Filed Under:
Tickers in this Article: ZINC, MCF, TX, CF, NUE
Zinc producer and metals recycler Horsehead Corporation (Nasdaq:ZINC) benefited from lift in zinc prices year over year. Fueled by a near 50% increase in the price zinc year over year, Horsehead reported consolidated net earnings of $5.7 million for the second quarter of 2010, or 13 cents per diluted share. For the second quarter of 2009, Horsehead had a consolidated net loss of $9.3 million, or 26 cents per diluted share.

IN PICTURES: How To Make Your First $1 Million

What Matters Most: Production Cost
Despite its $300 million market cap, Horsehead is actually a leader in zinc production and electric arc furnace dust recycling. EAF dust is the hazardous by-product that mini mill steel producers like Nucor (NYSE:NUE) produce as part of the mini-mill steel production process. EAF is extremely hazardous, and has to be disposed of properly. Horsehead, as a recycler, can take that dust and turn it into zinc based products which are used in tires, pharmaceuticals and other essentials. As a recycler, Horsehead pays next to nothing for one its primary input ingredients. This gives Horsehead the only sustainable advantage in a commodity type business: low cost of production.

It's until times are tough when being the low-cost producer demonstrates its value. The ability to price at the lower end of a pricing cycle, and remain incredibly competitive, is a tremendous edge. It's why low cost producers like nitrogen fertilizer supplier CF Industries (NYSE:CF), steel company Ternium (NYSE:TX) and natural gas company Contango (NYSE:MCF) have all weathered the recession without any decline in competitive standing.

Control what You can Control
While the price of zinc is instrumental to the profitability of Horsehead, management has no control over that. When any commodity price suffers a material decline, virtually all providers of that commodity experience a decline in profitability or suffer loss. Lower production costs reduce the severity, but can not eliminate the decline all together. In the meantime, as prices remain low, high cost producers will go away as they can't suffer indefinite losses. With less supply, prices stabilize and commodity pricing cycle starts again and names like Horsehead stand to reap more. For the six months of 2010, sales more than doubled, while costs of sales was up 50%, respectively. As a result, a $36 million loss in the six months of 2009 turned into a $20 million profit in 2010.

The Bottom Line
Understanding what matters most to a commodity company - production costs - shows why Horsehead can continue to remain competitive going forward. (To learn more, see Profiting In A Post-Recession Economy.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center