust recycling capacity will allow us to enter new markets for the sale of crude zinc oxide (“CZO”) to other zinc smelters in the U.S. and internationally. We also intend to continue to identify and explore strategic acquisition opportunities.

Our History

We, together with the previous owners of our assets, have been operating in the zinc industry for more than 150 years. Horsehead Industries, Inc. (“HII”) was formed as a result of several purchases of assets and entities that substantially form our existing company. In 2002, record-low zinc prices, production inefficiencies, high operational costs and legacy environmental costs associated with prior owners/operators of our facilities caused HII to file for Chapter 11 bankruptcy protection. An affiliate of Sun Capital Partners, Inc. (together with its affiliates, “Sun Capital”) purchased substantially all of the operating assets and assumed limited liabilities of HII in December 2003 pursuant to a sale order under Section 363 of the U.S. Bankruptcy Code. Sun Capital assisted us in hiring our current chief executive officer and chief financial officer in 2004, and since that time we have implemented significant operational improvements as well as experienced significantly improved industry conditions. In addition, since 2004 we have performed maintenance at our production facilities that was deferred by our predecessor due to its financial difficulties. We expect to continue to perform additional maintenance at these facilities for the foreseeable future. As a result of certain transactions in 2007 Sun Capital and its affiliates no longer own any of our outstanding common stock.

On November 30, 2006, we completed the private placement of 15,812,500 shares of our common stock at a price of $13.00 per share (less discounts and commissions of $0.91 per share) through Friedman, Billings, Ramsey & Co., Inc. (“FBR”) who served as the initial purchaser and placement agent. On April 12, 2007, we completed the private placement of 13,973,862 shares of our common stock at a price of $13.50 per share (less discounts and commissions of $0.95) through FBR who served as the initial purchaser and placement agent. We used the net proceeds of the offerings primarily to repurchase shares and redeem warrants held by our pre-November 2006 stockholders (including Sun Capital). On August 15, 2007, we completed the public offering of 5,597,050 shares of our common stock at a price of $18.00 per share (less discounts and commissions of $1.26) as part of an underwritten public offering. We used a portion of the net proceeds to retire substantially all debt and are using the net proceeds of the public offering to fund capital expenditures and for general corporate purposes.

On August 13, 2007, the SEC declared effective a registration statement that registered for resale up to 29,860,436 shares of our common stock. There were resale restrictions on these shares that lapsed on October 9, 2007.

Operations

Our recycling facilities recycle EAF dust into CZO, and zinc calcine, which we then use as raw material feedstocks in the production of zinc metal and value-added zinc products. Our recycling and production operations form a complete zinc recycling loop, from recycled zinc to finished zinc products. We are the only zinc producer in the U.S. that uses recycled materials for substantially all of its zinc feedstocks.

Recycling

We operate four and have plans for a fifth hazardous waste recycling facilities for the recovery of zinc from EAF dust. Our recycling process has been designated by the EPA as a “Best Demonstrated Available Technology” for the processing of EAF dust. Our recycling facilities are strategically located near sources of EAF dust production. These facilities recover zinc from EAF dust generated primarily by steel mini-mill manufacturers during the melting of steel scrap, as well as from other waste material. We extract zinc from EAF dust, and recycle the other components of EAF dust into non-hazardous materials, using our proprietary “Waelz Kiln” process at our Palmerton, Rockwood, and Calumet facilities, and our “Flame Reactor” technology at our Beaumont facility.

Our Waelz Kiln recycling process blends, conditions and adds carbon to EAF dust, feeding it then into the kiln itself, a refractory-lined tube that is approximately 160 feet in length and 12 feet in diameter. During the passage through the kiln, the material is heated under reducing conditions at temperatures exceeding 1,100 degrees Celsius, thereby volatilizing the nonferrous metals, including zinc. The resulting volatized gas stream is oxidized and collected as CZO, which has a zinc content of between 50% and 55%. Our Flame Reactor recycling process heats feedstock to a temperature high enough (approximately 1,650 degrees Celsius) to convert nonferrous metals into CZO. In addition, both processes produce iron-rich material that we sell for use as an aggregate in asphalt and as an iron source in cement.

The majority of the CZO generated by both processes is shipped to our Palmerton facility, where it is further refined in a process, called “calcining,” whereby we heat the material to drive off impurities. Through this rotary kiln process, which is fired with natural gas, the zinc content is further upgraded to approximately 65% and collected as zinc calcine in granular form for shipment to our Monaca facility or sale to other zinc refineries around the world. The metal concentrate product from the calcining process is shipped for final metals recovery to our state-of-the-art hydrometallurgical processing facility in Bartlesville. We have added technology at our smelting facility to allow us to ship an increasing amount of CZO directly as a feed to our Monaca, Pennsylvania, facility.

In 2004, we spent approximately $0.2 million to expand the capacity of two of our Palmerton Waelz Kilns by approximately 8%-10%, or an additional 15,000 tons of annual capacity. We have subsequently implemented similar projects in our Rockwood and Calumet facilities, at an additional aggregate cost of approximately $0.4 million. In addition, in 2003-2004 we spent approximately $2.1 million to convert a calcining kiln in Palmerton to a “swing kiln” capable of either waelzing or calcining.

In order to further expand our EAF dust recycling capacity, we brought an 80,000 ton per year kiln online at our Rockwood, Tennessee facility in early January 2008 at a cost of approximately $33 million. This new kiln will provide approximately 14,500 tons of additional zinc that we will either use directly in our own smelting process or sell as feed to other zinc smelters. We are currently completing the engineering, site selection and incentives negotiations for a new kiln facility in the Carolinas.

Production

Our 175,000 tons-per-year capacity electrothermic zinc smelter and refinery in Monaca produces zinc metal and value-added zinc products (e.g., zinc oxide) using a wide range of feedstocks, including zinc generated by our recycling operations, zinc secondary material from galvanizers and other users of zinc. This uniquely flexible electrothermic smelter and refinery in Monaca provides a substantial competitive advantage both in raw material costs (where it is able to use a wide range of zinc-bearing feedstocks) and in finished products (where, together with our refining operations, it can produce a wide range of zinc metal and value-added zinc products).

Our Monaca smelter is the only smelter in North America that is able to use this wide range of feedstocks, including 100% recycled feedstocks, to produce our zinc products. Our unique ability to vary our feedstock blend lowers our overall raw materials costs without corresponding reductions in product quality, as compared to other zinc smelters and refiners, which generally can accept only a narrow slate of specific mined zinc concentrates, together with only small amounts of recycled materials. We also own and operate at our Monaca facility a 110 megawatt coal-fired power plant that provides us with a cost-competitive source of electricity and allows us to sell approximately one-fifth of its capacity.

The Monaca facility operates on a 24-hours-per-day, 365-days-per-year basis to maximize efficiency and output. EAF-sourced calcine and other purchased secondary zinc materials are processed through a sintering operation (which is a method for making solid material from particles by heating the particles to below their melting point until they adhere to each other). The sintering process converts this combined zinc feedstock into a uniform, hard, porous material suitable for the electrothermic furnaces. Monaca’s seven electrothermic furnaces are the key to Monaca’s production flexibility. Sintered feedstock and metallic zinc secondary materials are mixed with metallurgical coke and fed directly into the top of the furnaces. Metallic zinc vapor is drawn from the furnaces into a vacuum condenser, which is then tapped to produce molten zinc metal. This metal is then either cast as slab zinc metal, or conveyed directly to the zinc refinery in liquid form. This integrated facility reduces costs by eliminating the need to cast and then remelt the zinc to refinery feed.

At the refinery, the molten zinc is directly fed through distillation columns to produce an ultra-high-purity zinc vapor that is condensed into “thermally refined” SSHG zinc metal or processed through a combustion chamber into zinc oxide. The condensed metal is either sold or sent for further conversion into zinc powder.

We believe that our thermally produced SSHG zinc metal is among the purest and highest quality SSHG zinc metal sold in North America. Our zinc oxide is processed and separately refined through the largest North American, and highly automated, zinc oxide screening, coating and packing facility to create one of our 50 grades of zinc oxide with ISO:9002 certification.

Our Product Development Lab, located at the Monaca site, is designed for production of specially engineered zinc oxide products for unique, “high tech” applications. One such product is an extremely fine particle size (micronized) zinc oxide that may be used in cosmetic and pharmaceutical applications.

The Flow of Operations chart below describes our operations, beginning with the input of raw materials, continuing through the production processes and identifying finished products and end uses for each such raw material.

Products and Services

We offer a wide variety of zinc products and services. In 2007, we sold approximately 153,000 tons of zinc products. The following are our primary zinc products:

Zinc Metal

Our primary zinc metal product is PW zinc metal, which we sell to the hot-dip galvanizing and brass industries. We also produce SSHG zinc metal, which is used as feed for the manufacture of high-purity zinc powder and zinc alloys. SSHG zinc metal is an ultra pure grade of zinc exceeding the American Society for Testing and Materials standard for special high-grade zinc. Our zinc metal is recognized within the galvanizing industry for its consistent quality and appearance. We are the leading supplier of zinc metal to the after-fabrication hot-dip segment of the North American galvanizing industry (approximately 100 customers), who use our zinc metal to provide a protective coating to a myriad of fabricated products, from pipe and guard rails to, heat exchangers and telecommunications towers. We also sell PW zinc metal for use in the production of brass, a zinc/copper alloy. We believe that our operational standards and proximity to customers allow us to deliver higher-quality metal than many of our competitors, as lengthy transit times and poor skimming techniques can often result in surface oxidation. To accommodate various customer handling needs, our zinc metal is sold in numerous forms, from 55-pound slabs to 2,500-pound ingots.

Zinc Oxide

We sell over 50 different grades of zinc oxide with differing particle sizes, shapes, coatings and purity levels. Zinc oxide is an important ingredient in the production of tire and rubber products, chemicals, ceramics, plastics, paints, lubricating oils and pharmaceuticals. The various end uses for zinc oxide are:


• Tire and rubber applications: Zinc oxide aids in the vulcanization process, acts as a strengthening and reinforcing agent, provides UV protection, and enhances thermal and electrical properties. There is approximately a half pound of zinc oxide in a typical automobile tire.

• Chemical applications: In motor oil, zinc oxide is used to reduce oxidation, inhibit corrosion and extend the wear of automotive engines. In plastics, zinc oxide is an effective UV stabilizer for polypropylene and polyethylene.

• Ceramics: Ceramics containing zinc oxide are used in electronic components. For example, in ceramic varistors (surge protectors), zinc oxide allows for high temperature stability, resistance to electrical load, current shock and humidity.

• Other applications: In paints, zinc oxide provides mold and mildew protection, functions as a white pigment and provides UV protection and chalking resistance. In pharmaceutical applications, zinc oxide operates as a sunscreen, a vitamin supplement and a medicinal ointment.

EAF Dust Recycling

We created the market for EAF dust recycling with the development of our recycling technology in the early 1980s, which has since been designated by the EPA as the “Best Demonstrated Available Technology” for processing of EAF dust, a hazardous waste generated by steel mini-mills. To date, we have recycled over 7.0 million tons of EAF dust (equivalent to 1.4 million tons of zinc), representing the dust generated in the production of over 440 million tons of steel. Since EAF dust is sold or converted into saleable products, the steel mini-mills’ exposure to environmental liabilities related to EAF dust is reduced.

In 2007, we recycled approximately 500,000 tons of EAF dust. The installation of a new Waelz Kiln in Rockwood in early January 2008 increased our recycling capacity by 80,000 net tons, or 15%. We currently are planning to construct a new kiln facility in the Carolinas, adding additional EAF dust processing capacity by the end of 2009.

CZO Sales

Given the strong demand for zinc-bearing feed materials and attractive pricing, we began selling CZO generated in our Waelz Kilns to other zinc smelters in 2007. We plan to expand sales of this product during periods of generation in excess of our smelter requirements.

Zinc Powder and Copper-Based Powders

Our zinc powder is sold for use in a variety of chemical, metallurgical and battery applications as well as for use in corrosion-resistant coating applications. Zinc powder is manufactured by the atomization of molten zinc, and is coarser than zinc dust.

We manufacture three basic lines of powders:


• Special Zinc Powders: These are used in general chemical and metallurgical applications and in friction applications such as brake linings for automobiles.

• Battery Grade Zinc Powders: These are used in most types of alkaline batteries as well as mercuric oxide, silver oxide and zinc-air batteries.

• Copper-Based Powders: These include brass, bronze and nickel-silver powders. These products are used in a variety of applications including brazing, infiltrating and powdered metallurgical hardware such as lock bodies, valves and gears.

Sales and Marketing

Our sales and marketing staff consists of the following:


• A sales and marketing group comprised of sales professionals whose goal is to develop and maintain excellent customer relationships and provide key market analysis;

• A customer service department responsible for processing zinc orders, scheduling product shipments and answering customer inquiries; and

• A technical service staff highly trained to assist zinc customers with specification development, new applications, process improvements and on-site troubleshooting assistance when needed.

Our process engineering group provides additional technical help to our EAF clients with monthly EAF analytical information and assistance with any problems encountered on EAF dust chemistry, transportation and environmental matters. In addition to our sales and marketing organization, our quality assurance department provides extensive laboratory services critical to maintaining in-plant process control and to providing customer support by certifying compliance to hundreds of unique product specifications. We are ISO 9002 certified. Our laboratory also offers sales and technical services support by assisting in new product developments and troubleshooting various application and processing issues both in-plant and with specific customers. We also rely on a network of distributors with warehouses throughout North America who assist us with supporting smaller customers.

Customers

Most of the zinc metal we produce is purchased by galvanizers and brass producers. We are the leading supplier of zinc metal to the after-fabrication hot-dip segment of the North American galvanizing industry. We sell zinc metal to a broad group of approximately 100 hot-dip galvanizers. In many cases, these customers are also suppliers of secondary materials (including zinc remnants of steel galvanizing processes) to us. We also sell a smaller portion of our metal product to brass manufacturers.

We sell zinc oxide to over 200 different customers under contract as well as on a spot basis, principally to manufacturers of tire and rubber products, lubricating oils, chemicals, paints, ceramics, plastics and pharmaceuticals. Goodyear accounted for 10.4% of our total fiscal 2007 sales.

Our SSHG zinc metal product is used in the manufacturing of zinc powder for the alkaline battery industry.

We typically enter into multi-year service contracts with steel mini-mills to recycle their EAF dust. We provide our EAF dust recycling services to over 45 steel producing facilities.

Raw Material

In 2007, approximately 59% of the raw material used in the Monaca facility was sourced through our EAF dust recycling operations. The remaining 41% of the raw material was comprised of zinc secondaries, which are principally zinc-containing remnants of steel galvanizing processes, including top drosses, bottom drosses and skimmings that we purchase primarily from several of our metal customers. The prices of zinc secondaries vary according to the amount of recoverable zinc contained and provide us with a diverse portfolio of low cost inputs from which to choose. In addition to the dross and skims from the galvanizing industry, we purchase other types of zinc-bearing residues from the zinc, brass and alloying industries. Many of these materials are acquired from our own customers. In addition, we also have long standing relationships with zinc scrap brokers in North America, Europe and South America. These brokers in some cases act as an agent for us and are favorably located to supply us with reliable and cost effective zinc scrap.


CEO BACKGROUND

John van Roden, 59, director, was appointed to our Board in April 2007. Mr. van Roden is currently a consultant to P.H. Glatfelter Company, a New York Stock Exchange (“NYSE”)-listed producer of engineered paper products. From 2006 to 2007, Mr. van Roden served as Executive Vice President of P.H. Glatfelter Company and served as Executive Vice President and Chief Financial Officer of P.H. Glatfelter Company from 2003 to 2006. From 1998 to 2003, Mr. van Roden was Senior Vice President and Chief Financial Officer of Conectiv Corp. Mr. van Roden is a director of (i) H.B. Fuller Company, an NYSE-listed global manufacturer and marketer of adhesives and specialty chemical products, (ii) PVG GP, LLC, the general partner of Penn Virginia G.P. Holdings, L.P., an NYSE-listed limited partnership engaged in the management of coal properties and the gathering and processing of natural gas, and (iii) Airgas, Inc., an NYSE-listed distributor of industrial, medical and specialty gases and welding, safety and related products. Mr. van Roden received a BA in Economics from Denison University in 1971 and an MBA from Drexel University in 1974.

Jack Shilling, 64, Director, was appointed to our Board in September 2007. From July 2001 through April 2007, Mr. Shilling served as an Executive Vice President and Chief Technology Officer of Allegheny Technologies Incorporated, an NYSE-listed producer of specialty metals (“ATI”), where his responsibilities included working closely with several individual ATI businesses on strategic growth opportunities. Prior to such positions with ATI, beginning in 1973, Mr. Shilling worked for a subsidiary of ATI, Allegheny Ludlum Corporation, of which he became president in 1998 after holding positions of increasing responsibility in technical and operations management. He then became president of the high performance metals segment of ATI in 2000. Mr. Shilling has served also as the chairman of the Specialty Steel Industry of North America, a trade association representing the producers of stainless steel and other specialty metals in North America. Mr. Shilling received a BA in Physics from Franklin & Marshall College in 1965, an MS in Physics from Cornell University in 1967 and a PhD in Metallurgical Engineering from the University of Pittsburgh in 1975.

James M. Hensler, Chairman of the Board of Directors, President and Chief Executive Officer, joined us in April 2004. He has over 28 years of experience working in the metals industry. From 2003 to April 2004, Mr. Hensler was a consultant to various companies in the metals industry. From 1999 to 2003, Mr. Hensler was Vice President of Global Operations and Vice President and General Manager of the Huntington Alloys Business Unit for Special Metals Corp., a leading international manufacturer of high performance nickel and cobalt alloys. Prior to that, Mr. Hensler was the Executive Vice President for Austeel Lemont Co., General Manager of Washington Steel Co. and Director of Business Planning for Allegheny Teledyne Inc. He received a BS in Chemical Engineering from the University of Notre Dame in 1977, an MSE in Chemical Engineering from Princeton University in 1978 and an MBA from the Katz Graduate School of Business at the University of Pittsburgh in 1987.

Robert D. Scherich, Vice President and Chief Financial Officer, joined us in July 2004. From 1996 to 2004, Mr. Scherich was the Chief Financial Officer of Valley National Gases, Inc. Prior to that, he was the Controller and General Manager at Wheeling-Pittsburgh Steel Corp. and an accountant at Ernst & Whinney. Mr. Scherich received a BS in Business Administration from The Pennsylvania State University in 1982. He is a certified public accountant.

Robert Elwell, Vice President — Operations, joined us in June 2006 with 31 years of industry experience. For the previous eight years, he was the President of Greenville Metals, a division of Precision Castparts Corporation. Previous positions include Vice President of Manufacturing for Cannon-Muskegon Corporation (also a Precision Castparts Corporation), Vice President of Quality and Technology for Freedom Forge Corporation, Manufacturing Manager for Haynes International, Inc. and several operating and technical positions at Lukens Steel Co. Mr. Elwell has a BS in Metallurgical Engineering from Lafayette College in 1975 and an MBA from Widener University in 1979.

James A. Totera, Vice President — Sales and Marketing, joined us in 1997. Prior to that, he was the Vice President of Sales for Steel Mill Products, where he worked in, among other things, EAF dust recycling, and also spent over 15 years working in sales positions, including as General Manager of Sales, at Insul Company. Mr. Totera received a BA in Economics, Administrative Management Science and Psychology from Carnegie Mellon University in 1979.

Thomas E. Janeck, Vice President — Environment, Health and Safety, has worked for us and our predecessors since 1964. Prior to his current position, Mr. Janeck served in a number of capacities and was most recently Vice President of Environmental Services and Director of Regulatory Affairs. Mr. Janeck is a member of the Board of Directors of the National Mining Association and serves as Chairman of its Environment Committee. Mr. Janeck received a BS in Chemical Engineering from the University of Pittsburgh in 1967.

Ali Alavi, Vice President — Corporate Administration, General Counsel and Secretary, joined us in 1996. Mr. Alavi previously served as our Director & Counsel of Environment, Health & Safety and Director of Environmental Performance. Prior to joining us, Mr. Alavi worked as Assistant General Counsel of Clean Sites, Inc., Senior Regulatory Analyst of the American Petroleum Institute and Project Manager/Engineer for the U.S. Army Toxic & Hazardous Materials Agency. Mr. Alavi received a BA in Geography/Environmental Studies from the University of Pittsburgh in 1983, an MS in Petroleum Engineering from the University of Pittsburgh School of Engineering in 1985 and a JD from the University of Maryland Law School in 1993.

Daryl K. Fox, Vice President — Human Resources, joined us in October 2005. He has over 34 years of Human Resources experience working in the metals and transportation industries. Prior to joining us, from August 2004 to February 2005, Mr. Fox served as a consultant to Allegheny Technologies Incorporated. Previously, Mr. Fox served as Vice President — Human Resources for J&L Specialty Steel, LLC, a producer of stainless steel, from June 1993 until it was acquired by Allegheny Technologies Incorporated in July 2004. Mr. Fox received a BA in Sociology from Duke University in 1973.

John van Roden was appointed to our Board in April 2007. Mr. van Roden is currently a consultant to P.H. Glatfelter Company. From 2006 to 2007, Mr. van Roden served as Executive Vice President of P.H. Glatfelter Company, an NYSE-listed producer of engineered paper products, and served as Executive Vice President and Chief Financial Officer of P.H. Glatfelter Company from 2003 to 2006. From 1998 to 2003, Mr. van Roden was Senior Vice President and Chief Financial Officer of Conectiv Corp. From 1992 to 1998, Mr. van Roden was Senior Vice President and Chief Financial Officer of Lukens Inc. Mr. van Roden is a director of (i) H.B. Fuller Company, an NYSE-listed global manufacturer and marketer of adhesives and specialty chemical products, (ii) PVG GP, LLC, the general partner of Penn Virginia G.P. Holdings, L.P., an NYSE-listed limited partnership engaged in the management of coal properties and the gathering and processing of natural gas, and (iii) Airgas, Inc., an NYSE-listed distributor of industrial, medical and specialty gases and welding, safety and related products. Mr. van Roden received a BA in Economics from Denison University in 1971 and an MBA from Drexel University in 1974.

T. Grant John was appointed to our Board in May 2007. Since 2003, Mr. John has served as the principal of T.G. John & Associates, Inc., a strategy, search and turnaround consulting firm focused on the primary metals and metalworking industries. From 1999 to 2003, Mr. John was the president and chief executive officer of Special Metals Corporation, a producer of nickel and cobalt alloys. Prior to 1999 and beginning in 1966, Mr. John served in various executive and management roles for companies in the metals industry. Mr. John earned B.A.Sc. and Ph.D. degrees in metallurgical engineering at the University of British Columbia.

Bryan D. Rosenberger was appointed to our Board in May 2007. Mr. Rosenberger is Of Counsel to the law firm of Eckert Seamans Cherin & Mellott, LLC, engaging in corporate and securities law matters on behalf of both publicly and privately held businesses. Mr. Rosenberger has previously served as Chairman of Eckert Seamans Cherin & Mellott, LLC’s Business Division and as a member of that firm’s Executive Committee and Board of Directors. Mr. Rosenberger has been Of Counsel at Eckert Seamans Cherin & Mellott, LLC since 2006 and was a partner/member from 1983 to 2006. Mr. Rosenberger received a BS in Economics from Juniata College in 1971 and a JD from the College of William and Mary Marshall-Wythe School of Law in 1974.

Jack Shilling , was appointed to our Board in September 2007. From July 2001 through April 2007, Mr. Shilling served as an Executive Vice President and Chief Technology Officer of Allegheny Technologies Incorporated, an NYSE-listed producer of specialty metals (“ATI”), where his responsibilities included working closely with several individual ATI businesses on strategic growth opportunities. Prior to such positions with ATI, beginning in 1973, Mr. Shilling worked for a subsidiary of ATI, Allegheny Ludlum Corporation, of which he became president in 1998 after holding positions of increasing responsibility in technical and operations management. He then became president of the high performance metals segment of ATI in 2000. Mr. Shilling has served also as the chairman of the Specialty Steel Industry of North America, a trade association representing the producers of stainless steel and other specialty metals in North America. Mr. Shilling received a BA in Physics from Franklin & Marshall College in 1965, an MS in Physics from Cornell University in 1967 and a PhD in Metallurgical Engineering from the University of Pittsburgh in 1975.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Our History

We are a leading U.S. producer of zinc and zinc-based products. Our products are used in a wide variety of applications, including in the galvanizing of fabricated steel products and as components in rubber tires, alkaline batteries, paint, chemicals and pharmaceuticals. We believe that we are the largest refiner of zinc oxide and PW zinc metal in North America. We believe we are also the largest North American recycler of EAF dust, a hazardous waste produced by the steel mini-mill manufacturing process. We, together with our predecessors, have been operating in the zinc industry for more than 150 years.

While we vary our raw material inputs, or feedstocks, based on cost and availability, we generally produce our zinc products using nearly 100% recycled zinc, including zinc recovered from our EAF dust recycling operations. We believe that our ability to convert recycled zinc into finished products results in lower feed costs than for smelters that rely primarily on zinc concentrates. Our four EAF dust recycling facilities also generate service fee revenue from steel mini-mills by providing a convenient and safe means for recycling their EAF dust.

Prior to December 24, 2003, HII operated our business. In 2002, record-low zinc prices, production inefficiencies, high operational costs and legacy environmental costs associated with prior owners/operators of our facilities caused HII to file for Chapter 11 bankruptcy protection. We purchased substantially all of the operating assets of HII in December 2003 pursuant to a Sale Order under Section 363 of the U.S. Bankruptcy Code. For more information, see “Business — Our History.”

Factors Affecting Our Operating Results

Market Price for Zinc. Since we generate the substantial majority of our net sales from the sale of zinc and zinc-based products, our operating results depend greatly on the prevailing market price for zinc. Our principal raw materials are zinc extracted from recycled EAF dust and other zinc-bearing secondary materials that we purchase from third parties. Costs to acquire and recycle EAF dust, which, during 2007, comprised approximately 59% of our raw materials, were not impacted directly by fluctuations in the market price of zinc on the LME. The price of our finished products is impacted directly by changes in the market price of zinc, which can result in rapid and significant changes in our monthly revenues. Zinc prices experienced a period of general decline between 2000 and 2003, primarily due to increased exports from China and declines in global zinc consumption. During 2004, however, zinc prices began to recover, primarily due to increases in global zinc demand, including in China, and to declines in global production due to closed or permanently idled zinc mining and smelting capacity. Zinc prices rose throughout 2005 and 2006 to a historical high of $2.08 per pound on December 5, 2006 and have since fallen to $1.04 per pound as of December 31, 2007.

Demand for Zinc-Based Products. We generate revenue from the sale of zinc metal, zinc oxide, zinc- and copper-based powders, as well as from the collection and recycling of EAF dust. For the periods covered in this discussion and analysis, North American consumption of PW zinc metal (the grade of zinc metal in which we specialize) and zinc oxide (the value-added zinc-based product from which we generate the most net sales on an historical basis) has increased. Because of the need to perform additional maintenance on key equipment that was deferred due to our predecessor’s financial difficulties, we have not been able to produce at capacity to take full advantage of this consumption increase. Production of zinc at our Monaca facility declined, primarily due to this delayed maintenance on equipment, from approximately 170,000 tons in 2000 to approximately 139,000 tons per year in 2005, 2006 and approximately 140,000 in 2007. To meet demand we purchased and resold metal to our customers. We began to reduce these purchases in 2006 and further in 2007. We expect to continue to perform additional maintenance to this equipment for the foreseeable future. The table below illustrates historical sales volumes and revenues for each of the zinc products and EAF.

Cost of Sales (excluding depreciation). Our cost of producing zinc products consists principally of purchased feedstock, energy, maintenance and labor costs. In 2007, approximately 44% of our operating costs were feedstock-related and approximately 56% were conversion-related. Other components of cost of sales include transportation costs, as well as other manufacturing expenses. The main factors that influence our cost of sales as a percentage of net sales are fluctuations in zinc prices, production and shipment volumes, efficiencies, energy costs and our ability to implement cost control measures aimed at improving productivity. A majority of our purchased feedstock is priced at a discount to the LME.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses consist of all sales and marketing expenditures, as well as administrative overhead costs, such as salary and benefit costs for sales personnel and administrative staff, expenses related to the use and maintenance of administrative offices, other administrative expenses, including expenses relating to logistics and information systems and legal and accounting expense, and other selling expenses, including travel costs. Salary and benefit costs historically have comprised the largest single component of our selling, general and administrative expenses, excluding management services fees paid in fiscal 2006 to Sun Capital Partners Management III, LLC pursuant to a Management Services Agreement, totaling approximately 70% of such expenses in fiscal 2006. Selling, general and administrative expenses as a percent of net sales historically have been impacted by changes in salary and benefit costs, as well as by changes in sales volumes.

Trends Affecting Our Business

Our operating results are and will be influenced by a variety of factors, including:


• LME price of zinc;

• gain and loss of customers;

• pricing pressures from competitors;

• decline in use of zinc products;

• expansion into new products and expansion of our capacity, each of which requires us to incur costs prior to generating revenues;

• expenditures required to comply with environmental and other operational regulations;

• ability to operate as a public company; and

• our operational efficiency improvement programs.

We have experienced fluctuations in our sales and operating profits in recent years due to fluctuations in zinc prices. Historically, zinc prices have been extremely volatile, and we expect that volatility to continue. For example, the LME price of zinc rose from $0.58 per pound on December 31, 2004 to $2.08 per pound on December 5, 2006 and has since fallen to $1.04 per pound as of December 31, 2007. Changes in zinc pricing have impacted our revenues, since the prices of the products we sell are based primarily on LME zinc prices, and they have impacted our costs of production, since the prices of many of our feedstocks are based on LME zinc prices. Therefore, since a large portion of our sales and a portion of our expenses are affected by the LME zinc price, we expect that changing zinc prices will continue to impact our operations and financial results in the future and any significant drop in zinc prices will negatively impact our results of operations. We employ various hedging instruments to hedge the selling prices of a portion of our expected production.

Since 2004, our management has been focused on opportunities to improve our results of operations by improving operational efficiencies. We have reduced our manufacturing costs by increasing our usage of low-cost feedstock, reducing our energy consumption, streamlining our organizational structure and implementing “Six Sigma” — based process improvement initiatives, and we intend to continue to focus on these and similar initiatives in the future. Our ability to capitalize on these and other efficiency improvements will help us to improve our margins. Our management is also focused on increasing our EAF dust recycling capabilities, in order to capture opportunities created by the expansion in the EAF dust recycling market that we anticipate. We also currently expect to begin additional capacity expansion projects in the near future, including the addition of smelter capacity.

Our zinc products compete with other materials in many of their applications, and in some cases our customers may shift to new processes or products. For example, our zinc is used by steel fabricators in the hot dip galvanizing process, in which steel is coated with zinc in order to protect it from corrosion. Demand for our zinc as a galvanizing material may shift depending on how customers view the respective merits of hot dip galvanizing and paint. Our ability to anticipate shifts in product usage and to produce new products to meet our current and future customers’ needs will significantly impact our operating results. We also face intense competition from regional, national and global providers of zinc based products, and the growth of any of those competitors could reduce our market share and negatively impact our operating results.

Finally, our business is subject to a wide variety of environmental and other regulations and our operations expose us to a wide variety of potential liabilities. Our total cost of environmental compliance at any time depends on a variety of regulatory, technical and factual issues, some of which cannot be anticipated. Changes in regulations and/or our failure to comply with existing regulations can result in significant capital expenditure requirements or penalties.

Summary of Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Note B to the audited consolidated financial statements contained in this Annual Report on Form 10-K contains a summary of our significant accounting policies. Certain of these accounting polices are described below.

Inventories

Inventories, which consist primarily of zinc bearing materials, zinc products and supplies and spare parts, are valued at the lower of cost or market using a moving average cost method. Raw materials are purchased, as well as produced from the processing of EAF dust. Supplies and spare parts inventory used in the production process are purchased. Work-in-process and finished goods inventories are valued based on the costs of raw materials plus applicable conversion costs, including depreciation and overhead costs relating to associated process facilities.

Zinc is traded as a commodity on the LME and, accordingly, product inventories are subject to price fluctuations. When reviewing inventory for the lower of cost or market, we consider decreases in the LME zinc price subsequent to the end of the year.

Financial Instruments

The following methods are used to estimate the fair value of our financial instruments:


• Cash and cash equivalents, accounts receivable, notes payable due within one year, accounts payable and accrued expenses approximate their fair value due to the short-term nature of these instruments.

• The revolver approximates its fair value as it bears interest at variable rates indexed to market rates of interest.

We enter into certain financial swap and financial option instruments that are carried at fair value in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). We recognize changes in fair value within the consolidated statements of income as they occur (see Note N to our audited consolidated financial statements).

We do not purchase, hold or sell derivative financial instruments unless we have an existing asset or obligation or anticipate a future activity that is likely to occur and will result in exposing us to market risk. We use various strategies to manage our market risk, including the use of derivative instruments to limit, offset or reduce such risk. Derivative financial instruments are used to manage well-defined commodity price risks from our primary business activity. The fair values of derivative instruments are based on valuations provided by third parties.

We are exposed to credit loss in cases where counter-parties with which we have entered into derivative transactions are unable to pay us when they owe us funds as a result of agreements with them. To minimize the risk of such losses, we use highly rated counter-parties that meet certain requirements. We currently do not anticipate that any of our counter-parties will default on their obligations to us.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines “fair value”, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement does not change existing accounting rules governing what can or must be recognized and reported at fair value in our financial statements, or disclosed in the notes to our financial statements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We do not believe the impact of our adoption of SFAS 157 will be material.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to chose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This statement does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not believe the impact of our adoption of SFAS 159 will be material.

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006

Net sales. Net sales increased $49.2 million, or 9.9%, to $545.6 million for fiscal 2007 compared to $496.4 million for fiscal 2006. The net increase was attributable to increases in price realization of $57.3 million and co-product and miscellaneous sales of $5.4 million partially offset by a sales volume decrease of $21.5 million. The remaining $8.0 million increase relates to the mark to market adjustments on various hedging instruments we employed to hedge the selling prices of a portion of our expected production. Net sales for fiscal 2007 and fiscal 2006 were reduced by mark to market adjustments of $5.2 million and $13.2 million, respectively.

The average sales price realization for zinc products on a zinc contained basis was $1.73 per pound for fiscal 2007 versus $1.52 per pound for fiscal 2006. The increase in price realization was due to a higher premium to the LME on zinc products sold and the lag effect of record high LME average zinc prices in the fourth quarter of fiscal 2006 being partially realized in the first quarter of fiscal 2007. Additionally, the year to date LME average zinc prices for the first three quarters of fiscal 2007 were higher than full year fiscal 2006 as illustrated in the table above. The LME average zinc price declined 19% in the fourth quarter of fiscal 2007 to bring the year to date average to $1.47 per pound versus $1.49 per pound for fiscal 2006.

Zinc product shipments decreased 4,926 tons, or 3.1%, to 152,745 tons, or 136,698 tons on a zinc contained basis, for fiscal 2007 compared to 157,671 tons, or 142,767 tons on a zinc contained basis, for fiscal 2006. The decrease reflects primarily a decrease in shipments of zinc metal partially offset by an increase in shipments of zinc oxide. The decrease in shipments of zinc metal reflects decreases in both brokered metal and zinc metal produced of 5,171 tons and 5,123 tons, respectively.

Net sales of zinc metal decreased $15.7 million, or 6.5%, to $226.3 million for fiscal 2007 compared to $242.0 million for fiscal 2006. The decrease was primarily attributable to a decrease in sales volume of $30.3 million partially offset by an increase in price realization of $14.6 million. The reduced sales volume primarily reflects reduced shipment levels of brokered metal and an increase in the quantity of produced metal further processed into zinc oxide. The increase in price realization reflects the higher LME average zinc price during most of fiscal 2007 as mentioned above and a higher average premium to the LME on zinc products sold.

Net sales of zinc oxide increased $56.7 million, or 29.9%, to $244.6 million for fiscal 2007 compared to $187.9 million for fiscal 2006. The increase was attributable to an increase in price realization of $42.3 million and a shipment volume increase of $14.4 million. The increase in price realization reflects the lag effect of record high LME average zinc prices in the fourth quarter of fiscal 2006 being partially realized in the first quarter of fiscal 2007 as well as the year to date LME average zinc prices for the first three quarters of fiscal 2007 exceeding the full year fiscal 2006 average. The increased shipment volume reflects the settlement of a fourth quarter 2006 work stoppage at the operations of our largest oxide customer. Consumption in 2007 has returned to pre-work stoppage levels.

Net sales of zinc and copper-based powder increased $0.2 million, or 1.6%, to $12.9 million for fiscal 2007 compared to $12.7 million for fiscal 2006. The increase was attributable to an increase in price realization of $1.2 million partially offset by a decrease in sales volume of $1.0 million.

Revenues from EAF dust recycling decreased $5.4 million, or 10.7%, to $45.2 million for fiscal 2007 compared to $50.6 million for fiscal 2006. Decreased volume led to a decrease in revenues of $4.6 million. The decreased volume primarily reflects reduced steel production by our EAF customers. EAF dust revenues for fiscal 2007 were based on 458,052 tons versus 503,985 tons for fiscal 2006. A 1.8% decrease in price realization reduced revenues by $0.8 million.

Cost of sales (excluding depreciation). Cost of sales increased $13.2 million, or 3.6%, to $373.4 million for fiscal 2007 compared to $360.2 million for fiscal 2006. As a percentage of net sales, cost of sales was 68.4% for fiscal 2007 versus 72.6% for fiscal 2006. The increase was primarily attributable to a cost increase of $29.2 million partially offset by a shipment volume decrease of $16.0 million. The volume decrease was caused by decreases of $15.8 million and $8.9 million in brokered metal and produced metal shipments, respectively, a decrease of $0.8 million in zinc and copper-based powder shipments partially offset by a $9.5 million increase in oxide shipments.

The cost increase of $29.2 million was primarily attributable to a $19.9 million increase in conversion costs and a $12.7 million increase in purchased feed costs at our Monaca smelter partially offset by a $3.4 million decrease in recycling and other costs. The largest components of the conversion cost increase are a $10.9 million increase in labor and maintenance costs, a $5.3 million increase in utilities and a net $3.7 million increase in supplies, fuels, additives and other costs. The increase in labor and maintenance costs includes $5.4 million in signing bonuses related to the collective bargaining unit agreements negotiated in 2007 at our Palmerton, Calumet and Monaca facilities.

The purchased feed cost increase reflects the higher average LME zinc price for the majority of 2007 as well as a 9.7% increase in the percentage of the average LME zinc price we pay for our purchased feeds. These increases were partially offset by a 9.0% decrease in the quantity of purchased feeds used in fiscal 2007.

Depreciation. Depreciation expense increased $1.7 million, or 18.9%, to $10.2 million for fiscal 2007 compared to $8.5 million for fiscal 2006. The increase is attributable to an increase in property, plant and equipment in fiscal 2007. Capital expenditures were $45.3 million in fiscal 2007.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased $15.6 million, or 48.9%, to $15.7 million for fiscal 2007 compared to $31.3 million for fiscal 2006. The decrease was primarily attributable to the elimination of the management fees to Sun Capital Partners Management III, LLC pursuant to our management services agreement with them that was terminated in November 2006. The fees totaled $16.3 million in fiscal 2006.

Interest expense. Interest expense decreased $1.9 million, or 21.8%, to $7.6 million for fiscal 2007 compared to $9.5 million for fiscal 2006. Lower average debt levels in 2007 due to repayment of substantially all debt more than offset the effects of higher average variable interest rates associated with the debt. Interest expense for fiscal 2007 included $2.5 million in amortization of deferred finance charges, of which $1.6 million was related to the early extinguishment of notes payable during the year.

Interest and other income increased to $3.0 million for fiscal 2007 compared to $0.3 million for fiscal 2006. The increase was primarily attributable to $1.7 million in interest earned on excess cash during the year resulting primarily from the second quarter private placement transaction, the initial public offering of our common stock and strong cash flows provided by operations during the year.

Income tax provision. Our income tax provision was $51.1 million during fiscal 2007, compared to $32.7 million for fiscal 2006. Our effective tax rate for fiscal 2007 was 36.1%, compared to 37.5% for fiscal 2006.

Net income. For the reasons described above, net income increased $36.2 million, or 66.5%, to $90.7 million for fiscal 2007 compared to $54.5 million for fiscal 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Three Months Ended March 31, 2008 Compared with Three Months Ended March 31, 2007
Net sales. Net sales decreased $33.4 million, or 22.6%, to $114.4 million for the three months ended March 31, 2008 compared to $147.8 million from the three months ended March 31, 2007. The decrease was a result of a $45.2 million decrease in price realization, due primarily to a lower average LME zinc price for the first quarter of fiscal 2008 versus the first quarter of fiscal 2007 coupled with a lower average premium to the LME on zinc products sold for the first quarter of fiscal 2008 versus the first quarter of fiscal 2007. Offsetting our decreases in net sales was a sales volume increase of $11.7 million reflecting increases in shipments across all product lines, increases of EAF dust receipts and a $0.5 million increase in co-product and miscellaneous sales. Zinc product shipments were 41,241 tons for the three months ended March 31, 2008, or 37,025 tons on a zinc contained basis, compared to 38,791 tons, or 34,675 tons on a zinc contained basis for the three months ended March 31, 2007. The average sales price realization for zinc products on a zinc contained basis was $1.26 per pound for the three months ended March 31, 2008, compared to $1.88 per pound for the three months ended March 31, 2007.
Approximately $0.4 million of the decrease in net sales was a result of a mark to market adjustment on various hedging instruments we employed to hedge the selling prices of a portion of our expected production. The adjustment for the three months ended March 31, 2008 reduced net sales by $0.8 million compared to a reduction in net sales of $0.4 million for the three months ended March 31, 2007.
Net sales of zinc metal decreased $14.7 million, or 24.2%, to $46.1 million for the three months ended March 31, 2008, compared to $60.8 million for the three months ended March 31, 2007. The decrease was attributable primarily to a $21.3 million decrease in price realization partially offset by a $6.6 million increase in sales volume. The decrease in price realization was attributable to both a lower average LME zinc price for the first quarter of fiscal 2008 versus the first quarter of fiscal 2007 and a lower average premium to the LME on zinc products sold for the first quarter of fiscal 2008 versus the first quarter of fiscal 2007.
Net sales of zinc oxide decreased $22.1 million, or 32.1%, to $46.8 million for the three months ended March 31, 2008, compared to $68.9 million for the three months ended March 31, 2007. The decrease was attributable to a $23.8 million decrease in price realization due primarily to the lag effect of pricing a majority of our zinc oxide shipments on prior months’ average LME zinc prices. The average LME zinc price was $1.19 per pound for the three months ended December 31, 2007 compared to $1.91 per pound for the three months ended December 31, 2006. Additionally, the average premium to the LME we realized on sales of zinc oxide in the first quarter of fiscal 2008 was lower than the premium we realized in the first quarter of fiscal 2007. The decreases were partially offset by a $1.7 million increase in sales volume.
Net sales of zinc and copper-based powder increased $1.1 million, or 37.9%, to $4.0 million for the three months ended March 31, 2008 compared to $2.9 million for the three months ended March 31, 2007. This increase was attributable primarily to increases in prices and shipment volume of our copper-based powders.
Revenues from EAF dust recycling increased $2.3 million, or 20.4%, to $13.6 million for the three months ended March 31, 2008, compared to $11.3 million for the three months ended March 31, 2007. Increased volumes caused revenues to increase by $2.4 million. A 1% decrease in price realization on EAF dust recycling fees for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 resulted in a decrease in net sales of $0.1 million. EAF dust revenues for the three months ended March 31, 2008 were based upon 138,955 tons versus 114,515 tons for the three months ended March 31, 2007.
Cost of sales (excluding depreciation). Cost of sales decreased $4.1 million, or 4.3%, to $92.8 million for the three months ended March 31, 2008, compared to $96.9 million for the three months ended March 31, 2007. As a percentage of net sales, cost of sales was 81.1% for the three months ended March 31, 2008 as compared to 65.6% for the three months ended March 31, 2007. The decrease was primarily a result of a $12.4 million decrease in the cost of metal, oxide and powders shipped in the three months ended March 31, 2008 compared to the three months ended March 31, 2007 partially offset by a $6.0 million increase in shipment volume and a $3.4 million increase in our recycling costs. The cost decrease was caused largely by a decline in the cost of purchased feeds which reflects the net effect of the 29.9% decline in the LME average zinc price from the three months ended March 31, 2007 partially offset by an increase in the percentage of the purchased feeds used in the feed mix. Included in cost of sales for the three months ended March 31, 2008 were costs totaling $3.7 million relating to the higher percentage of purchased feed, the start-up of the new kiln placed in service in early January 2008 at our Rockwood, Tennessee facility and an unplanned outage at the power plant located at our Monaca, Pennsylvania facility.
Depreciation . Depreciation expense increased $0.3 million, or 12.4%, to $2.9 million for the three months ended March 31, 2008 compared to $2.6 million for the three months ended March 31, 2007. The increase reflects the increased capital expenditures during the twelve months ended March 31, 2008, most notably the kiln expansion project at our Rockwood, Tennessee facility which was completed and placed into service in early January 2008.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $0.2 million to $3.6 million for the three months ended March 31, 2008, compared to $3.4 million for the three months ended March 31, 2007. The increase primarily reflects costs associated with our public company status, namely increased legal and audit expenses, directors’ fees and public company filing fees not incurred in the three months ended March 31, 2007. Non-cash compensation expense included in selling, general and administrative expenses was $0.4 million and $0.2 million for the three months ended March 31, 2008 and March 31, 2007, respectively.
Interest expense. Interest expense decreased $2.3 million to $0.3 million for the three months ended March 31, 2008, compared to $2.6 million for the three months ended March 31, 2007. The decrease is attributable primarily to lower debt levels in 2008. Substantially all of our debt was repaid in the second and third quarters of fiscal 2007 in conjunction with our private equity placement in 2007 and the initial public offering of our common stock.
Interest and other income increased $0.6 million for the three months ended March 31, 2008. The increase was attributable primarily to a $0.5 million increase in interest earned on excess cash during the quarter.
Income tax provision. Our income tax provision was $5.6 million for the three months ended March 31, 2008, compared to $15.4 million for the three months ended March 31, 2007. Our effective tax rates were 36.2% for the three months ended March 31, 2008 and 36.5% for the three months ended March 31, 2007.
Net income. For the reasons stated above, our net income decreased to $9.9 million for the three months ended March 31, 2008, compared to $26.9 million for the three months ended March 31, 2007.
Liquidity and Capital Resources
We finance our operations, capital expenditures and debt service primarily with funds generated by our operations. We believe that cash generated from operations, our initial public offering and the borrowing availability under our credit facilities will be sufficient to satisfy our liquidity and capital requirements for the next twelve months. Our ability to continue to fund these requirements may be affected by industry factors, including LME zinc prices, and by general economic, financial, competitive, legislative, regulatory and other factors discussed herein.
Cash Flows from Operating Activities
Our operations generated a net $10.5 million in cash for the three months ended March 31, 2008. Net income and non-cash items totaled $14.1 million. Although the LME average price of zinc during the three months ended March 31, 2008 has declined 7.6% from December 31, 2007 levels, it remains at historically high levels and contributed to our positive cash flow for the period.
Our investment in working capital increased 3.2% to $154.8 million at March 31, 2008 from $150.0 million at December 31, 2007. The increase reflects a $2.7 million increase in cash and cash equivalents and a $7.0 million increase in put options purchased as part of our hedging strategy. These increases were offset by a $5.9 million increase in accounts payable and accrued expenses. Other notable changes in working capital include a $4.6 million increase in accounts receivable and a $3.4 million decrease in inventory. The decrease in the inventory was caused by an 11% reduction in the tons of inventory on hand and a corresponding 5% decrease in cost.
Cash Flows from Investing Activities
Cash used in investing activities was $8.8 million for the three months ended March 31, 2008. A majority of the expenditures, $5.2 million, related to capital expansion projects. Although our credit facility imposes certain limits on capital spending, such limits did not preclude us from funding any of our currently planned projects. We funded capital expenditures with cash provided by operations and cash from our initial public offering.

Cash Flows from Financing Activities
Our financing activities for the three months ended March 31, 2008 provided a net $1.0 million in cash resulting from the exercise of employee stock options and the related tax benefit. During the quarter, options underlying approximately 143,000 shares were exercised at an average exercise price of $2.81 per share.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements include operating leases and letters of credit. As of March 31, 2008, we had letters of credit outstanding in the amount of $15.1 million to collateralize self-insured claims for workers’ compensation and other general insurance claims and closure bonds for our two facilities in Pennsylvania. These letters of credit are covered by a $35.0 million letter of credit sub-line under the terms of our credit facility.

CONF CALL

Ali Alavi

Good morning everyone and thank you for joining us on our first quarter 2008 earnings release conference call. My name is Ali Alavi and I'm Horsehead's Vice President of Corporate Administration, General Counsel, and Secretary. Before I turn the call over to Jim Hensler, I would like to quickly remind everyone that this communication may include forward-looking statements about our company or market and our prospects that are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. These risks and uncertainties include a variety of factors, some of which are beyond our control.

These forward-looking statements speak as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after this communication. You should refer to our filings with the U. S. Securities and Exchange Commission, including our most recent annual report on Form 10-K filed on March 31, 2008 for a more detailed description of the risk factors that may affect our results.

With that, I'm pleased to introduce Jim Hensler, our President and CEO. Jim?

Jim Hensler

Thanks, Ali. It's my pleasure to welcome you to this conference call to discuss the first quarter 2008 results. I will review the performance of our operations and markets, then turn it over to Bob Scherich, our CFO, who will review the financial results.

We are pleased with the continued strong market demand for our products and services as we achieve higher production levels. In particular, our EAF dust recycling business has exhibited strong growth. Receipts of electric arc furnace dust increased by 21% compared against the first quarter of 2007 to an annualized rate of 559,000 tons per year. Dust receipts also increased by 20% versus the previous quarter. In addition, new EAF dust sources are expected to begin deliveries in the second quarter of this year. We believe we are on track to meet our 2008 goal of receiving 575,000 tons of dust.

The startup of the Rockwood number two kiln on January 1 of this year added an additional 80,000 tons per year of capacity. We absorbed one time startup costs of approximately $700,000 for additional training and energy usage during the startup period.

We've selected a site in South Carolina to build a new dust recycling facility in conjunction with a multi-year agreement with Nucor steel. The Board has approved the capital investment of $88 million to install a two kiln facility with capacity of over 160,000 tons per year which will provide sufficient capacity to service Nucor and secure additional business in that region of the country. We expect to complete air permitting for the South Carolina plant by the end of June which will allow construction to begin. Kiln one is expected to start up by mid-year 2009.

Our zinc smelting operations in Monaca continue to demonstrate strong productivity gains. The zinc smelter produced 37,750 tons of zinc in the first quarter of 2008, an 18% increase compared with the prior year quarter. This occurred despite a 72 hour outage that resulted from a loss of power at the plant. We are track with meeting of our production plan of 152,000 zinc tons this year. Furthermore, the planned zinc oxide expansion came online as scheduled at our Monaca plant on April 1 and it started up with minimal problems. We are on track to meet or exceed our shipment plan of 85,000 tons of oxide this year.

Strong market demand for our products is supporting higher shipment levels. Market demand for our products was stronger in the quarter as zinc shipments increased by 6.8% compared with the first quarter of 2007 to about 37,000 tons. Shipments increased by 8.6% compared with the typical seasonally lower fourth quarter of 2007.

Demand in the general galvanizing market has improved as infrastructure related spending continues to be strong and as we enter the construction season. Oxide demand has also been steady. And we have also seen a slight increase in export shipments of oxide this year from 4.2% of total shipments during the first quarter of last year to 6.2% this year. We expect export shipments to continue to grow as we continue to partner with several of our larger customers who have global production facilities.

We experienced a temporary increase in production costs during the quarter due to transitional issues associated with the start-up of the Rockwood kiln and one-time events. At first, we had a prolonged unplanned outage at our power plant, which resulted in operating with only one of two generating units for nearly two months. This resulted in the need to purchase power at prices higher than our normal generating cost, and reduced our revenue from selling the excess power that we generate with both units operating. The outage highlighted the need to upgrade some of the electrical infrastructure in our Monaca plant and we're developing plans in this area.

Also as noted earlier, we experienced start-up related costs with the Rockwood number two kiln and we also experienced higher feed costs during the quarter as the percentage of purchased feeds increased from 41% in the first quarter of 2007 to 44% during the first quarter of this year to support the higher production rate from the smelter.

In the second quarter, Rockwood number two will be at full production and will produce sufficient crude zinc oxide to reduce the amount of purchased feeds. The cumulative impact of these events was an increase in cost of goods sold of approximately $3.7 million or $0.07 per share.

The LME zinc price declined 30% as compared against the first quarter of 2007. LME prices averaged $1.10 per pound for the quarter, also 7% lower than the previous quarter. The realized premiums on metal averaged about $0.05 during the quarter, a slight decrease from the prior quarter reflecting competitive pressures from additional supply in the market. Transactional premiums for zinc oxide remained steady, however realized premiums have declined somewhat as the lag effect on prices has lessened, as LME prices have stabilized over the past few months.

And finally, we completed the purchase of put options for 2009 bringing the total coverage to 90,000 zinc tons at a strike price of $0.90 per pound. We also hedged a similar quantity in 2008 and a strike price of $1 per pound.

I'll now turn it over to Bob Scherich, Horsehead's CFO, to review the financial results.

Bob Scherich

Thanks, Jim. For the first quarter, earnings per share were $0.28. As Jim mentioned, this was off $0.07 due to the transition issues related to the startup of Rockwood number two and the unplanned outage at the power plant. Combining this with the non-cash charge for hedge mark-to-market adjustments results in a normalize EPS of approximately $0.365. Detail of our quarter performance reflects a decrease in sales of $33.4 million as lower price realization of $45.2 million was partially offset by an increase in shipment volume of $11.7 million in comparison to the prior-year quarter. This resulted in decreased sales of 23% as compared to a decrease in the underlying LME price of 30% during the same period.

Average price realization per pound on a Zinc contained basis for Zinc products reflected a $0.16 premium over the average LME for the quarter. This compares to $0.32 per pound for the prior year quarter as the lag effect on pricing for Zinc Oxide reduced as LME prices have began to stabilize. Net sales of Zinc metal were $46.1 million, a decrease of $14.7 million when compared to $60.8 million for the prior year quarter. The decrease reflects a reduced price effect of $21.3 million, partially offset by a sales volume increase of $6.6 million.

Net sales of zinc oxide were $46.8 million, a decrease of $22.1 million for the quarter when compared to the $68.9 million for the prior year quarter. Decrease in price realization of $23.8 million was partially offset by a shipment volume increase of $1.7 million.

Net sales of zinc and copper based powder were $4 million for the current quarter versus $2.9 million, reflecting both higher price and volume. Revenues from EAF dust recycling were $13.6 million, an increase of $2.3 million compared to $11.3 million for the prior year quarter, with an increased volume effect of $2.4 million and a decrease in price realization of $0.1 million.

Cost of sales decreased $4.1 million for the quarter compared to the prior year, reflecting a decrease in purchase feed cost, given the lower LME price, partially offset by a higher proportion of purchase feeds. This proportional increase reflected the requirements to meet the higher production levels, while the expanded EAF dust processing was coming online.

As Jim mentioned, the combination of this higher level of purchase feeds, start-up cost of the Rockwood kiln, and the outage at our power plants increased cost $3.7 million or approximately $0.07 per share. Depreciation expense increased $0.3 million for the quarter, reflecting the increased capital spending during the last 12 months. SG&A expenses increased $0.2 million for the quarter. Interest expense decreased $2.3 million for the quarter, reflecting lower debt levels.

Interest and other income increased $0.6 million for the quarter and our effective tax rate was 36.2% compared to 36.5% for the prior year quarter. Net income decreased to $9.9 million for the quarter compared to $26.9 million for the prior year quarter. Weighted average shares outstanding were 35,165,000 for the quarter compared to 28,855,000 for the prior year quarter, reflecting the equity offerings completed during the last 12 months.

Cash flow from operating activities was $10.5 million for the quarter after being reduced $7 million for the purchase of put options for 2009. Availability on our revolver is approximately $60 million.

At this time, I'd like to turn things back to Jim for some final comments.

Jim Hensler

Thanks, Bob. In summary, before we open the call for questions, I'd like to say that we continue to be pleased with the progress that we're making on our growth strategies and market demand continues to support our growth efforts. Steel production enhanced EAF dust generation has increased since last year due to strengthening of steel demand and a reduction in steel imports.

Through the first quarter, we feel confident that we can meet or exceed our operational targets for 2008, namely 152,000 tons of zinc production, 575,000 of EAF dust processed, and 85,000 tons of zinc oxide shipments. We expect stronger earnings in the second half of the year as capacity ramps up and start up are cost absorbed during the first half of the year.

We're also excited about reaching a conclusion on site selection for our new EAF dust recycling plant in South Carolina, and look forward to the start of construction in the next few months. I'm also pleased that we've executed our hedging strategy through 2009 with the purchase of additional put options. The zinc price hedges we have put in place will provide downside protection while allowing us to enjoy full upside in zinc price increases.

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