10-K 1 zinc-2013123110k.htm 10-K ZINC-2013.12.31.10K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-K 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission File Number: 001-33658
Horsehead Holding Corp.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
20-0447377
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
4955 Steubenville Pike, Suite 405
Pittsburgh, Pennsylvania 15205
 
(724) 774-1020
(Address of Principal Executive Offices, including Zip Code)
 
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: 
Title of each class                    Name of exchange on which registered
Common Stock, par value $0.01 per share            The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨ No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨ No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated Filer
¨
  
Accelerated filer
x
 
Non-accelerated filer
¨
 
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of June 30, 2013, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $427 million (based upon the closing sale price of the common stock on that date on The NASDAQ Global Select Market). For this purpose, all shares held by directors, executive officers and stockholders beneficially owning ten percent or more of the registrant's common stock have been treated as held by affiliates.
The number of shares of the registrant’s common stock outstanding as of March 11, 2014 was 50,619,165.  
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement for its 2014 annual meeting of stockholders, which is expected to be filed with the Securities and Exchange Commission not later than March 26, 2014 are incorporated by reference into Part III of this report on Form 10-K. In the event such proxy statement is not filed by March 26, 2014, the required information will be filed as an amendment to this report on Form 10-K no later than that date.





TABLE OF CONTENTS
 
 
Item 1.
Business
 
Item 1A. Risk Factors
 
Item 1B. Unresolved Staff Comments
 
 
 
Item 2
Properties
 
 
 
Item 3
Legal Proceedings
 
 
 
Item 4
Mine Safety Disclosures
 
 
 

 
 
 
Item 5
Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities
 
 
 
Item 6
Selected Financial Data
 
 
 
Item 7
Management's Discussion and Analysis of Financial Condition and Results of Operation
 
 
 
Item 8
Consolidated Financial Statements and Supplementary Data
 
 
 
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Item 9A. Controls and Procedures
 
Item 9B. Other Information
 
 
 
 
Item 10
Directors, Executive Officers and Corporate Governance
 
 
 
Item 11
Executive Compensation
 
 
 
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
 
Item 13
Certain Relationships and Related Transactions and Director Independence
 
 
 
Item 14
Principal Accountant Fees and Services
 
 
 

Item 15
Exhibits and Financial Statement Schedules
 
 
 
EXHIBIT INDEX
 

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CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of the federal securities laws. These statements relate to analyses and other information, which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies.
These forward looking statements are identified by the use of terms and phrases such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, and similar terms and phrases, including references to assumptions. However, these words are not the exclusive means of identifying such statements. These statements are contained in many sections of this report (including “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”). Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that we will achieve those plans, intentions or expectations. We believe that the following factors, among others (including those described in “Part I, Item 1A. Risk Factors”), could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf: the cyclical nature of the metals industry; the state of the credit and financial markets; decreases in the prices of zinc and nickel-based products; competition from global zinc and nickel manufacturers; our ability to implement our business strategy successfully; our ability to complete the final phase of construction, commissioning and ramp up of our new zinc facility; our ability to realize the projected benefits from the new zinc facility once fully operational; our ability to service our debt; our ability to integrate acquired businesses; work stoppages and labor disputes; material disruptions at any of our manufacturing facilities, including for equipment, power failures or industrial accidents; decreases in order volume from major customers; the costs of compliance with environmental, health and safety laws and responding to potential liabilities and changes under these laws; the effect of litigation related to worker safety or employment laws; failure of our hedging strategies, including those relating to the prices of energy, raw materials and zinc products; our ability to attract and retain key personnel; our ability to protect our intellectual property and know-how; our dependence on third parties for transportation services; and risks associated with our substantial indebtedness and limitations in our debt documents.
There may be other factors that may cause our actual results to differ materially from the forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” section of this report for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements are qualified in their entirety by this cautionary statement, and we undertake no obligation to revise or update this Annual Report on Form 10-K to reflect events or circumstances after the date hereof.

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PART I

ITEM 1. BUSINESS

Horsehead Holding Corp. is the parent company of Horsehead Corporation, a leading U.S. producer of specialty zinc and zinc-based products and a leading recycler of electric arc furnace ("EAF") dust (“Horsehead”), The International Metals Reclamation Company, Inc., a leading recycler of nickel-bearing wastes and nickel-cadmium (“Ni-Cd”) batteries in North America (“INMETCO”) and Zochem Inc. (“Zochem”), a producer of zinc oxide in North America. Horsehead Corporation is the parent company of Horsehead Metal Products, Inc., currently in the final phase of construction of our new zinc facility in Mooresboro, North Carolina and Horsehead Zinc Powders, LLC (“HZP”), a leading manufacturer of zinc powders for the alkaline battery business. We currently have production and/or recycling operations at six facilities located in four states in the United States. Zochem operates from one facility located in Canada.

Our products are used in a wide variety of applications, including in the galvanizing of fabricated steel products, as components in rubber tires, alkaline batteries, paint, chemicals and pharmaceuticals and as a remelt alloy in the production of stainless steel. We believe we are the largest producer of zinc oxide and Prime Western grade (“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 EAF dust, a hazardous waste produced by the carbon steel mini-mill manufacturing process. Through our INMETCO operations, we believe we are also a leading recycler of EAF dust and other nickel-bearing waste generated by specialty steel producers and a leading recycler of Ni-Cd batteries and other types of batteries in North America.

While we vary our raw material inputs, or feedstocks, based on cost and availability, our zinc products produced at our Monaca, Pennsylvania facility, products to be produced at our new zinc facility in Mooresboro, North Carolina and our nickel products produced at our INMETCO facility, use nearly 100% recycled materials, including, in the case of our zinc products, 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. We produce zinc products at our Brampton, Ontario, Canada facility utilizing special high grade zinc metal as raw material feedstock. Our four EAF dust recycling facilities generate service fee revenue from steel mini-mills by providing a convenient and safe means for recycling their EAF dust. We provide recycling services, some of which are on a tolling basis, from a single production facility in Ellwood City, Pennsylvania. Our new zinc facility located in Mooresboro, North Carolina could potentially enable us to recover other marketable materials from EAF dust.

During 2013, we sold approximately 338.8 million pounds of zinc products and 20.9 million pounds of nickel-based products, generally priced at amounts based on zinc and nickel prices on the London Metals Exchange (“LME”). For the year ended December 31, 2013, we generated sales and recorded a net loss of $441.9 million  and $14.0 million, respectively.

In 2009, we began discussions with Tecnicas Reunidas, S.A. the developer of the ZINCEX R solvent extraction process, to assess the feasibility of using ZINCEX TM solvent extraction technology to convert Waelz oxide (“WOX”) and other zinc-containing recycled materials into special high grade zinc and other zinc products. After completing our assessment, we undertook a site selection process during 2010 to identify and secure a strategically located property to construct a new zinc facility utilizing ZINCEX TM solvent extraction technology coupled with state-of-the-art electro-winning and casting capabilities. In September of 2011, we announced the new zinc facility would be located in Mooresboro, North Carolina, and anticipate it will be capable of production in excess of 155,000 tons of zinc metal per year once fully operational, including SHG zinc and Continuous Galvanizing Grade ("CGG") zinc, in addition to the Prime Western ("PW") zinc that we currently produce and will also enable us to potentially recover other marketable metals from WOX produced from EAF dust recycling. The facility is designed to be capable of producing up to 175,000 tons of zinc metal per year without significant additional investment. The plant design will rely upon sustainable manufacturing practices to produce zinc solely from recycled materials and use significantly less fossil fuel than our current smelter. The new zinc facility will enable us to convert WOX and other recycled materials into SHG zinc and other grades that sell at a premium to the PW grade that we currently offer. This will allow us to expand into new markets, including selling to continuous galvanizers, which include some of our EAF dust customers, die casters and LME warehouses, while continuing to serve customers in our existing markets. In addition, we believe the new technology will also allow us to recover value from certain metals such as silver and lead from WOX produced from EAF dust recycling. The new zinc facility will replace our current zinc smelter in Monaca, Pennsylvania, which is over eighty years old and utilizes a higher-cost pyrometallurgical process.

The new facility will reduce our manufacturing conversion costs due to the lower energy cost, higher labor productivity, reduced operating maintenance costs and lower operating costs in our EAF dust recycling plants resulting from the elimination of the need to calcine a portion of our WOX prior to its use.



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We also believe that additional benefits not reflected in that estimate may be realized once the new facility is fully operational. These additional benefits include reduced maintenance capital spending, which has averaged $7.8 million at our Monaca, Pennsylvania facility for the past six years and reduced state income taxes as a result of credits that we believe we will qualify for. Under our hedging program, we have purchased put options at an average annual cost of $9.1 million for the last six years; however, as a low cost producer at our new zinc facility, we expect our hedging costs to be substantially lower, as our risk of negative cash flow at lower zinc prices will be substantially less.

We are approaching the point of mechanical completion of the equipment required to begin zinc production at the Mooresboro facility. Work continues on punch list items and ancillary facilities not needed to begin zinc production. The commissioning process is working toward completion in all of the critical areas. Throughout this process, no issues have been identified affecting our key assumptions regarding the technology, the value of the project, or our ramp-up expectations upon startup. We expect to complete final work in March 2014 which could allow zinc production to begin before the end of the first quarter of 2014. The lead-silver recovery circuit is still expected to start up late in the second quarter of 2014. We have approximately 230 employees on-site and trained, supporting both the commissioning and start-up activities.

The zinc oxide and high purity zinc metal refinery operations at the Monaca facility ceased operation on December 23, 2013. The smelting operation was reduced from six furnaces to five furnaces as remaining zinc feedstock at the site is being converted to PW grade metal. The smelting operation is expected to be closed within a few weeks after first zinc production at the new facility.

We, together with our predecessors, have been operating in the zinc industry for more than 150 years and in the nickel-bearing waste industry for more than 30 years. We operate as two business segments, zinc products and services and nickel products and services.

Competitive Strengths

Leading Market Positions and Strategically Located Recycling Facilities

We believe that we are the largest producer of zinc in the United States based on capacity, and that we are a leading recycler of nickel-bearing waste material generated by the stainless and specialty steel industry and a leading recycler of nickel-bearing batteries. 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 long-term EAF dust contracts with several of our customers, 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, zinc recycling and nickel-bearing waste recycling.

Strong, Long-Standing 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 believe we are the leading supplier of zinc metal to the after-fabrication hot-dip segment of the North American galvanizing industry. We sell zinc oxide to over 200 producers of tire and rubber products, chemicals, paints, plastics and pharmaceuticals. We have supplied zinc oxide to nine of our current ten largest zinc oxide customers for over ten years, and our acquisition of Zochem on November 1, 2011, a producer of zinc oxide in North America, expanded our customer base throughout North America. We believe that we are the largest recycler of EAF dust in the United States, and we now recycle EAF dust for nine of North America’s ten largest carbon steel EAF operators and North America’s four largest stainless steel producers. In addition, we provide environmental services to over 200 customers that generate nickel-containing waste products such as filter cake, spent pickle liquor, grinding swarf and mill scale. We also collect and recycle batteries from The Rechargeable Battery Recycling Corporation, founded in 1994 by five major rechargeable battery makers, as well as through our own collection programs.

A Leading Environmental Services Provider to the U.S. Steel Industry

We believe that we are one of the leading environmental service providers to the U.S. steel industry, having recycled 10.6 million tons of EAF dust since 1990, which is the equivalent of approximately 2.1 million tons of zinc to date representing the dust generated in the production of over 620 million tons of steel. Our recycling and conversion of this EAF dust reduces a steel mini-mill’s exposure to environmental liabilities which may arise when the EAF dust is sent to a landfill. Our predecessor company

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developed this proprietary process during the 1980s and have been a leading EAF dust processor ever since. We use the recycled material as low cost feedstock for our metal production operations, yielding a competitive cost advantage.

Low-Cost Feedstock and Contracted EAF Dust Sources

We believe that we are the only zinc smelter in North America with the proven ability to refine zinc metal 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. Further, several of our EAF dust customers have long-term contracts to provide us with their EAF dust.

The new zinc facility currently in the final phase of construction in Mooresboro, North Carolina will utilize Tecnicas Reunidas' ZINCEX R solvent extraction technology coupled with state-of-the-art electro-winning and casting capabilities. The plant design will rely upon sustainable manufacturing practices to produce zinc solely from recycled materials and use significantly less fossil fuel than our current smelter. The new zinc facility will convert WOX produced from EAF dust recycling and other recycled materials into SHG and other grades of zinc and will eliminate the need to calcine a portion of our WOX prior to its use. We believe the technology associated with the new zinc facility will also allow us to recover value from metals such as silver and lead contained in EAF dust.

Proven, Proprietary Technology with Flexible Processes

Since our recycling processes convert EAF dust and other wastes into saleable products, our customers generally face less exposure to environmental liabilities from EAF dust, which the U.S. Environmental Protection Agency (“EPA”) classifies as a listed hazardous waste, than if they disposed of their EAF dust in landfills. The EPA has designated our recycling processes as the “Best Demonstrated Available Technology” for the high-temperature metals recovery from EAF dust from both carbon steel mini-mill and stainless steel producers. In addition, our new zinc facility smelter is expected to be able to produce zinc from a wide range of zinc-bearing raw materials. We expect that this flexibility will allow 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. We believe that our recycling process is a successful technology for the recycling of a broad range of nickel-bearing waste products. We have successfully licensed this technology in the past.

Strong, Experienced Management Team

Our ten-member senior management team collectively has over 200 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, productivity improvements and growth.

Business Strategy

We are currently in the final phase of construction of our new state-of-the-art zinc facility. We anticipate completion of construction and commissioning near the end of March 2014. Once fully operational, we expect to achieve significant benefits from the new zinc facility, including lower energy cost, higher labor productivity, reduced operating maintenance costs and lower operating and logistics costs at our EAF dust recycling plants resulting from the elimination of the need to calcine a portion of our WOX prior to its use.

We expect that the new zinc facility will initially be capable of producing 155,000 tons per year of zinc once fully operational, and is being designed to be capable of producing up to 175,000 tons of zinc metal per year without significant additional investment. The facility will enable us to convert WOX derived from EAF dust and other recycled materials into SHG zinc and CGG zinc in addition to the PW grade that we currently produce. This will allow us to expand into new markets, including selling to continuous galvanizers (which include some of our EAF dust customers) die casters and LME warehouses, while continuing to serve customers in our existing markets. We believe the technology associated with the new zinc facility will also allow us to recover value from metals such as silver and lead contained in EAF dust. The new zinc facility is replacing our older smelter technology and will allow us to significantly reduce emissions of greenhouse gases and particulates into the atmosphere.
    
We believe we will be able to achieve a number of additional benefits in connection with our transition to the new zinc facility, including lower capital expenditures for maintenance, lower state income taxes as a result of incentives available for the investment in the new zinc facility and lower cash costs associated with our hedging program. For instance, our annual capital expenditures for maintenance of the Monaca, Pennsylvania facility averaged $7.8 million over the last six years; we expect these

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expenditures at our new facility to be substantially less. Under our hedging program, we have purchased put options at an average annual cost of $9.1 million for the last six years; however, as a low cost producer at our new zinc facility, we expect our hedging costs to be substantially lower, as our risk of negative cash flow at lower zinc prices will be substantially less.

Continue to Focus on Production Efficiencies and Operating Cost Reductions

We continue to focus on production efficiencies and operating cost reductions at all of our production facilities.

In 2011, we idled our power plant located in Monaca and entered into a contract to purchase electricity realizing estimated savings of $5.4 million in 2012. In the fourth quarter of 2012, we decided to permanently shut down the power plant.

During 2012, we increased the use of WOX at our smelting facility and also implemented initiatives to reduce the iron content of the WOX produced at three of our recycling facilities, resulting in cost savings of $2.5 million and $1.7 million, respectively.

In March 2012, we granted Shell Chemical LP ("Shell") an option to purchase our Monaca, Pennsylvania facility (which we subsequently extended on two occasions). In December 2013, we signed an Amended and Restated Option and Purchase Agreement with Shell to continue to perform its evaluation of the Monaca site and to allow for the start of demolition and related activities at Shell's expense. The demolition activities began in the first quarter of 2014, with respect to certain portions of the site. The option if exercised, will further reduce closure costs associated with our Monaca facility.

We believe that our new state-of-art zinc facility currently in the final phase of construction in North Carolina will significantly reduce our conversion costs to produce zinc metal and provide us with a number of other potential benefits.

In December 2013, we entered into a joint venture known as ThirtyOx, LLC ("ThirtyOx") with Imperial Zinc Corp. for the acquisition and processing of zinc bearing secondary materials. The processing operation will be located in North Carolina near the new zinc facility. The majority of the feedstock for the new zinc facility will be supplied by Horsehead's EAF dust recycling plants. ThirtyOx is expected to supply a portion of the incremental zinc feed required by the new zinc facility by recovering secondary zinc oxides from the residues generated by galvanizers, die-casters and other users of zinc metal. Our anticipated investment in ThirtyOx is expected to be less than $2.0 million. This facility is expected to be operational by mid-year 2014.

In December 2013, we sold our copper-based powders line of business located in Palmerton, Pennsylvania. This business unit was considered to be non-core and was not making a positive contribution margin. We will continue to operate our zinc powder business.

We intend to continue to focus on initiatives that will reduce our operating costs.
    
Expand EAF Dust Recycling Capacity

We estimate that in 2007 approximately one-third of the carbon steel EAF dust generated in the United States was deposited in landfills, including by existing customers. Since then, new EAF steel plant projects have come online, 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 increased in the last ten years and is expected to account for over 60% of U.S. steel produced, according to the Steel Manufacturers Association. Steel mini-mill operators have increasingly relied on recyclers rather than landfills to manage this increased output. In order to grow our EAF dust recycling business, we placed a new kiln with an annual EAF dust recycling capacity of 80,000 tons into production in early 2008 at our facility in Rockwood, Tennessee and placed into production two kilns with a combined annual capacity of 180,000 tons at our facility in Barnwell, South Carolina in 2010. We entered into a long term contract with a major U.S. steel mini-mill producer to process all of the EAF dust generated at its facilities located near this plant. In 2009, we acquired the EAF dust contracts held by Envirosafe Services of Ohio, Inc (“ESOI”), a leading landfill disposer of EAF dust. In addition to generating additional service fees, our kilns 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. We estimate that with the increased recycling capacity, less than 10% of the EAF dust generated is now deposited in landfills. We are currently considering the addition of another kiln in the U.S. market to increase our production capacity and reduce transportation costs. In addition, we have begun discussions with potential joint venture partners in several countries outside the U.S., primarily in Asia, which could lead to potential investment opportunities in EAF dust recycling projects that leverage our expertise.

Diversify and Expand Environmental Services Business

Our core strengths relate to our proven ability to manage hazardous and non-hazardous wastes generated by industrial processes and our experience and capabilities to recover valuable metals from these waste streams. We expect to expand our

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environmental services business into a broader range of metal-bearing wastes. The acquisition of INMETCO is an example of this diversification and we believe that INMETCO will be a platform for further growth. We are considering options to increase capacity at INMETCO because we believe the market opportunity has increased with the entrance of Outokumpu's new stainless steel melt shop into the market. We also expect to continue to pursue capital investment and acquisition opportunities in this area and believe this will reduce our exposure to changes in zinc and nickel prices.

Continue to Reduce Exposure to Commodity Price Fluctuations

We regularly evaluate our zinc price hedging alternatives considering the costs and benefits in light of the commodity price environment. We sourced approximately 87% of our zinc feedstock during 2013 at our Monaca, Pennsylvania facility from our EAF dust recycling operations. This source of feedstock is not significantly impacted by changes in LME zinc prices. The remainder of our zinc feedstock costs is derived primarily from zinc secondaries which use LME-based pricing, and therefore are somewhat naturally hedged against changes in the LME price.

At December 31, 2012, we had zinc put options in place with an $0.85 per pound strike price outstanding, which covered approximately 106,000 tons of zinc production, representing approximately 75% of our expected shipments for the period from January 2013 through December 2013.

During the first quarter of 2013, we purchased put options, with an $0.85 per pound strike price, for the first quarter of 2014 that covered approximately 13,200 tons of production at a cost of $0.8 million. These put options were put in place to provide protection to operating cash flow in the event that zinc prices decline below that level during the completion of construction and start up of the new zinc facility. During August 2013, we put in place equivalent $0.85 per pound strike price put options covering an additional 4,400 tons per month of zinc production for the period of January 2014 through March 2014 and converted $0.85 per pound strike price put options covering 5,000 tons per month of zinc production from October 2013 through March 2014 to fixed price swap contracts for the same period at an average price of approximately $0.903 per pound. The sale of the put options resulted in a $1.3 million cash benefit, and we were able to put the swaps in place without any additional payment. In December 2013, we entered into additional fixed price swap contracts for the first quarter of 2014 at an average price of approximately $0.90 per pound. These swaps were transacted without any payment by us. At December 31, 2013, the total quantity covered under forward fixed price swaps for the first quarter of 2014 is 26,600 tons. We converted a portion of our put options into swaps in order to reduce the effect of changes in the zinc price on cash flow during the period of planned transition of operations to the new zinc facility. At December 31, 2013, we also continue to have put options in place with a strike price of $0.85 per pound covering approximately 11,600 tons of zinc production through the first quarter of 2014.

During the first quarter of 2014, we added fixed price swaps for the second quarter of 2014, at an average price of approximately $0.94 per pound for a total quantity covered of 26,500 tons for the quarter.

Under our hedging program, we have purchased put options at an average annual cost of $9.1 million for the last six years; however, as a low cost producer at our new zinc facility, we expect our hedging costs to be substantially lower, as our risk of negative cash flow at lower zinc prices will be substantially less, once the new zinc facility is fully operational.

Pursue Acquisition, Diversification and Expansion Opportunities

We intend to continue to seek to identify and enter new markets and to increase our production capacity, product offerings, customer base, operating flexibility and product margins through strategic acquisitions and internal expansion initiatives.

On November 1, 2011, we acquired Zochem, located in Brampton, Ontario Canada, a producer of zinc oxide in North America. This acquisition broadened our geographic reach, diversified our customers and markets for zinc oxide and provided added operational flexibility. We are currently expanding capacity at this facility due to the closure of the zinc oxide refinery at our Monaca, Pennsylvania location, and expect to complete this expansion during the first quarter of 2014. We believe the expansion project will increase the total zinc oxide production capacity at Zochem to approximately 72,000 tons per year. In addition, through Zochem, we plan to open a zinc oxide distribution and service center in 2014 to serve the growing market in the Southeastern region of the U.S. We expect that this distribution and service center will increase our warehousing and distribution network in the U.S. providing additional value to our long-standing relationships with our strategic zinc oxide customers.

On November 16, 2012, we acquired HZP, a leading manufacturer of zinc powders for the alkaline battery business. Our acquisition of HZP enabled us to increase our product margins by allowing us to convert our zinc metal into a higher margin zinc powder product for the battery market.


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We believe INMETCO provides new potential platforms for growth, including increasing capacity of the existing facility, growing our share of the battery recycling market, recycling other industrial wastes to recover metals in addition to nickel and enabling us to expand internationally. We have started to increase power to our submerged arc furnace to increase melting output and keep pace with stronger tolling receipts.

In December 2013, we entered into the ThirtyOx joint venture with Imperial Zinc Corp. for the acquisition and processing of zinc bearing secondary materials. The processing operation will be located in North Carolina near the new zinc facility.

We intend to seek to continue to identify and explore these and other strategic acquisition and internal expansion opportunities in the future.

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 certain 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. 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, and 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 all of which we subsequently registered for resale with the Securities and Exchange Commission (“SEC”). 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 used the remaining net proceeds of the public offering to fund capital expansion and improvements and for general corporate purposes.

In June 2009, we acquired the EAF dust collection business of ESOI, the largest land-filler in our market. As part of this acquisition, we purchased their EAF dust contracts, one of which was for 10 years with a major Midwestern producer. We did not acquire their landfill or landfill operations.

In September 2009, we completed an underwritten public offering of 8,050,000 shares of common stock at $10.50 per share.

On December 31, 2009, we acquired INMETCO.

On November 1, 2011, we acquired Zochem.

On November 16, 2012, we acquired HZP.

On October 30, 2013, we completed an underwritten public offering of 6,325,000 shares of common stock at $12.00 per share.

Operations

Our zinc recycling facilities recycle EAF dust into WOX and zinc calcine, which we then use as raw material feedstocks in the production of zinc metal and value-added zinc products. Our nickel facility recycles a broad range of nickel-bearing wastes into a remelt alloy product used in the production of stainless steel. Our recycling and production operations form a complete recycling loop, as illustrated below, from recycled metals to finished zinc or nickel-bearing products. We believe we are the only primary zinc producer in the U.S. that uses recycled materials for substantially all of its zinc feedstocks. Once the Monaca smelter is shut down, we will no longer produce zinc calcine.


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The new zinc facility in Mooresboro, North Carolina will utilize ZINCEX TM solvent extraction technology coupled with state-of-the-art electro-winning and casting capabilities. The new zinc facility will convert WOX produced from EAF dust recycling and other recycled materials into SHG and other grades of zinc and will eliminate the need to calcine a portion of our WOX prior to its use. We believe the new technology will also allow us to recover value from metals such as silver and lead contained in EAF dust.
 
Zochem, which we acquired on November 1, 2011, uses zinc metal to produce zinc oxide.

HZP, which we acquired on November 16, 2012, uses zinc metal to produce zinc powder that we sell to the battery industry.

Zinc Products and Services

Recycling Operations

Horsehead operates four 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 carbon 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, Pennsylvania, Barnwell, South Carolina, Rockwood, Tennessee, and Calumet, Illinois facilities.

Our Waelz Kiln recycling process blends, conditions, adds carbon to and pelletizes EAF dust, and then feeds it into the kiln itself, a refractory-lined tube that is typically 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 WOX, which has a zinc content of between 55% and 65%. In addition, we produce iron-rich material that we sell for use as an aggregate in asphalt and as an iron source in cement.

Currently, the majority of the WOX generated is shipped to our Palmerton, Pennsylvania 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 increased to approximately 65% to 70%, and the product is collected as zinc calcine in granular form for shipment to our Monaca, Pennsylvania facility or for sale to other zinc refineries around the world. During the first quarter of 2014, due to the reduced production at the Monaca facility, we anticipate selling WOX and calcine to third parties until production begins at the new zinc facility. Once the Monaca smelter is shut down, we will no longer produce zinc calcine.

We believe the technology associated with the new zinc facility will also allow us to recover value from metals such as silver and lead contained in EAF dust.

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In order to expand our EAF dust recycling capacity, we brought an 80,000 tons per year kiln online at our Rockwood, Tennessee facility in January 2008 at a cost of approximately $33 million. This kiln provides approximately 14,500 tons of zinc that we either use directly in our own smelting process or sell as feed to other zinc smelters. In 2010, we brought a new 180,000 tons per year kiln facility online in Barnwell, South Carolina for a total investment of approximately $65 million. We are currently considering the addition of another kiln in the U.S. market to increase our production capacity and reduce transportation costs. In addition, we have begun discussions with potential joint venture partners in several countries outside the U.S., primarily in Asia, which could lead to potential investment opportunities in EAF dust recycling projects that leverage our expertise.

Zinc Production

When our new zinc facility in Mooresboro, North Carolina becomes operational, our approximately 150,000 ton-per-year capacity electrothermic zinc smelter and refinery in Monaca, Pennsylvania will be shut down permanently. On October 31, 2013, we notified various required parties, as required by the Worker Adjustment and Retraining Notification Act of 1988, 29 U.S.C. § 2101 et seq., that a majority of our manufacturing operations at the plant located in Monaca, Pennsylvania were expected to be permanently closed and shut down on or about December 31, 2013. On December 23, 2013, the zinc oxide and high purity metal refinery operations at the Monaca facility ceased operation. As of December 31, 2013, the smelting operation has been reduced from six furnaces to five furnaces as the remaining zinc feedstock at the site is being converted to PW grade zinc metal. The smelting operation is expected to be closed within a few weeks after the first zinc production in the new zinc facility.

Up through December 23, 2013, the Monaca facility produced 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. As a result of reduced demand for our zinc products resulting from the economic downturn that began in the third quarter of 2008 and extended through 2009, we operated our smelting and refinery facility at less than capacity in 2009, producing 106,000 tons of zinc. Our smelting facility, due to the refinery incident that occurred in July 2010, operated at less than full capacity during the latter part of 2010 but returned to full capacity by the end of the year. We operated at full capacity, with the exception of intermittent production difficulties, during 2011 and produced 137,000 tons of zinc in 2011. Our Monaca facility operated at full capacity during 2012 and produced 146,000 tons of zinc in 2012. Our Monaca facility operated at less than full capacity in 2013 and produced 125,000 tons of zinc in 2013.

The Monaca facility operated 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 were processed through a sintering operation. The sintering process converted this combined zinc feedstock into a uniform, hard, porous material suitable for the electrothermic furnaces. Monaca’s seven electrothermic furnaces were the key to Monaca’s production flexibility. Sintered feedstock and metallic zinc secondary materials were mixed with metallurgical coke and were fed directly into the top of the furnaces. Metallic zinc vapor was drawn from the furnaces into a vacuum condenser, which was then tapped to produce molten zinc metal. This metal was then either cast as slab zinc metal, or conveyed directly to the zinc refinery in liquid form. This integrated facility reduced costs by eliminating the need to cast and then remelt the zinc to refinery feed.

Up through December 23, 2013, molten zinc was fed directly through distillation columns to produce an ultra-high-purity zinc vapor that was condensed into “thermally refined” special special high grade (“SSHG”) zinc metal or processed through a combustion chamber into zinc oxide. The condensed metal was either sold or sent for further conversion into zinc powder. During 2014, all zinc oxide production will occur at our Brampton, Ontario Canada facility.


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The chart below describes the flow of operations for our zinc facilities, including our new zinc facility currently in the final phase of construction in Mooresboro, North Carolina. The chart begins with the input of raw materials, continuing through the production processes and identifying finished products and end uses for each such raw material. The chart does not include our Monaca, Pennsylvania location which is expected to be permanently shut down during 2014.


The new zinc plant located in Mooresboro, North Carolina is in the commissioning process during the beginning of 2014 and is expected to begin production shortly. The facility, when fully operational, is expected to produce 155,000 tons per year of zinc metal in the form of slabs or jumbo ingots and in zinc grades including SHG, CGG and PW. The equipment as-built is believed to be capable of producing 175,000 tons per year at some point in the future if sufficient feed is available. The plant will be fed with a combination of WOX generated at the Company’s EAF dust recycling plants and secondary zinc oxides purchased by the Company’s ThirtyOx joint venture. These sources may be supplemented by other purchased sources of zinc-bearing materials from time-to-time.

The new zinc plant uses a technology which is completely different from that used at the Company’s Monaca smelter which will be permanently closed when the new facility begins to ramp up. The technology consists of two primary parts: (1) leaching and solvent extraction, known as the ZINCEXR process which was licensed under an agreement with Tecnicas Reunidas and (2) electrowinning, melting and casting technology licensed under an agreement with Asturiana de Zinc. In the leach-SX section, WOX is first washed in water to remove soluble elements such as chlorine, potassium and sodium, then leached in a sulfuric acid solution to dissolve the contained zinc creating a pregnant liquor solution (PLS). The undissolved solids which will contain lead and silver are filtered and treated separately in a lead-silver recovery circuit to produce a high grade lead carbonate product which will be sold as a feed source to lead smelters. The lead-silver recovery circuit is not expected to be completed until the end of the second quarter of 2014. The PLS will be processed in a solvent extraction step in which zinc is selectively extracted from the PLS using an organic solvent creating a purified zinc-loaded electrolyte solution. During this process, impurities that build up in the system are removed in a bleed treatment step, which removes contaminants, to produce a clean effluent solution which will be discharged from the facility. The loaded electrolyte is fed into the electrowinning process also known as the cell house or tank house. In this process, electrical energy is applied across a series of anodes and cathodes submerged in “cells” containing the electrolyte solution causing the zinc to deposit on the surfaces of the cathodes. As the zinc metal builds up on these surfaces, the cathodes are periodically harvested in order to strip the zinc from their surfaces at which point the cathodes are returned to the cells to continue the deposition process. The sheets of zinc cathode are bundled and transported to an induction melting unit and automatically lowered into a bath of molten zinc. The molten zinc flowing from the melting unit may be directed either to alloying

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furnaces to produce CGG or PW or cast directly as SHG in either slab or jumbo ingot molds for sale to galvanizers, alloyers, brass producers and other users of zinc metal.

Our Zochem facility, which we acquired on November 1, 2011, is located in Brampton, Ontario, Canada and produces zinc oxide. The facility had production capabilities of approximately 49,600 tons of zinc oxide per year from six muffle type furnaces. The production process uses SHG zinc metal as raw material which is added to the melting section of the furnaces. The melted zinc is then boiled and the zinc vapor is combusted as it enters an oxidation chamber. The zinc oxide is then collected and packaged for shipment. During 2012, we began a project to expand capacity at our Zochem facility. The capacity increase includes the expansion of four existing muffle furnaces and the addition of a seventh muffle furnace. Our annual capacity as of December 31, 2013 was approximately 60,000 tons. When the expansion is completed, which is currently anticipated to be near the end of the first quarter of 2014, the Zochem facility will have production capabilities of approximately 72,000 tons of zinc oxide per year.

Products and Services

We offer a wide variety of zinc products and services. In 2013, we sold approximately 169,000 tons of zinc finished products. The following are our primary zinc products.

Zinc Metal

Our primary zinc metal product at the Monaca facility is PW zinc metal, which we sell to the hot-dip galvanizing and brass industries. Until December 23, 2013, we also produced SSHG zinc metal, which was 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. SSHG was used by our subsidiary, HZP, in the production of zinc powder for battery manufacturers. Our zinc metal was recognized within the galvanizing industry for its consistent quality and appearance. We believe we are the leading supplier of zinc metal to the after-fabrication hot-dip segment of the North American galvanizing industry, which uses 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. To accommodate various customer handling needs, our zinc metal is sold in numerous forms, from 55-pound slabs to 2,500-pound ingots.

The new zinc facility will be capable of producing SHG, CGG and PW zinc that we currently produce, and will also enable us to potentially recover other marketable metals from WOX produced from EAF dust recycling. It will also allow for SHG zinc to be alloyed with other metals. This will allow us to expand into new markets, including selling to continuous galvanizers operated by the steel mills, which include some of our EAF dust customers, die casters and LME warehouses, while continuing to serve customers in our existing markets.

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. Various end uses for zinc oxide include the following.

Tire and rubber applications. Zinc oxide aids in the vulcanization process, acts as a strengthening and reinforcing agent, provides ultra-violet (“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.


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As a result of the acquisition of Zochem on November 1, 2011, we were able to broaden our geographic reach, diversify our customer base and markets for zinc oxide and provide added operational flexibility.

On December 23, 2013, the zinc oxide refinery operation at the Monaca facility ceased operation. During 2014, all zinc oxide will be produced by our Zochem facility located in Brampton, Ontario Canada.

EAF Dust Recycling

Our predecessor company created the market for EAF dust recycling for carbon steel mini-mill producers 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 10.6 million tons of EAF dust (equivalent to approximately 2.1 million tons of zinc), representing the dust generated in the production of over 620 million tons of steel. We believe the recycling and conversion of EAF dust reduces the steel mini-mill’s exposure to environmental liabilities which may arise when the EAF dust is sent to a landfill.

In 2013, we recycled 629,000 tons of EAF dust compared to 646,000 tons in 2012. 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 commenced operations at our new kiln facility in South Carolina in 2010, adding an additional 180,000 tons, or 31%, of EAF dust processing capacity. We are currently considering the additional of another kiln in the U.S. market to increase our production capacity and reduce transportation costs. In addition, we have begun discussions with potential joint venture partners in several countries outside the U.S., primarily in Asia, which could lead to potential investment opportunities in EAF dust recycling projects that leverage our expertise.
 
In June 2009, we acquired the EAF dust collection business of ESOI, the largest land-filler in our market. As part of this acquisition we purchased ESOI’s EAF dust contracts, one of which was a ten year contract with a major Midwestern producer.

The new zinc facility will enable us to convert WOX derived from EAF dust and other recycled materials into SHG zinc and other grades. We believe the new technology will also allow us to recover value from metals such as silver and lead contained in EAF dust.

WOX

In response to the strong demand for zinc-bearing feed materials and attractive pricing, we began selling WOX generated in our Waelz Kilns to other zinc smelters in 2007. We plan to continue selling WOX from time to time based on market conditions. We sold $2.9 million of WOX in 2013 and plan on continuing to sell WOX in 2014 until the new zinc facility is operational.

Zinc Powder

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.

We manufacture the following basic lines of powders at our Palmerton facility.

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.

On November 16, 2012, we acquired HZP, a leading manufacturer of zinc powders for the alkaline battery business. Horsehead had been a long-term supplier of SSHG zinc metal to this business which is co-located at the site of our Monaca zinc smelter.

In December 2013, we sold our copper-based powders business located in Palmerton, Pennsylvania. This business unit was considered to be non-core and was not making a positive contribution toward earnings. Certain assets and the production of copper powders will be relocated by the purchaser. We will continue to operate our zinc powder business.


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Sales and Marketing

Zinc Products and Services sales and marketing staff consists of:

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. Our quality assurance department provides extensive laboratory services critical to maintaining in-plant process control and providing customer support by certifying compliance to hundreds of unique product specifications. 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 that assist us with supporting smaller customers.

Customers

Most of the zinc metal we produce at the Monaca facility is purchased by galvanizers and brass producers. We believe 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 90 hot-dip galvanizers. In many cases, these customers are also suppliers of secondary materials, including zinc remnants of steel galvanizing processes, to us.

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.

Our SSHG zinc metal product produced at our Monaca was used in the manufacturing of zinc powder that we sold to 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 50 steel producing facilities.

The new zinc facility will be capable of producing SHG, CGG, and PW zinc that we currently produce and will also enable us to potentially recover other marketable metals from WOX produced from EAF dust recycling. It will also allow for SHG zinc to be alloyed with other metals. This will allow us to expand into new markets, including selling to continuous galvanizers operated by the steel mills, which include some of our EAF dust customers, die casters and LME warehouses, while continuing to serve customers in our existing markets.

Raw Material

In 2013, approximately 87% of the raw material used in our Monaca, Pennsylvania facility was sourced through our EAF dust recycling operations. The remaining 13% 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. We also buy WOX from one of the other U.S. based EAF dust recyclers. In addition, we also have long standing relationships with zinc 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 feedstock.

In December 2013, we entered into the ThirtyOx joint venture with Imperial Zinc Corp. for the acquisition and processing of zinc bearing secondary materials. The processing operation will be located in North Carolina near the new zinc facility. The majority of the feedstock for the new zinc facility will be supplied by Horsehead's EAF dust recycling plants. ThirtyOx is expected to supply a portion of the incremental zinc feed required by the new zinc facility by recovering secondary zinc oxides from the

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residues generated by galvanizers, die-casters and other users of zinc metal. Our anticipated investment is expected to be less than $2.0 million. This facility is expected to be operational by mid-year 2014.

Raw materials used in our Zochem facility consist entirely of SHG zinc metal purchased from several suppliers. The price of these metal blocks is based on the LME zinc price.

Intellectual Property

We possess proprietary technical expertise and know-how related to EAF dust recycling and zinc production, particularly zinc production using recycled feedstocks. Our proprietary know-how includes production methods for zinc oxide and micro-fine zinc oxides and widely varying customer specifications. As a major supplier of zinc metal and other zinc-based products to industrial and commercial markets, we emphasize developing intellectual property and protecting our rights in our processes. However, the scope of protection afforded by intellectual property rights, including ours, is often uncertain and involves complex legal and factual issues. Also, there can be no assurance that intellectual property rights will not be infringed or designed around by others. In addition, we may not elect to pursue an infringer due to the high costs and uncertainties associated with litigation. Further, there can be no assurance that courts will ultimately hold issued intellectual property rights to be valid and enforceable.

Competition

We believe that we are a unique business, having no direct competitor that recycles similar secondary materials into finished zinc products in North America. Our primary competitor in the zinc oxide segment is U.S. Zinc Corporation (“US Zinc”), a wholly-owned subsidiary of Votorantim Metals, Ltda. On November 1, 2011, we acquired Zochem, a wholly owned subsidiary of Hudson Bay Mining and Smelting Co. Limited ("Hudbay") which was previously one of our competitors in the zinc oxide business. US Zinc, located in the middle-southern states of the United States, is also a zinc recycler and our primary competitor but lacks our integrated processing and smelting capabilities.

Approximately 76% of the zinc metal consumed in the United States is imported. Therefore, we enjoy a domestic freight and reliability advantage over foreign competitors with respect to U.S. customers. Hudbay, Teck Cominco Limited, Nyrstar, Glencore and Penoles are the primary zinc metal producers in the North American market. The vast majority of the metal produced by these companies is used by continuous galvanizers in the coating of steel sheet products. In addition, these producers have mining and smelting operations while we engage only in smelting. In contrast, we currently produce PW zinc metal primarily for use by hot-dip galvanizers.

We compete for EAF dust management contracts primarily with one other domestic recycler of EAF dust and to a lesser extent with landfill operators. The domestic recycler is Steel Dust Recycling. Steel Dust Recycling commenced operations during the second quarter of 2008 and was subsequently acquired in October 2009 by Zinc Nacional, a Mexico-based recycler. We expect to see new entrants once again explore opportunities in this area when zinc prices are at or near historical high levels. Our proven reliability, expanded processing capacity and customer service have helped us maintain long-standing customer relationships. Many of our EAF dust customers have been under contract with us since our predecessor began recycling EAF dust in the 1980s. In June of 2009, we acquired the EAF dust collection contracts of ESOI.

Nickel Products and Services

Recycling Operations for Nickel-Bearing Waste

Our INMETCO facility located in Ellwood City, Pennsylvania, operates a high temperature metals recovery facility, which utilizes a combination rotary hearth furnace and electric arc smelting furnace to recover nickel, chromium and iron, along with smaller amounts of other metals, from a variety of metal-bearing waste materials, generated primarily by the specialty steel industry. INMETCO’s main product is a nickel-chromium-iron (“Ni-Cr-Fe”) remelt alloy ingot that is used as a feedstock to produce stainless and specialty steels. INMETCO also recycles Ni-Cd batteries and alkaline batteries in conjunction with Horsehead.

The INMETCO process for treating Ni-Cr-Fe metals waste is comprised of feed preparation, blending and pelletizing, thermal reduction and smelting and casting.

The first portion of the INMETCO process consists of material preparation, storage, blending, feeding and pelletizing. INMETCO receives the various wastes and pretreats them when necessary to ensure a uniform size of the raw material. These materials, as well as flue dust and carbon, are pelletized. Pellets are transferred to the Rotary Hearth Furnace (“RHF”) for the reduction of some oxidized metal to its metallic form. Reduced pellets are fed to the EAF for production of Ni-Cr-Fe remelt alloy. Slag discharged from the EAF is processed and sold primarily as road aggregate.


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The chart below describes the INMETCO flow of operations, beginning with raw materials, continuing through the process and identifying products.


Products and Services

INMETCO provides recycling services to its customers under two types of fee arrangements: toll processing arrangements and environmental services arrangements.

Tolling Services

Under the tolling arrangement, INMETCO charges a processing fee per ton of waste received and returns a remelt alloy product based on the waste’s metal content and INMETCO’s historical metal recovery factors for similar waste products. INMETCO serves almost all of the major austenitic stainless steel manufacturers in the United States in its tolling segment. We believe INMETCO is the only recycler of stainless steel wastes in North America and that INMETCO’s customers rely on its services to promote sustainable business practices, to avoid potential environmental liabilities associated with disposing of hazardous wastes at landfills and to take advantage of the return of valuable metals from their metal-bearing waste products. Most of INMETCO’s tolling customers have signed long-term, exclusive contracts, under which INMETCO processes their metal-bearing wastes. INMETCO receives four main nickel-containing waste materials from the specialty steel industry, which support the “tolling” segment of the business. These materials are flue dust, mill scale, grinding swarf and pickling filter cakes from spent pickling solution and are received either in a dry form or a wet form containing oil and/or water. Furnace baghouse dust or flue dust is generated during the melting and refining steps in the manufacture of stainless steel.
 
Environmental Services

Under the environmental fee arrangement, INMETCO acquires waste materials and processes those materials with no obligation to return any product to the customer. Depending on the state of the metals markets, INMETCO either charges a fee or pays to acquire environmental services materials. These materials include batteries and specialty steel industry wastes. All battery chemistries are accommodated. Batteries with chemistry compatible with the INMETCO process are processed directly while non-compatible types are sent to third party recyclers for processing. Recycling of household alkaline batteries has become a growing market that results in scrap steel as a feed to INMETCO and zinc concentrate used by Horsehead. Specialty steel industry

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wastes include flue dust, mill scale, grinding swarf and pickling filter cake along with a wide variety of other nickel-bearing wastes. Revenues are derived from these materials through the sale of the derived products into the appropriate markets as well as scrap sales and brokerage activities. No materials are sent to landfills.

Remelt Alloy

INMETCO sells its remelt alloy product, produced from waste accepted as an environmental service, back to the stainless steel industry. Because the sale of remelt alloy product is based on metals market prices, INMETCO’s revenues and profits fluctuate with prevailing metal prices.

In addition to the production of the remelt alloy in 30-pound ingot size, INMETCO also produces a larger 1000-pound ingot on request.

Sales and Marketing

INMETCO’s marketing team consists of a sales manager and two inside sales assistants. The marketing team provides in-house INMETCO seminars in which current applicable regulations regarding storage and treatment of wastes, manifesting and transporting wastes and the recycling process are discussed. These seminars conclude with a tour of the INMETCO facility. INMETCO has also been active in exhibiting or presenting papers at outside seminars and trade shows to promote the capabilities of the business segment. The marketing team supplements these activities with advertisements in applicable industry publications, as well as on the Internet.

Customers

While INMETCO has over 200 customers in total, approximately 73% of its sales are made to its top three customers. INMETCO has had a long-term relationship with most of its major customers. Two of INMETCO's top five customers have been customers since INMETCO commenced operations in the late 1970's, one has been a customer since the mid 1980's and two others have been customers since their own start-up in the early 2000's and 2012.

Intellectual Property

The INMETCO process enables the business to treat and reclaim Ni-Cr-Fe bearing hazardous and non-hazardous materials in a low cost, environmentally safe manner. The INMETCO process is recognized by the EPA as the “Best Demonstrated Available Technology” for the treatment of steelmaking dust (i.e., low zinc KO61, KO62 and F006 designated hazardous waste).

Competition

We believe that our recycling facilities provide an environmentally favorable alternative for disposing of hazardous waste. Since 1978, INMETCO has provided a recycling alternative for a wide variety of hazardous waste products produced by the specialty steel industry, including steelmaking dust, mill scale and grinding swarf. Stainless steel producers are faced with the same dust disposal problems as carbon steel producers. However, the process requirements and economics of stainless steelmaking dust processing are different, since the cost of treating the dust may be substantially offset by the recovery of valuable metals such as nickel, chromium and iron, which are recycled and returned to the specialty steel industry under toll arrangements.

In the metal processing industry, the most commonly used techniques for managing and disposing of hazardous waste are land disposal facilities and recycling facilities such as INMETCO’s. We believe the INMETCO process offers three key advantages over landfill: (1) it is a preferred solution from an environmental and product stewardship perspective, (2) it offers potential cost advantages through the return of valuable metals and (3) it avoids exposure to long-term contingent liabilities associated with sending waste to landfill facilities. Accordingly, we expect the INMETCO process to continue to remain the alternative of choice for the specialty steel industry. We believe INMETCO is the largest recycler of nickel-bearing hazardous waste in North America.

Governmental Regulation and Environmental Issues

Our facilities and operations are subject to various federal, state and local governmental laws and regulations with respect to the protection of the environment, including regulations relating to air and water quality and solid and hazardous waste management and disposal. These laws include the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”), the Superfund Amendment Reauthorization Act , the Resource Conservation and Recovery Act (“RCRA”), the Clean Air Act , the Clean Water Act , and their state equivalents. We are also subject to various other laws and regulations, including those administered by the Department of Labor, the Surface Transportation Board, the Occupational Health and Safety Administration, the Department of Transportation and the Federal Railroad Administration, as well as certain of their

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state equivalents. We believe that we are in material compliance with applicable laws and regulations, including environmental laws and regulations governing our ongoing operations, and that we have obtained or applied in a timely manner for all material permits and approvals necessary for the operation of our business.

Our process modifications have resulted in operations fully utilizing recycled feedstocks. The use of recycled zinc feedstocks preserves natural resources, precluding the need for mining and land reclamation and thereby operating in a manner consistent with the principles of sustainable development. Our recycling services avoid the potential environmental impacts that are associated with land filling hazardous wastes. EAF dust itself is a listed hazardous waste created from the melting of steel scrap in electric arc furnaces by the steel mini-mill industry. Our recycling process has been designated by the EPA as “Best Demonstrated Available Technology” for the recycling of EAF dust.

We maintain surety bonds to address financial assurance requirements for potential future remediation costs and RCRA permit termination for several facilities. Financial assurance is required under RCRA permit requirements for the Ellwood City, Pennsylvania and Palmerton, Pennsylvania facilities. Financial assurance, through a surety bond, is also required for eventual closure of our residual landfill at the Monaca, Pennsylvania facility.

In Bartlesville, Oklahoma, we and our predecessor formerly operated a primary zinc processing facility which was closed in the 1990’s and subsequently dismantled. Environmental remediation work at this facility was completed in 2003 in connection with closing these former facilities under a consent agreement with the Oklahoma Department of Environmental Quality. We currently manage this facility including groundwater monitoring and other maintenance activities under a RCRA post-closure permit. We, along with two other responsible parties, provide financial assurance for future post closure care activities at the Bartlesville facility. At December 31, 2013, a reserve on our balance sheet in the amount of $0.6 million has been established for our share of future costs associated with this matter.

Our Palmerton, Pennsylvania property is part of a CERCLA, or “Superfund,” site that was added to the National Priorities List in 1983. When the Palmerton, Pennsylvania facility’s assets were purchased out of bankruptcy in December 2003, we acquired only those assets, including real property, needed to support the ongoing recycling and metal powders businesses at that location. We currently hold 107 acres within an area of the approximately 1,600 acres owned by HII. With limited exceptions, the successor in interest to previous owners has contractually assumed responsibility for historic site contamination and associated remediation and has indemnified us against any liabilities related to the property, including Natural Resource Damages. Exceptions to this indemnity include our obligations under the 1995 consent decree described below and non-Superfund RCRA obligations and environmental liabilities resulting from our ongoing operations.

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Employees

As of December 31, 2013, we employed 1,074 persons at the following locations.
Location

Salaried
Personnel
 

Hourly
Personnel
 
Union
Contract
Expiration
Monaca, Pennsylvania
80

 
315

 
4/30/14
Monaca, Pennsylvania (HZP)
1

 
13

 
4/30/14
Pittsburgh, Pennsylvania
16

 

 
N/A
Bartlesville, Oklahoma
1

 

 
N/A
Calumet, Illinois
14

 
49

 
08/03/14
Palmerton, Pennsylvania
21

 
98

 
04/27/15
Palmerton (Chestnut Ridge Railroad), Pennsylvania

 
4

 
12/15/16
Rockwood, Tennessee
12

 
52

 
07/01/15
Barnwell, South Carolina
9

 
41

 
N/A
Ellwood City, Pennsylvania
28

 
70

 
10/31/16
Mooresboro, North Carolina
46

 
167

 
N/A
Brampton, Ontario Canada
15

 
22

 
6/30/16
Total
243

 
831

 
 
       
The vast majority of our hourly personnel are unionized. Hourly workers receive medical, dental and prescription drug benefits. We do not have defined benefit plans for hourly or salaried employees, except at our Brampton, Ontario Canada site, which was acquired on November 1, 2011. These defined benefit plans include 37 active employees and are currently frozen to additional participants. We have a 401(k) plan for both our hourly and salaried employees at all sites in the United States. Employees at our Brampton, Ontario Canada facility hired after June 30, 2012 are eligible to participate in a retirement plan similar to a 401(k). We have no company-paid medical plan for retirees. Our labor contracts provide for a company contribution and in most cases a company match, which varies from contract to contract. We believe we have satisfactory relations with our employees.

Executive Officers and Key Employees of the Registrant

Set forth below is information concerning our executive officers and key employees.
Name
Age
Position
James M. Hensler
58
Chairman of the Board of Directors, Class I Director, President and Chief Executive Officer
Robert D. Scherich
53
Vice President and Chief Financial Officer
Gary Whitaker
58
Vice President, General Counsel and Secretary
Lee Burkett
57
Vice President - Manufacturing
James A. Totera
57
Vice President - Sales and Marketing
Timothy R. Basilone
54
Vice President - Environmental Affairs
Ali Alavi
52
Senior Vice President - Corporate and Environmental Affairs
Bruce Morgan
42
Vice President - Human Resources
Mark Tomaszewski
57
President - INMETCO
Joshua Belczyk
36
General Manager - Zochem
Dr. Anthony Staley
39
General Manager - Horsehead Metal Products, Inc.

James M. Hensler, Chairman of the Board of Directors, President and Chief Executive Officer, joined us in April 2004. He has over 30 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

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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.

Gary R. Whitaker, Vice President, General Counsel and Secretary, joined us in December 2011. Mr. Whitaker previously was in private practice in Atlanta, Georgia from 2009 to 2011. He served as Vice President, General Counsel and Secretary for GrafTech International Ltd., a manufacturer of graphite products, including graphite electrodes used in electric arc furnaces, from 2006 to 2008, and as Vice President, General Counsel and Secretary for the US operations of the SK Group, one of South Korea’s largest conglomerates, from 1998 to 2006. Mr. Whitaker also worked as a corporate attorney for Eastman Chemical Company and for the DuPont Company, and was a senior associate for Powell, Goldstein, Frazer and Murphy, in Atlanta, Georgia. Mr. Whitaker received a B.A. in History from U.C.L.A. in 1976 and a J.D. from the University of Houston Law School in 1980.

Lee Burkett, Vice President-Manufacturing of Horsehead Corporation, joined us in November 2006 with over 27 years of industry experience. During the three years prior to joining us, Mr. Burkett served as General Manager of the Bridgeville Facility of Universal Stainless. Previous positions included General Manager-Finishing Operations of J&L Specialty Steel, Plant Manager of Timet’s Toronto, Ohio facility, Vice President Operations for Caparo Steel and 14 years with Washington Steel with responsibilities in all aspects of the operation including Plant Manager of Finishing. Mr. Burkett received a BS in Mechanical Engineering from The Pennsylvania State University in 1979.

James A. Totera, Vice President-Sales and Marketing - Horsehead Corporation, 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, electric arc furnace (“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.

Timothy R. Basilone, Vice President-Environmental Affairs - Horsehead Corporation, joined us in January 2010. Mr. Basilone has over 20 years of experience working in all aspects of environmental affairs in a variety of industries. Prior to joining us, he spent ten years with Koppers Inc., including seven years as a Senior Manager in the Corporate Environmental Affairs Department and three years as Operations Superintendent at the Koppers coal tar distillation facility in Clairton, Pennsylvania. Prior to that Mr. Basilone spent nine years at Westinghouse Electric Corporation as the Environmental Remediation Program Manager in the Corporate Legal and Environmental Affairs Department. He began his professional career as an Exploration / Production Geologist with Marathon Oil Company before moving on to Westinghouse. Mr. Basilone earned an MS degree in Earth and Planetary Science from the University of Pittsburgh in 1984 and a BA degree in Geology from the College of Wooster in 1981.

Ali Alavi, Senior Vice President-Corporate and Environmental Affairs - Horsehead Corporation, joined us in 1996. Mr. Alavi previously served as our Vice President-Corporate Administration, General Counsel and Secretary, 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.

Bruce Morgan, Vice President-Human Resources - Horsehead Corporation joined us in May 2010. Prior to joining us, from November 2006 to May 2010, Mr. Morgan served as Director of Human Resources-North America for the Steel Mill Services division of Harsco Corporation. Prior to that, Mr. Morgan served as Director of Human Resources for both the Steel and Foundry Divisions of Vesuvius USA, a global refractory manufacturer, where he was employed from March 1997 to November 2006. Among other previous employment, Mr. Morgan served as an HR Associate for the construction and start-up of Gallatin Steel Company, where he was employed from June 1994 to August 1995. Mr. Morgan received a BS degree in Industrial and Labor Relations from Cornell University in 1994.

Mark Tomaszewski, President-INMETCO, joined us on December 31, 2009 when we acquired INMETCO, where he has served for over 30 years in positions ranging from General Manager-Finance and Administration to his current position of President of INMETCO, which position he has held since August 2008. Mr. Tomaszewski received a BS in Business Administration from West Virginia Wesleyan College in 1978 and an MS in Business Administration from Robert Morris University in 1992.


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Joshua Belczyk, General Manager - Zochem, Inc., joined us in September 2010 as Director - Business Development.  Prior to joining Horsehead, he worked with FTI Consulting, Inc. in corporate finance and restructuring.  Prior to that, Mr. Belczyk worked eight years for Bailey-PVS Oxides, LLC, an environmental service and recycling provider to the steel industry, where he last served as a multi-site General Manager.  Mr. Belczyk received a BS degree in Environmental Science and Public Policy from Harvard University in 2000 and a MBA from the University of Michigan in 2009.

Dr. Anthony Staley, General Manager - Horsehead Metal Products, Inc., joined us in early 2012. Dr. Staley has over 15 years of experience in diversified metals processing. Prior to joining us, he was employed at Freeport McMoRan’s Morenci Operations, the largest installed capacity Copper SX/EW facility in the world, as the Manager of Hydrometallurgical Operations and Technology. He played a significant technical role in the startup of the Freeport McMoRan’s Tenke-Fungarume Copper SX/EW facility in the Democratic Republic of Congo. His prior experience includes serving as Manager of Hydrometallurgical Operations at Freeport McMoRan’s Bagdad facility, as well as Chief Metallurgist for Newmont Mining Corporation. Dr. Staley earned a PhD in Physio-Chemical Processing of Metals from the Colorado School of Mines. He also received a MBE and a BS degree in Chemical and Petroleum-Refining Engineering from the same school. In addition, he has multiple peer reviewed publications ranging from Zinc Solvent Extraction and Electrowinning, Copper Electrowinning, Gold Sampling Protocol, to Aluminum Processing.

Available Information

We file annual, quarterly and current reports and other information with the SEC. These filings are available to the public at the SEC’s web site at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room located in Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.

Our internet website address is www.horsehead.net. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Additionally, our Code of Ethics may be accessed within the Investor Relations section of our web site. Our website and the information contained or incorporated therein are not intended to be incorporated into this report.

ITEM 1A. RISK FACTORS

In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be read carefully in connection with evaluating our business and the forward-looking information contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, operating results, financial condition and the actual outcome of matters as to which we have made forward-looking statements in this Annual Report on Form 10-K. There may be additional risks and uncertainties that are not presently known or that we do not currently consider to be significant that may adversely affect our business, performance or financial condition in the future.
    
Risks related to our business    

The metals industry is highly cyclical. Fluctuations in the availability of zinc and nickel and in levels of customer demand have historically been severe, and future changes and/or fluctuations could cause us to experience lower sales volumes, which would negatively impact our profit margins.

The metals industry is highly cyclical. The length and magnitude of industry cycles have varied over time and by product but generally reflect changes in macroeconomic conditions, levels of industry capacity and availability of usable raw materials. The overall levels of demand for our products containing zinc or nickel reflect fluctuations in levels of end-user demand, which depend in large part on general macroeconomic conditions in North America and regional economic conditions in our markets. For example, many of the principal consumers of zinc metal and zinc-related products operate in industries such as transportation, construction or general manufacturing, that themselves are heavily dependent on general economic conditions, including the availability of affordable energy sources, employment levels, interest rates, consumer confidence and housing demand. These cyclical shifts in our customers’ industries tend to result in significant fluctuations in demand and pricing for our products and services. As a result, in periods of recession or low economic growth, such as the one we are currently experiencing, metals companies, including ours, have generally tended to under-perform compared to other industries. We generally have high fixed costs, so changes in industry demand that impact our production volume also can significantly impact our profit margins and our overall financial condition. Economic downturns in the national and international economies and prolonged recessions in our principal industry segments have had a negative impact on our operations and on those of our predecessor both recently and in

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the past, and a continuation or further deterioration of current economic conditions could have a negative impact on our future financial condition or results of operations.

Current or future credit and financial market conditions could materially and adversely affect our business and results of operations in several ways.

Financial markets in the United States, Europe and Asia have experienced extreme disruption, including, among other things, extreme volatility in securities prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. Despite improvements in credit and financial markets, there can be no assurance that there will not be further deterioration in these markets and confidence in economic conditions. These economic developments affect businesses such as ours in a number of ways. Tightening of credit in financial markets may delay or prevent our customers from securing funding adequate to honor their existing contracts with us or to enter into new contracts to purchase our products and could result in a decrease in or cancellation of orders for our products. Our customers may also seek to delay deliveries of our products under existing contracts, which may postpone our ability to recognize revenue on contracts in our order backlog.

Our business is also adversely affected by decreases in the general level of economic activity, including the levels of purchasing and investment in general. Strengthening of the rate of exchange for the U.S. dollar against certain major currencies may adversely affect our results or may adversely affect our domestic customers’ ability to export their product. We may also face increased risk that the counterparty or clearing agent to a hedging transaction that we enter or have entered into may default on its obligation to pay or deliver under the forward contract. We are unable to predict the likely duration and severity of disruptions in financial markets and sluggish economic conditions in the United States and other countries, and any resulting effects or changes, including those described above, may have a material and adverse effect on our business, results of operations and financial condition.

Changes in the prices of zinc and nickel will have a significant impact on our operating results and financial condition.

We derive most of our revenue from the sale of zinc and nickel-based products. Changes in the market prices of zinc and nickel impact the selling prices of our products, and therefore our profitability is significantly affected by decreased zinc and nickel prices. Market prices of these metals are dependent upon supply and demand and a variety of factors over which we have little or no control, including:

U.S. and world economic conditions;
availability and relative pricing of metal substitutes;
labor costs;
energy prices;
environmental laws and regulations;
weather;
import and export restrictions; and
the effect of financial commodity speculations.

Declines in the price of zinc have had a negative impact on our operations in the past, and future declines could have a negative impact on our future financial condition or results of operations. In 2002, record low zinc prices, together with high operational and legacy environmental costs and inefficiencies, caused our predecessor, HII, to file for Chapter 11 bankruptcy protection. Market conditions beyond our control determine the prices for our products, and the price for any one or more of our products may fall below our production costs, requiring us to either incur short-term losses and/or idle or permanently shut down production capacity. Market prices for zinc and nickel may decrease, and therefore our operating results may be significantly harmed.

Some of our products and services are vulnerable to long-term declines in demand due to competing technologies, materials or imports, which would significantly reduce our sales.

Our zinc and nickel-based products compete with other materials in many of their applications. For example, our PW 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. Steel fabricators also can use paint, which we do not sell, for corrosion protection. Demand for our zinc as a galvanizing material may shift depending on how customers view the respective merits of hot dip galvanizing and paint. In addition, some of our customers may reduce or eliminate their usage of PW grade zinc metal because it contains a small amount of lead and may switch to other grades of zinc metal that we do not produce.

Our nickel-based products are used in the stainless steel industry. Demand for our products and services may decline if demand for stainless steel lessens. Nickel-bearing stainless steel faces competition from stainless steels containing a lower level of nickel or no nickel. Domestic production of stainless steel may be negatively impacted by imports.

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In addition, in periods of high zinc and nickel prices, consumers of these metals may have additional incentives to invest in the development of technologically viable substitutes for zinc and nickel-based products. Similarly, customers may develop ways to manufacture their products by using less zinc and nickel-based material than they do currently. If one or more of our customers successfully identify alternative products that can be substituted for our zinc or nickel-based products, or find ways to reduce their zinc or nickel consumption, our sales to those and other customers would likely decline.

Demand for our EAF dust or nickel-bearing waste recycling operations may decline to the extent that steel mini-mill producers identify less expensive or more convenient alternatives for the disposal of their EAF dust or nickel-bearing waste or if the EPA were to no longer classify EAF dust as a listed hazardous waste. We may in the future face increased competition from other EAF dust or nickel-bearing waste recyclers, including new entrants into those recycling markets, or from landfills implementing more effective disposal techniques. Furthermore, our current recycling customers may seek to capitalize on the value of the EAF dust or nickel-bearing waste produced by their operations, or may seek to recycle their material themselves, or reduce the price they pay to us for the material they deliver to us. Any of these developments would have an adverse effect on our financial results.

We may be unable to compete effectively against manufacturers of zinc and nickel products in one or more of our markets, which would limit our market share or reduce our sales and our operating profit margins.

We face intense competition from regional, national and global companies in each of the markets we serve, where we face also the potential for future entrants and competitors. We compete on the basis of product quality, on-time delivery performance and price, with price representing a more important factor for our larger customers and for sales of standard zinc products than for smaller customers and customers to whom we sell value-added zinc-based products. Our competitors include other independent zinc producers as well as vertically integrated zinc companies that mine and produce zinc. Some of our competitors have substantially greater financial and other resources than we do. In addition, as of December 31, 2013, we estimate that our products comprised only approximately 14% of total zinc consumption in the United States, and several of our competitors have greater market share than we do. Our competitors may also foresee the course of market development more accurately than we do, sell products at a lower price than we can and/or adapt more quickly to new technologies or industry and customer requirements. We operate in a global marketplace, and zinc metal imports now represent approximately 76% of U.S. zinc metal consumption.

In the future, foreign zinc metal producers may develop new ways of packaging and transporting zinc metal that could mitigate the freight cost and other shipping limitations that we believe currently limit their ability to more fully penetrate the U.S. zinc market. If our customers in any of the end-user markets we serve were to shift their production outside the United States and Canada, then those customers would likely source zinc overseas, and, as a result, our net sales and results of operations would be adversely affected. If we cannot compete other than by reducing prices, we may lose market share and suffer reduced profit margins. If our competitors lower their prices, it could inhibit our ability to compete for customers with higher value-added sales and could lead to a reduction in our sales volumes and profit. If our product mix changed as a result of competitive pricing, it could have an adverse impact on our gross margins and profitability.

If we fail to implement our business strategy, our financial condition and results of operations could be materially and adversely affected.

Our ability to achieve our business and financial objectives is subject to a variety of factors, many of which are beyond our control. For example, factors such as increased competition, legal and regulatory developments, general economic conditions or increased operating costs could prevent us from increasing our capacity, implementing further productivity improvements, investing in technology upgrades or continuing to enhance our business and product mix.

An important part of our strategy is to grow our business by expanding our capacity to process EAF dust. One new kiln to process EAF dust was placed into service in 2008 at our Rockwood, Tennessee facility and two new kilns were placed into service in 2010 at our new recycling facility in Barnwell, South Carolina. In addition, we are currently in the final phase of construction of our new zinc facility and may initiate other construction projects in the future. Our costs in connection with construction projects may also increase to levels that would make our facilities unprofitable to operate. Our planned projects may also suffer significant delays or cost overruns as a result of a variety of factors, such as shortages of workers or materials, transportation constraints, adverse weather, unforeseen difficulties or labor issues, any of which could prevent us from completing our expansion plans as currently expected. Our project plans may also result in other unanticipated adverse consequences, such as the diversion of management’s attention from our existing operations. In addition, even if we are able to implement our strategy, projected volumes with respect to our products may not materialize to the extent we expect, or at all, resulting in under utilized capacity. Any failure to successfully implement our business strategy, including for any of the above reasons, could materially and adversely affect our financial condition and results of operations. We may, in addition, decide to alter or discontinue certain aspects of our business strategy at any time.

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We may not have sufficient funds to finish the final phase of construction of the new zinc facility.

As of December 31, 2013, we had $136.3 million of cash on hand, which together with borrowings available under our three revolving credit facilities and the Credit Agreement, we believe will be sufficient to enable us to complete the final construction phase of the new zinc facility. However, increases in the costs of constructing the final phase of the new zinc facility or other unforeseen circumstances could require us to obtain additional financing, which we may not be able to obtain on acceptable terms in a timely manner or at all. If we cannot complete the final construction phase of the new zinc facility, or final completion of construction is further delayed, it could affect our business strategies and our liquidity, financial condition and operations could be materially adversely affected.

We may experience further delays or be unable to complete the final phase of construction, commissioning and ramp up of the new zinc facility, which would harm our profitability.

We are currently in the final phase of construction and commissioning of our new zinc facility and currently expect to start operations near the end of March 2014. The construction and commissioning of the zinc facility have suffered various delays, including delays in early 2014 as a result of severe and prolonged cold weather conditions. We have also experienced delays due to minor equipment issues mostly related to locating and repairing sources of leaks. While we expect to complete the necessary work for the new zinc facility to be operational around the end of March 2014, unforeseen events could further delay completion of the final phase of construction and commissioning and could effect the ramp up of the facility to full production. If we cannot complete the final phase of construction and commissioning of the new zinc facility, or completion of construction and commissioning is significantly delayed, or the ramp up to full production is slower than expected, it could affect our business strategies and our liquidity, financial condition or operations could be materially adversely affected.

The projected benefits from the new zinc facility may fail to materialize.

The benefits that we project to receive from the new zinc facility are based on numerous assumptions, and if these assumptions are incorrect, it could negatively impact such projected benefits. The technology that we plan to use at this new zinc facility has only been implemented in a limited number of production environments, and our assumptions with regard to this technology may be incorrect. For example, some aspects of the technology in the new zinc facility have not been tested in exactly the same manner on a production scale or the equipment in the new zinc facility may not be operated in exactly the same manner as the other production environments. This could decrease the amount of SHG zinc, as well as other metals, that we are able to recover using the technology at the new zinc facility, which would increase the cost of the products that we expect to produce. We may also not be able to realize the reduced recycling costs or the logistical benefits that come from directly converting WOX to SHG zinc. If we are unable to successfully utilize the technology that we currently plan to use at the new zinc facility, we may not be able to fully realize the benefits that we expect from this new facility or we may be required to invest in additional equipment to realize these benefits. Further, we may be unable to penetrate the market for the SHG zinc that we plan to produce. Finally, the projected benefits at the new zinc facility are based on numerous other assumptions, including the recovery rate and prices of zinc and the other metals we expect to recover, energy consumption requirements, energy prices, the number of employees required to operate the new zinc facility and labor and maintenance costs at the new zinc facility. If any of our assumptions are incorrect, we may not realize the anticipated benefits from the new zinc facility, which could negatively impact our future business and results of operations.

Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay the notes or other debt we may occur.

Our ability to make scheduled payments of the principal or pay interest on or to refinance the Convertible Notes, the Senior Secured Notes, our credit facilities or other indebtedness we may incur, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control including our assumptions about the completion of construction, commissioning and ramp up to full production of our new zinc facility. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the Convertible Notes, the Senior Secured Notes, our credit facilities or other debt obligations we may incur.


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Our business could be harmed if we do not successfully manage the integration of businesses that we acquire in the future or we may not realize all or any of the anticipated benefits from acquisitions we make in the future.

As part of our business strategy, we have and may continue to acquire other businesses that complement our core capabilities, including the acquisition of Zochem on November 1, 2011 and HZP on November 16, 2012. The benefits of an acquisition, including our recent acquisitions, may often take considerable time to develop and may not be realized. Business acquisitions entail a number of inherent risks such as:

the potential loss of key customers and employees of the acquired business;
the in-ability to achieve the operating and financial synergies anticipated from an acquisition;
disruptions that can arise from the integration of the acquired business; and
potential unknown liabilities or other difficulties associated with the acquired businesses.
As a result of the aforementioned and other risks, we may not realize the anticipated benefits from acquisitions, which could adversely affect our business.

Work stoppages and other labor matters could interrupt our production or increase our costs, either of which would negatively impact our operating results.

As of December 31, 2013, we had 1,074 employees, 623, or approximately 58%, of whom were covered by eight union contracts. The collective bargaining agreement for our Calumet, Illinois facility expires in August 2014 and the rest of our collective bargaining agreements expire between 2015 and 2016. We may be unable to resolve any present or future contract negotiations without work stoppages or significant increases in costs, which could have a material adverse effect on our financial condition, cash flows and operating results. We may be unable to maintain satisfactory relationships with our employees and their unions, and we may encounter strikes, further unionization efforts or other types of conflicts with labor unions or our employees, which may interfere with our production or increase our costs, either of which would negatively impact our operating results.

Equipment or power failures, delays in deliveries or catastrophic loss at any of our facilities, such as experienced in the refinery incident at our Monaca, Pennsylvania facility that occurred on July 22, 2010 and the fire which occurred at our Ellwood City, Pennsylvania facility on October 28, 2012, could prevent us from meeting customer demand, reduce our sales, increase our costs and/or negatively impact our results of operations.

An interruption in production or service capabilities at any of our production facilities as a result of equipment or power failure or other reasons could limit our ability to deliver products to our customers, reducing our net sales and net income, increasing our costs and potentially damaging relationships with our customers. Any significant delay in deliveries to our customers could lead to increased returns or cancellations, damage to our reputation and/or permanent loss of customers. Any such production stoppage or delay could also require us to make unplanned capital expenditures, which together with reduced sales and increased costs, could adversely affect our results or operations.

For instance, in July 2010, we experienced an incident at our refinery at our Monaca, Pennsylvania facility that resulted in two fatalities and reported injuries to two employees.  We determined that we needed to rebuild each of the ten columns used to produce zinc oxide and refined zinc metal at this facility before production could be restarted but we were unable to commence reconstruction for several weeks pending completion of various regulatory and other investigations.  Consequently, we lost approximately 12,000 tons of zinc production, incurred $17.9 million in increased costs related to the incident and estimate that our profit was decreased by $20.5 million excluding the amounts of any insurance recovery.

Additionally, on October 28, 2012, our Ellwood City facility, which was in the process of its annual maintenance shutdown, experienced an unrelated fire and incurred damage to a portion of the building. The planned maintenance outage was only extended a day as a result of delays caused by the fire but we were not able to operate at full capacity until mid-December of 2012 because power was not fully restored to some ancillary operations. We completed final repairs at this facility by the end of the first quarter of 2013. The damages from the fire exceeded the Company’s insurance deductible of $0.5 million. We recorded $1.5 million in insurance recoveries related to property damage, which represents the partial settlement of our claim at December 31, 2012. In 2013, we reached a final settlement in the amount of $4.0 million and recorded an additional $2.5 million in insurance claim income related to property damage.

Furthermore, because many of our customers are, to varying degrees, dependent on deliveries from our facilities, customers that have to reschedule their own production due to our missed deliveries could pursue financial claims against us. Our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, adverse weather conditions or other refinery incidents. We have experienced, and may experience in the future, periods of reduced production as a result of repairs that are necessary to our operations. If any of these events occur in the future, they could have a material adverse effect on our business,

23


financial condition or results of operations. Our insurance policies may not cover all of our losses and we could incur uninsured losses and liabilities arising from, among other things, loss of life, physical damage, business interruptions and product liability.

Fluctuations in the cost or availability of electricity, coke, and/or natural gas would lead to higher manufacturing costs, thereby reducing our margins and limiting our cash flows from operations.

Energy is one of our most significant costs, comprising approximately $84 million of our production costs at our Monaca and recycling facilities in 2013. Our processes rely on electricity, coke and natural gas in order to operate, and our freight operations depend heavily on the availability of diesel fuel. Energy prices, particularly for electricity, natural gas, coke and diesel fuel, have been volatile and have exceeded historical averages in recent years. These fluctuations impact our manufacturing costs and contribute to earnings volatility. We estimate that a hypothetical 10% increase in electricity, natural gas and coke costs would have reduced our income from operations by approximately $8.4 million for 2013. In addition, at most of our facilities we do not maintain sources of secondary power, and therefore any prolonged interruptions in the supply of energy to our facilities could result in lengthy production shutdowns, increased costs associated with restarting production and waste of production in progress. We have experienced rolling power outages in the past, and any future outages would reduce our production capacity, reducing our net sales and potentially impacting our ability to deliver products to our customers.

If we were to lose order volumes from any of our major customers, our sales could decline significantly and our cash flows may be reduced.

In 2013, our ten largest customers were responsible for 34% of our consolidated sales. In 2013, three of INMETCO’s customers provided 73% of its sales. A loss of order volumes from, or a loss of industry share by, any major customer could negatively affect our financial condition and results of operations by lowering sales volumes, increasing costs and lowering profitability. In addition, some of our customers could become involved in bankruptcy or insolvency proceedings and could default on their obligations to us. We may be required to record significant additional reserves for accounts receivable from customers which may have a material impact on our financial condition, results of operations and cash flows.

In addition, approximately 46% by volume of our zinc product shipments in 2013 were to customers who do not have long-term contractual arrangements with us. These customers purchase products and services from us on a spot basis and may choose not to continue to purchase our products and services. The loss of these customers or a significant reduction in their purchase orders could have a negative impact on our sales volume and business.

Our operations are subject to numerous federal and state statutes that regulate the protection of the health and safety of our employees, and changes in health and safety regulation could result in significant costs, which would reduce our margins and adversely affect our cash flow from operations.

We are subject to the requirements of the U.S. Occupational Safety and Health Administration (“OSHA”), and comparable state statutes that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and customers. We are also subject to federal and state laws regarding operational safety. Costs and liabilities related to worker safety may be incurred and any violation of health and safety laws or regulations could impose substantial costs on us. Possible future developments, including stricter safety laws for workers or others, regulations and enforcement policies and claims for personal injury or property damages resulting from our operations could result in substantial costs and liabilities that could reduce the amount of cash that we would otherwise have to distribute or use to service our indebtedness or further enhance our business.

Litigation related to worker safety or employment laws may result in significant liabilities and limit our profitability.

We may be involved in claims and litigation filed on behalf of persons alleging injuries suffered predominantly because of occupational exposure to substances at our facilities, or allegations of violations of laws prohibiting discrimination, or harassment or providing other rights relating to the employment relationship. It is not possible to predict the ultimate outcome of these claims and lawsuits due to the unpredictable nature of personal injury or employment law litigation. If these claims and lawsuits, individually or in the aggregate, were finally resolved against us, our results of operations and cash flows could be adversely affected.

We are subject to stringent environmental regulation, which may cause us to incur significant costs and liabilities that could materially harm our operating results.

Our business is subject to a variety of environmental regulations and our operations expose us to various potential environmental liabilities. For example, we recycle EAF dust, which is listed and regulated as a hazardous waste under the EPA’s

24


solid waste RCRA. Failure to properly process and manage EAF dust could result in significant liability for us, including, among other things, costs for health-related claims or for remediation of hazardous substances in the environment. In addition, as part of the purchase of assets out of bankruptcy, we inherited responsibility for several environmental issues from our predecessor at our Palmerton, Pennsylvania and Bartlesville, Oklahoma facilities. The issues related to our Palmerton, Pennsylvania facility are cited in a 1995 EPA and PADEP consent decree, and the matters relating to our Bartlesville, Oklahoma facility are covered in a RCRA post-closure care permit issued by the Oklahoma Department of Environmental Quality. A reserve in the amount of $2.2 million was originally established as of December 31, 2010, to cover the cost of construction of a storage building for calcine kiln feed materials at our Palmerton, Pennsylvania facility ($1.5 million) and for ongoing post-closure groundwater monitoring and maintenance activities at our Bartlesville, Oklahoma facility ($0.7 million). The reserve ($1.5 million) for the Palmerton, Pennsylvania facility was removed during 2011 since the PADEP concurred with our assessment that construction of the storage building for calcine feed was not necessary. Consequently, no further reserves have been recorded. We may also incur costs related to future compliance with or violations of applicable environmental laws and regulations, including air emission regulations under “Maximum Achievable Control Technology” (“MACT”) rules relating to industrial boilers, future MACT regulations relating to the non-ferrous secondary metals production category and rules, compliance with the CO&A with PADEP entered into on November 21, 2012, related to the National Ambient Air Quality Standard (“NAAQS”) for lead emissions at our Monaca, Pennsylvania facility. Our total cost of environmental compliance at any time depends on a variety of regulatory, legal, technical and factual issues, some of which cannot be anticipated. Additional environmental issues could arise, or laws and regulations could be passed and promulgated, resulting in additional costs, which our reserves may not cover and which could materially harm our operating results.

Potential federal climate change legislation or greenhouse gas regulation could result in increased operating costs and reduced demand for our products.

Over the past several years, Congress has considered legislation that would cap and reduce emissions of greenhouse gases (“GHGs”) for most industrial sectors, although to date no major climate change bill has been enacted. In June 2009, the U.S. House of Representatives passed the American Clean Energy Security Act of 2009, which was introduced by Rep. Henry Waxman (D-CA) and Rep. Edward Markey (D-MA) and commonly known as “Waxman-Markey.” This bill would have established an economy-wide cap-and-trade system for emissions of GHGs, seeking to reduce them 17% below 2005 levels by 2020 and 83% below 2005 levels by 2050. Under Waxman-Markey, sources that emit GHGs would have been required to hold an emission allowance or an offset credit for each carbon dioxide-equivalent ton of a GHG emitted or produced on site. Broadly, Waxman-Markey and similar regulatory programs would likely have resulted in increased costs associated with the production and combustion of carbon-intensive fuels such as coal, oil, refined petroleum products, and gas. This bill was originally passed in the U.S. House, but was defeated in the Senate in 2009. It is possible that similar legislation could be proposed again in the near future.

In addition, the EPA has begun regulating GHG emissions under the Clean Air Act in response to the Supreme Court’s 2007 decision in Massachusetts v. EPA. In December 2009, the EPA published its findings that atmospheric concentrations of GHGs endanger public health and welfare pursuant to the Clean Air Act (“CAA”) and that GHG emissions from new motor vehicles and new motor vehicle engines are contributing to air pollution endangering public health and welfare pursuant to the CAA (the “endangerment finding”). Although these findings do not by themselves impose any requirements with respect to sources emitting GHGs and contain no specific emission reduction targets, they have resulted in subsequent efforts by the EPA to regulate GHGs under the CAA.

Following the endangerment finding, the EPA conducted several rulemakings that, if ultimately implemented, would regulate GHGs from certain stationary sources under the CAA. Separately, the EPA has promulgated a series of rulemakings requiring the reporting of GHG emissions. The adoption and implementation of any regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur significant costs to reduce emissions of GHGs associated with our operations.

On October 30, 2009, the EPA promulgated the Final Rule for the Mandatory Reporting of Greenhouse Gases (“GHG”). This rule became effective on December 29, 2009. As part of this rulemaking the EPA identified zinc production as a Source Category consisting of zinc smelters and secondary zinc recycling facilities in Subpart GG of 40 CFR Part 98. This requires the reporting of carbon dioxide (“CO2”), methane (“CH4”), and nitrous oxide (“N2O”) from each Waelz kiln and electrothermic furnace used for zinc production. Additionally CO2, CH4 and N2O from each stationary combustion unit other than the Waelz kilns must also be reported. Starting in 2010, GHG emissions for sources emitting greater than 25,000 metric tons of CO2 equivalents (CO2(e)) are to be reported into a national database set up by the EPA. Some states such as Pennsylvania are now asking that this also be reported as part of an annual inventory submittal.

In addition to the reporting rule on May 13, 2010, the EPA issued a GHG Tailoring Rule that sets thresholds for GHG emissions that define when permits under the New Source Review Prevention of Significant Deterioration (PSD) and Title V

25


Operating Permit programs are required for new and existing sources. The Tailoring Rule PSD permitting requirements cover new construction projects that emit GHG emissions of greater than 100,000 metric tons even if they do not exceed the threshold limits for any other criteria pollutants. Modifications at existing facilities that increase GHG emissions by at least 75,000 metric tons are also subject to the PSD requirements. This rule also requires Title V Permits for facilities that emit greater than 100,000 tons per year of CO2(e). As part of the Tailoring Rule, the EPA was also required to look at permitting smaller sources of GHG emissions. This is currently on hold but can be expected at a later date.

EPA rules regulating GHG emissions have resulted and will continue to result in electric utilities increasing their rates to pay for compliance measures, and our electric power costs could significantly increase as a result.

We believe we are in substantial compliance with existing environmental laws and regulations applicable to our current operations.  However, accidental spills or releases may occur in the course of our operations, and we cannot give any assurance that we will not incur substantial costs and liabilities as a result of such spills or releases, including those relating to claims for damage to property, persons, natural resources or the environment. Moreover, we cannot give any assurance that the passage of more stringent laws or regulations in the future will not have a negative effect on our business, financial condition and results of operations.

Our hedging strategies may fail to protect us from changes in the prices for natural gas, zinc and nickel, which could reduce our gross margin and cash flow.

We pursue various hedging strategies, including entering into forward purchase contracts and call and put options, in order to reduce our exposure to losses from adverse changes in the prices for natural gas, zinc and nickel. Our hedging activities may fail to protect or could harm our operating results because, among other things:

hedging can be expensive, particularly during periods of volatile prices;
available hedges may not correspond directly with the risks that we are seeking to protect ourselves against;
the duration of the hedge may not match the duration of the risk that we are seeking to protect ourselves against;
the counterparty or clearing agent to a hedging transaction may default on its obligation to pay or deliver under the forward contract; and
we may need to post collateral with counterparties for certain hedging transactions.

We depend on the service of key individuals, the loss of whom could materially harm our business.

Our success will depend, in part, on the efforts of our executive officers and other key employees, none of whom are covered by key person insurance policies. These individuals possess sales, marketing, engineering, manufacturing, financial and administrative skills that are critical to the operation of our business. If we lose or suffer an extended interruption in the services of one or more of our executive officers or other key employees, our business, results of operations and financial condition may be negatively impacted. Moreover, the market for qualified individuals may be highly competitive and we may not be able to attract and retain qualified personnel to succeed members of our management team or other key employees, should the need arise.

We may not be able to protect our intellectual property, particularly our proprietary technology related to the recycling of EAF dust and the processing of nickel-bearing materials. Our market share and results of operations could be harmed.

We rely upon proprietary know-how and continuing technological and operating innovation and other trade secrets to develop and maintain our competitive position. Our competitors could gain knowledge of our know-how or trade secrets, either directly or through one or more of our employees or other third parties. If one or more of our competitors can use or independently develop such know-how or trade secrets, our market share, sales volumes and profit margins could be adversely affected.

We depend on third parties for transportation services, and their failure to deliver raw material to us or finished products to our customers could increase our costs and harm our reputation and operating results.

We rely primarily on third parties for transportation of the products we manufacture, as well as the delivery of EAF dust to our recycling plants and other raw materials, including recycled zinc, to our production facilities. In particular, a substantial portion of the raw materials we use is transported by railroad, which is highly regulated. If any of our third-party transportation providers were to fail to deliver our products in a timely manner, we may be unable to sell those products at full value or at all. Similarly, if any of these providers were to fail to deliver raw materials to us in a timely manner, we may be unable to meet customer demand. In addition, if any of these third parties were to cease operations or cease doing business with us, we may be unable to replace them at reasonable cost. Any failure of a third-party transportation provider to deliver raw materials or finished products in a timely manner could disrupt our operations, harm our reputation and have a material adverse effect on our financial condition and operating results.


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We depend on our supplier relationships, and adverse changes in these relationships or our ability to enter into new relationships could negatively affect our revenue.

We rely significantly on our suppliers. Adverse changes in any of our relationships with suppliers or the inability to enter into new relationships with suppliers could negatively impact our operation and performance. Our current arrangements with suppliers may not remain in effect on current or similar terms and the impact of changes to those arrangements may adversely impact our revenue.

Our substantial indebtedness could adversely affect our financial flexibility and prevent us from fulfilling our obligations under the agreements governing our indebtedness.

As a result of the issuance of our 3.80% Convertible Notes on July 27, 2011, our 10.50% Senior Secured Notes on July 26, 2012 and June 3, 2013, borrowings on our Credit Agreement entered into on November 14, 2012 and borrowings under our ABL Facility entered into on September 28, 2011, our Zochem Facility entered into on December 21, 2012 and our INMETCO Facility entered into on June 24, 2013, we currently have a significant amount of indebtedness. At December 31, 2013, we had $357.6 million of total indebtedness outstanding (excluding $10.1 million of letters of credit outstanding under our ABL Facility and Zochem Facility) and $11.2 million of surety bonds outstanding). We have approximately an aggregate $7.2 million of available letter of credit and borrowing capacity under our three credit facilities and our Credit Agreement. Our substantial level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. Our substantial indebtedness could have other important consequences and significant effects on our business.

For example, it could:

limit our ability to borrow additional amounts to fund working capital, capital expenditures, debt service requirements, execution of our business strategy, or acquisitions;
require us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our debt, which would reduce the funds available to us for other purposes;
make us more vulnerable to adverse changes in general economic, industry and competitive conditions, in government regulations and in our business by limiting our flexibility in planning for, and making it more difficult for us to react quickly to, changing conditions; and
make it more difficult to satisfy our financial obligations, including payments on the Convertible Notes and the Senior Secured Notes.

Our ability to make payments on and refinance our debt depends on our ability to generate cash flow. To some extent, this is subject to prevailing economic and competitive conditions and to certain financial, business and other factors, many of which are beyond our control. Our business may not generate cash flow from operations at levels sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness, and our cash needs may increase. If we are unable to generate sufficient cash flow from operations to service our debt and meet our other cash needs, we may be forced to reduce or delay capital expenditures, sell or curtail assets or operations, seek additional capital, or seek to restructure or refinance our indebtedness. If we must sell or curtail our assets or operations, it may negatively affect our ability to generate revenue.

Restrictive covenants in the indentures and credit agreements governing the Convertible Notes, Senior Secured Notes, our three credit facilities and the Credit Agreement limit our current and future operations, particularly our ability to respond to changes in our business or to pursue our business strategies.

These indentures and credit agreements contain and the agreements evidencing or governing other future indebtedness may contain, restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. These indentures and credit agreements limit our ability to:

incur additional indebtedness and guarantee indebtedness;
declare or pay dividends, redeem capital stock or make other distributions to stockholders;
make investments and acquire assets;
enter into agreements that restrict distributions from restricted subsidiaries;
sell or transfer certain assets;
enter into transactions with affiliates;
create liens or use assets as security in other transactions;
enter into sale and leaseback transactions;
merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; and
make certain payments on indebtedness.


27


Our ability to comply with these covenants will likely be affected by many factors, including events beyond our control, and we may not satisfy those requirements. A breach of the covenants or restrictions under these indentures could result in a default under the applicable indebtedness. Such default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In the event our lenders and holders of the Convertible Notes or Senior Secured Notes accelerate the repayment of our borrowings, we cannot assure you that we and our subsidiaries would have sufficient assets to repay such indebtedness.

The restrictions contained in these indentures and agreements governing our other indebtedness could adversely affect our ability to:

finance our operations;
make needed capital expenditures;
make strategic acquisitions or investments or enter into alliances;
withstand a future downturn in our business or the economy in general;
engage in business activities, including future opportunities, that may be in our interest; and plan for or react to market conditions or otherwise execute our business strategies

Risks related to our Common Stock

The market price for shares of our common stock has been and may continue to be highly volatile and subject to wide fluctuations.

The market for equity securities has been subject to significant disruptions that have caused substantial volatility in the prices of these and other securities, which may or may not have corresponded to the business or financial performance of the particular company. The market price for shares of our common stock has been affected in the past and may continue to be affected by general market conditions unrelated to our operating performance.

Some specific factors that may have a significant effect on the future market price of our shares of common stock include:

our ability to successfully complete the final phase of construction of our new zinc facility and our ability to realize the benefits we expect to achieve from that facility;
actual or expected fluctuations in our operating results;
actual or expected changes in our growth rates or our competitors’ growth rates;
changes in general economic conditions or conditions in our industry generally;
changes in market prices for our products or for our raw materials, including changes in the price of zinc;
changes in revenue or earnings estimates, publication of research reports and recommendations by financial analysts;
changes in stock market analyst research and recommendations regarding the shares of our common stock, other comparable companies or our industry generally;
speculation in the press or investment community generally or relating to our reputation or our industry;
changes in conditions in the financial markets;
our ability to raise additional capital;
future sales of our equity or equity related securities;
our compliance with environmental laws and regulations and our exposure to liabilities and potential investigations and enforcement actions with respect to such laws and regulations;
changes in applicable laws or regulations;
adverse market reaction to any increased indebtedness we incur in the future;
additions or departures of key management personnel;
strategic actions by us or our competitors, such as acquisitions or restructurings; and
actions by our stockholders;

These and other factors may affect your ability to resell your shares of our common stock at or above the price you paid for such shares.

We do not have any current plan to pay, and are restricted in our ability to pay, any dividends on our common stock, and as a result, your only opportunity to achieve a return on your investment in our common stock is if the price of our common stock increases.

We anticipate that we will retain all future earnings and other cash resources for the future operation and development of our business. Accordingly, we do not intend to declare or pay regular cash dividends on our common stock in the near future. Payment of any future dividends will be at the discretion of our board of directors after taking into account many factors, including

28


our operating results, financial conditions, current and anticipated cash needs and plans for expansion. The declaration and payment of any dividends on our common stock is also restricted by the terms of our credit facilities and the indenture governing our 10.50% Senior Secured Notes due 2017. As a result, your only opportunity to achieve a return on your investment in us will be if the price of our common stock increases and if you are able to sell your shares at a profit. You may not be able to sell shares of our common stock at a price that exceeds the price that you paid.

Provisions of our Second Amended and Restated Certificate of Incorporation and Amended and Restated By-laws could delay or prevent a takeover of us by a third party and may prevent attempts by stockholders to replace or remove our current management.

Provisions in our Second Amended and Restated Certificate of Incorporation and Amended and Restated By-laws and of Delaware corporate law may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and board of directors. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change of control or change our management and board of directors.

Our Second Amended and Restated Certificate of Incorporation and Amended and Restated By-laws:

authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt;
prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors;
require super-majority voting by our stockholders to effect amendments to provisions of our Second Amended and Restated Certificate of Incorporation concerning the number of directors;
require super-majority voting by our stockholders to effect any stockholder-initiated amendment to any provision of our Amended and Restated By-laws;
limit who may call special meeting of our stockholders;
prohibit stockholder action by written consent, thereby requiring all actions to be taken at a meeting of the stockholders;
establish advance notice requirements for stockholder nominations of candidates for election to the board of directors or for stockholder proposals that can be acted upon at annual meetings of stockholders; and
require that vacancies on the board of directors, including newly-created directorships to be filled only by a majority vote of directors then in office.

In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock and limit the return, if any, you are able to achieve on your investment in us.
ITEM 1B. UNRESOLVED STAFF COMMENTS

None.


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ITEM 2. PROPERTIES

As of December 31, 2013, our zinc production operations are located in Monaca and Palmerton, Pennsylvania and Brampton, Ontario Canada and our principal zinc recycling operations are located in Palmerton, Calumet, Illinois; Rockwood, Tennessee; and Barnwell, South Carolina. Our nickel recycling operations are located in Ellwood City, Pennsylvania.

We are currently in the final stages of construction of our new zinc facility that we expect will be initially capable of producing 155,000 tons per year of zinc metal once fully operational, and is being designed to be capable of producing up to 175,000 tons of zinc metal per year without significant additional investment. The facility will enable us to convert WOX derived from EAF dust and other recycled materials into SHG zinc and CGG zinc in addition to the PW grade that we currently produce. This new zinc facility will replace our Monaca, Pennsylvania facility.

The chart below provides a brief description of each of our production facilities. We own each of the facilities listed below.
Location
Process
Product
Annual
Capacity (tons)
Monaca, PA
Finished Product
PW Metal
88,000 (1)
 
 
Zinc Powder
13,000 (2)
Brampton, Ontario Canada
Finished Product
Zinc Oxide
60,000 (3)
Barnwell, SC
Recycling
WOX(4)
              180,000*
Calumet, IL
Recycling
WOX
169,000*
Palmerton, PA
Recycling
Calcine
130,000 (5)
 
 
WOX
273,000*
 
 
Zinc Powder
5,000 to 14,000 (6)
Rockwood, TN
Recycling
WOX
148,000*
Ellwood City, PA
Recycling
Nickel-chromium-iron alloy
               70,000 *
 
 
 
 
Total carbon steel EAF dust Recycling Capacity
 
 
770,000
 
 
 
 
 
 
*
Represents EAF dust and other metal-bearing wastes recycling and processing capacity
 
 
 
 
 
 
(1)
When our new zinc facility in Mooresboro, North Carolina becomes operational, our approximately 150,000 ton-per-year capacity electrothermic zinc smelter and refinery in Monaca, Pennsylvania will be shut down permanently. On December 23, 2013, the zinc oxide and high purity metal refinery operations at the Monaca facility ceased operation. As of December 31, 2013, the smelting operation has been reduced from six furnaces to five furnaces as the remaining zinc feedstock at the site is being converted to PW grade zinc metal. The smelting operation is expected to be closed within a few weeks after the first zinc production at the new zinc facility.
(2)
Acquisition of HZP on November 16, 2012.
(3)
The Zochem facility is in the final stages of construction to increase its former capacity of 49,600 annual tons to 72,000 annual tons of zinc oxide per year. The expansion is expected to be completed by the end of the first quarter of 2014.
(4)
WOX, with approximately 55% - 65% zinc content, is produced by our recycling operations and is used as a feedstock for our zinc facility in Monaca or further processed in Palmerton into zinc calcine (up to 65% - 70% zinc content) before being used as a feedstock in Monaca. WOX will be used as a feedstock for the new zinc facility.
(5)
Assumes that one of four kilns is operated to produce calcine and the other three kilns are operated to produce WOX. Once the new zinc facility in Mooresboro, North Carolina is operational, calcine will no longer be produced and used as a feedstock.
(6)
Depending upon grade.

We believe that our existing space is adequate for our current operations. We believe that suitable replacement and additional space will be available in the future on commercially reasonable terms.

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ITEM 3. LEGAL PROCEEDINGS

We are party to various litigation, claims and disputes, including labor regulation claims and OSHA and environmental regulation violations arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, we expect that the outcome of these matters will not result in a material adverse effect on our business, financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES

None.


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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock has been listed on The NASDAQ Global Select Market under the symbol “ZINC” since August 10, 2007. The highest and lowest sale prices of our common stock for the most recent eight quarters were:
Quarter
High
 
Low
2013
 
 
 
10/01/13 - 12/31/13
$16.80
 
$12.07
07/01/13 - 09/30/13
$14.09
 
$10.85
04/01/13 - 06/30/13
$12.90
 
$9.38
01/01/13 - 03/31/13
$11.45
 
$9.69
 
 
 
 
2012
 
 
 
10/01/12 - 12/31/12
$10.25
 
$8.20
07/01/12 - 09/30/12
$10.53
 
$8.43
04/01/12 - 06/30/12
$11.76
 
$8.57
01/01/12 - 03/31/12
$12.65
 
$9.37



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As of March 12, 2014, there were 5 holders of record of our common stock and approximately 36,200 beneficial owners of such stock. The transfer agent and registrar for our common stock is Computershare, P.O. Box 43078, Providence, Rhode Island, 02940-3078, Toll-free telephone 800-622-6757 (US, Canada, Puerto Rico), 781-575-4735 (non-US).

Unregistered Sales of Equity Securities

Issuance of Convertible Senior Notes

On July 27, 2011, we completed the private placement of $100.0 million aggregate principal amount of 3.80% Convertible Notes due July 1, 2017. The Convertible Notes were offered at an initial issue price of 100% which resulted in net proceeds of $96.5 million, after underwriting discounts. The representative for the initial purchasers was Stifel, Nicolaus & Company, Incorporated.

The Convertible Notes are convertible into shares of the our common stock, cash, or a combination of our common stock and cash, at our election, at an initial conversion rate of 66.6667 shares of our common stock per $1,000 principal amount of the Convertible Notes (approximately 6,666,667 underlying shares), which is equivalent to an initial conversion price of approximately $15.00 per share of common stock, subject to adjustment in certain circumstances, as defined in the indenture governing the Convertible Notes.

Holders of the Convertible Notes may convert their Convertible Notes at the applicable conversion rate at any time on or after April 1, 2017 until the close of business on the second business day immediately preceding the maturity date. The Notes may be converted prior to April 1, 2017 only under certain circumstances. We do not have the right to redeem the Convertible Notes prior to the stated maturity date of July 1, 2017.

Neither the Convertible Notes nor the shares of common stock issuable upon conversion of the Convertible Notes are registered under the Securities Act of 1933, as amended, or the securities laws of any other jurisdiction. The offering was only made to qualified institutional buyers in accordance with Rule 144A under the Securities Act.

We used the proceeds from the issuance of the Convertible Notes for the initial stages of construction of our new zinc facility and general corporate purposes, including working capital needs, investment in business initiatives, capital expenditures and acquisitions.

Dividends

We currently do not plan to pay dividends on our common stock. As a result of our ABL Facility entered into on September 28, 2011, our Zochem Facility entered into on December 21, 2012 and our INMETCO Facility on June 24, 2013, Horsehead, Zochem and INMETCO are restricted, under certain circumstances, from providing cash to us This may limit our ability to pay dividends on our common stock during the terms of these three credit facilities.

In addition, the indenture governing our 10.50% Senior Secured Notes due 2017 also restricts the declaration and payment of dividends.

Any future determination to pay dividends will depend upon, among other factors, our results of operations, financial condition, capital requirements, debt covenants, any contractual restrictions and any other considerations our board of directors deems relevant.

Securities Authorized for Issuance under Equity Compensation Plans

Information regarding securities authorized for issuance under our equity compensation plans may be found in our Proxy Statement related to the 2014 Annual Meeting of Stockholders and is incorporated herein by reference.


33


Performance Graph
The following graph compares the sixty month cumulative stockholder return on our common stock with the return on the Russell 2000 Index and a Peer Group Index, from January 1, 2009 through December 31, 2013, the end of our fiscal year. The graph assumes investments of $100 on January 1, 2009 in our common stock, the Russell 2000 Index and the Peer Group Index and assumes the reinvestment of all dividends. During 2013, a portion of managements long term incentive program was based on the performance of the Company’s total shareholder return over a three year period compared to that of a group of global metals companies. Based on this change, management has prepared the performance graph based on the global metals companies which are included in the calculation under the long term incentive program. The Peer Group is composed of HudBay Minerals, Inc., Nyrstar, Abengoa S.A., Materion Corporation, Quanex Building Products Corporation, Vale S.A., Freeport-McMoRan Copper & Gold Inc., Teck Resources Limited, RTI International, Inc., Hecla Mining Co., Haynes International, Inc. and Glencore Intl. and is weighted by each of their relative market capitalizations at the beginning of each year for which returns are reported.
        
*$100 invested on 12/31/08 in stock or index, including reinvestment of dividends.

Copyright 2014 Russell Investment Group. All rights reserved.
Fiscal Year ending December 31
2008
2009
2010
2011
2012
2013
Horsehead Holding Corp.
100

271

277

192

217

345

Russell 2000
100

127

161

155

180

250

Peer Group
100

258

335

219

218

198



Issuer Purchases of Equity Securities

We did not repurchase any of our common stock during the fourth quarter of the fiscal year ended December 31, 2013, and we do not have a formal or publicly announced stock repurchase program.


34


ITEM 6. SELECTED FINANCIAL DATA

We have derived the selected historical consolidated financial information as of December 31, 2011, 2010 and 2009 and for the years ended December 31, 2010 and 2009 from our audited consolidated financial statements, which are not included in this Annual Report on Form 10-K. We have derived the selected historical consolidated financial information as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011 from our audited consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K.

The selected historical consolidated financial and other information presented below is condensed and may not contain all of the information that you should consider. You should read this information in conjunction with our consolidated financial statements, including, where applicable, the related notes, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section included in this Annual Report on Form 10-K.
 
Year ended December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
Statements of operations data (1)
( in thousands, except for LME price and per share data)
Net sales
$
441,936

 
$
435,666

 
$
451,180

 
$
382,362

 
$
216,530

Cost of sales
414,809

 
432,557

 
377,401

 
305,522

 
226,171

Depreciation and amortization
29,678

 
26,193

 
22,025

 
18,612

 
15,982

Selling, general and administrative expenses
22,207

 
20,882

 
22,942

 
18,672

 
17,080

Total costs and expenses
466,694

 
479,632

 
422,368

 
342,806

 
259,233

(Loss) income from operations
(24,758
)
 
(43,966
)
 
28,812

 
39,556

 
(42,703
)
Interest expense
(2,728
)
 
(7,864
)
 
(3,324
)
 
(1,226
)
 
(2,340
)
Gain on bargain purchase of a business

 
1,781

 
4,920

 

 

Interest and other income
6,072

 
2,694

 
1,948

 
849

 
883

(Loss) income before income taxes
(21,414
)
 
(47,355
)
 
32,356

 
39,179

 
(44,160
)
Income tax (benefit) provision
(7,455
)
 
(16,928
)
 
10,902

 
14,409

 
(16,689
)
Net (loss) income
$
(13,959
)
 
$
(30,427
)
 
$
21,454

 
$
24,770

 
$
(27,471
)
Net (loss) income per share:
 
 
 
 
 
 
 
 
 
Basic
$
(0.31
)
 
$
(0.69
)
 
$
0.49

 
$
0.57

 
$
(0.73
)
Diluted
$
(0.31
)
 
$
(0.69
)
 
$
0.49

 
$
0.57

 
$
(0.73
)
Balance sheet data (at end of period)
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
136,327

 
$
244,119

 
$
188,500

 
$
109,557

 
$
95,480

Working capital
114,334

 
265,571

 
260,930

 
170,120

 
143,455

Property, plant and equipment, net
708,250

 
405,222

 
260,052

 
218,652

 
191,307

Total assets
1,005,312

 
811,828

 
631,492

 
496,136

 
438,262

Total long-term debt, less current maturities
354,768

 
263,334

 
79,663

 
255

 
255

Stockholders' equity
444,894

 
383,281

 
412,251

 
373,010

 
345,417

Cash Flow statement data:
 
 
 
 
 
 
 
 
 
Operating cash flow
$
41,995

 
$
64,232

 
$
32,274

 
$
57,306

 
$
(6,733
)
Investing cash flow
(310,007
)
 
(181,177
)
 
(51,558
)
 
(44,134
)
 
(104,924
)
Financing cash flow
160,220

 
172,263

 
98,187

 
905

 
84,369

Other data:
 
 
 
 
 
 
 
 
 
Tons of zinc product shipped
169

 
189

 
152

 
137

 
118

Average LME zinc price (2)
$
0.87

 
$
0.88

 
$
0.99

 
$
0.98

 
$
0.75

Capital expenditures
311,798

 
184,541

 
64,709

 
44,704

 
37,151

Depreciation and amortization
29,678

 
26,193

 
22,025

 
18,612

 
16,981

(1)
We acquired HZP on November 16, 2012 for a purchase price of $1,101, Zochem on November 1, 2011 for a purchase price of $15,078 and INMETCO on December 31, 2009 for a purchase price of $38,567.
(2)
Average LME zinc price equals the average of each closing LME price for zinc on a dollars per pound basis during the measured period.

35


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with the other sections of this Annual Report on Form 10-K, including “Business” and “Selected Financial Data,” as well as our consolidated financial statements, including the notes thereto. The statements in this discussion and analysis regarding industry outlook, our expectations regarding our future performance and our liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. See the “Cautionary Statement Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied in any forward-looking statements due to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors.”
Overview

Our History

We are a leading U.S. producer of zinc and zinc oxide, a leading recycler of electric arc furnace dust and a leading recycler of nickel-bearing wastes and nickel-cadmium batteries in North America. 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, pharmaceuticals and as a remelt alloy in the production of stainless steel. We believe we are the largest producer 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 carbon steel mini-mill manufacturing process. Through our INMETCO operations, we believe we are also a leading recycler of EAF dust and other nickel-bearing waste generated by specialty steel producers and a leading recycler of Ni-Cd batteries and other types of batteries in North America. We, together with our predecessors, have been operating in the zinc industry for more than 150 years and in the nickel-bearing waste industry for more than 30 years. We operate as two business segments, zinc products and services and nickel products and services.

While we vary our raw material inputs, or feedstock, based on cost and availability, our zinc products produced at our Monaca, Pennsylvania facility, which we expect will be permanently shut down in 2014, products to be produced at our new zinc facility in Mooresboro, North Carolina and our nickel-based products at our INMETCO facility use nearly 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. We also produce zinc products at our Brampton, Ontario, Canada facility and utilize SHG zinc metal as raw material feedstock. 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. INMETCO also provides recycling services, some of which is on a tolling basis, from a single production facility in Ellwood City, Pennsylvania.

Strategic acquisitions and investments

In September of 2011, we announced plans to construct a new zinc facility to be located in Mooresboro, North Carolina, which we anticipate will be capable of production in excess of 155,000 tons of zinc metal per year once fully operational, including SHG zinc and CGG zinc, in addition to the PW zinc that we currently produce and will also enable us to potentially recover other marketable metals from WOX produced from EAF dust recycling. The facility is designed to be capable of producing up to 175,000 tons of zinc metal per year without significant additional investment. The plant design will rely upon sustainable manufacturing practices to produce zinc solely from recycled materials and use significantly less fossil fuel than our current smelter. The new zinc facility will convert WOX and other recycled materials into SHG zinc and other grades that sell at a premium to the PW grade that we currently offer. This will allow us to expand into new markets, including selling to continuous galvanizers, which include some of our EAF dust customers, die casters and LME warehouses, while continuing to serve customers in our existing markets. In addition, we believe the new technology will also allow us to recover value from certain metals such as silver and lead from WOX produced from EAF dust recycling. The new zinc facility will replace our older smelter technology and will allow us to significantly reduce emissions of greenhouse gases and particulates into the atmosphere.
The new facility will reduce our manufacturing conversion costs due to the lower energy cost, higher labor productivity, reduced operating maintenance costs, and lower operating costs in our EAF dust recycling plants resulting from the elimination of the need to calcine a portion of our WOX before it is fed to the smelter.
We are approaching the point of mechanical completion of the equipment required to begin zinc production at the Mooresboro facility. Work continues on punch list items and ancillary facilities not needed to begin zinc production. The commissioning process is working toward completion in all of the critical areas. Throughout this process, no issues have been identified affecting our key assumptions regarding the technology, the value of the project, or our ramp-up expectations upon startup. We have experienced delays during early 2014 and some damage to piping, valves and fittings as a result of severe and prolonged cold

36


weather conditions. The facility is particularly vulnerable to cold weather during the water circulation testing phase of the commissioning process. This is not expected to be the case during normal operations since residual heat in the system should be sufficient to minimize the risk of freezing. We have also experienced delays due to minor equipment issues mostly related to locating and repairing sources of leaks, which is to be expected during the commissioning process. The critical path to start-up is being paced by the commissioning activity in the cellhouse, which is primarily related to fine tuning the automation of crane movements and cathode stripping equipment. We expect to complete this work in March which could allow zinc production to begin before the end of the first quarter of 2014. The lead-silver recovery circuit is still expected to start up late in the second quarter of 2014. We have approximately 230 employees on-site and trained, supporting both the commissioning and start-up activities.
During 2011, to fund the initial stages of construction of the new zinc facility, we issued $100.0 million in principal amount of Convertible Notes on July 27, 2011 in a private placement. We received proceeds of $100.0 million and recognized approximately $3.5 million in issuance costs in connection with the offering. On September 28, 2011, we entered into a $60.0 million ABL Facility to support our liquidity needs during construction and to allow for the availability of previously restricted cash. We were able to release $18.7 million of restricted cash which was replaced with $17.8 million in letters of credit under the ABL Facility. We have $31.5 million outstanding under the ABL Facility at December 31, 2013.

In 2012, we issued $175.0 million of Senior Secured Notes on July 26, 2012 in a private placement. We received proceeds of $171.8 million and recognized approximately $7.7 million in issuance costs in connection with the offering. In addition, on August 28, 2012, we announced that we entered into a Credit Agreement with a Spanish bank to provide for the financing of up to €18.6 million (approximately $25.8 million USD) for purchases under certain contracts for equipment and related products and services for the new zinc facility and an additional $1.0 million for payment of the insurance premium on this loan. At December 31, 2013, we have $21.3 million outstanding under the Credit Agreement. On December 21, 2012, we entered into the $15.0 million CAD (approximately $14.1 million USD at December 31, 2013) Zochem Facility to support liquidity needs for its production capacity expansion under construction in Brampton, Ontario. At December 31, 2013, we have $10.0 million outstanding under the Zochem facility.

In 2013, we issued an additional $20.0 million of Senior Secured Notes on June 3, 2013. We received proceeds of $21.3 million and recognized $0.3 million in issuance costs in connection with the offering. On June 24, 2013, we entered into the $15.0 million INMETCO facility to support working capital requirements and for general corporate purposes. At December 31, 2013, we have $15.0 million outstanding under the INMETCO facility. On October 30, 2013, we completed an underwritten public offering and received $72.0 million in net proceeds after deducting $3.9 million in expenses related to the offering.

We have used the net proceeds of the 2011, 2012 and 2013 debt issuances, drawings under the credit facilities and proceeds from the equity offering, together with cash on hand, to construct the new zinc facility and for general corporate purposes, including working capital needs, investment in other business initiatives, other capital expenditures and acquisitions.

On November 16, 2012, we acquired the single membership interest in Mitsui Zinc Powder, LLC, a leading manufacturer of zinc powders for the alkaline battery business and renamed it Horsehead Zinc Powders, LLC. We had been a long-term supplier of SSHG zinc metal to MZP which is co-located at the site of our Monaca zinc smelter. Our acquisition of HZP enabled us to increase our product margins by allowing us to convert our zinc metal into a higher margin zinc powder product for the battery market.

On March 15, 2012, we announced that we had entered into an option agreement with Shell. On December 28, 2012, Shell extended its option to June 30, 2013. On June 28, 2013, we mutually agreed to further extend the period for Shell to exercise its option to January 2, 2014. At the end of December 2013, we entered into an Amended and Restated Option and Purchase Agreement with Shell that included extending the option period during which Shell may perform its evaluation. The amended agreement also provides for demolition activities to commence at Shell's expense. These activities have been initiated in certain areas of the facility while the smelter is still operation. A contractor has been engaged and demolition in certain areas is underway. We expect the demolition process to continue throughout 2014.

On September 27, 2012, we formed Horsehead Metal Products, Inc., a wholly owned subsidiary of Horsehead Corporation, which will own and operate our new Mooresboro, North Carolina facility.

On November 1, 2011, we acquired all of the outstanding shares of Zochem, a zinc oxide producer located in Brampton, Ontario Canada from Hudbay for a cash purchase price of $15.1 million. The acquisition broadened the Company’s geographic reach, provided added operational flexibility and diversified our customers and markets for zinc oxide. In 2012, we announced that we decided to move forward with plans to expand capacity at the Zochem facility in anticipation of the closure of the zinc oxide refinery at the Monaca, Pennsylvania location. We expect that the expansion project, which will increase the total zinc oxide

37


production capacity at Zochem by approximately 20,000 tons to 72,000 tons per year, will be completed by the end of the first quarter of 2014. In addition, through Zochem, we plan to open a zinc oxide distribution and service center in 2014 to serve the growing market in the Southeastern region of the U.S. We expect that this distribution and service center will increase our warehousing and distribution network in the U.S. providing additional value to our long-standing relationships with our strategic zinc oxide customers.

Economic Conditions and Outlook

Our primary focus in the first quarter of 2014 will be managing transitional issues related to the shutdown of the Monaca facility and the completion of construction and commissioning activities at our new Mooresboro, North Carolina facility and at Zochem. We announced the permanent closure of the Monaca zinc oxide refinery in late December and shifted all future sales and production of zinc oxide to Zochem. In addition, we announced the formation of the ThirtyOx joint venture with Imperial Zinc Corp. intended to recover secondary zinc oxides to feed Mooresboro and secondary zinc metals to feed Imperial.

In December 2013, we idled one of our ten waelz kilns to balance capacity with supply. We expect to remain at this level at least through the first quarter of 2014. Steel industry output remained steady as we entered the first quarter of 2014, however, the movement and unloading of railcars was hampered by severe weather conditions. We expect this backlog situation will resolve itself as weather conditions improve.

On December 23, 2013, we permanently closed the zinc oxide refinery at the Monaca facility. We expect to operate the smelter at a five furnace level producing PW zinc metal until it is closed. We would expect the permanent closure of the smelter to occur within a few weeks after we have started to ramp up zinc production at the Mooresboro facility. At a five furnace operating level, we have the opportunity to generate incremental value from the sale of WOX and zinc calcine to other zinc producers given that we have insufficient capacity to consume all of these zinc units internally. As a result, we started to sell these intermediate products during the fourth quarter of 2013 and expect to continue this practice until the Mooresboro facility is sufficiently ramped up to fully consume all of the waelz oxide we produce.

At Zochem, we operated five of seven muffle furnaces for most of the fourth quarter. We started the sixth furnace in February 2014 and expect to start the seventh furnace before the end of the first quarter of 2014 as we sell the remaining inventory in Monaca and ramp up production at Zochem. As we enter 2014, we continue to see oxide premiums holding steady with our previously-announced price increase, and volume has been stronger than expected. Construction activity related to the expansion project at Zochem is winding down with final punch list items expected to be completed before the end of the first quarter of 2014.
 
At INMETCO, we anticipate stronger tolling receipts in 2014 as Outokumpu continues ramping up production at its Calvert, Alabama facility. We have started to increase power to our submerged arc furnace to increase melting output and keep pace with stronger tolling receipt levels.

Zinc and nickel prices have also shown slight recovery since the end of 2013.

During 2013, the economy continued to remain stable. Our quarterly zinc product shipment levels for 2013, excluding Zochem shipments, decreased over the quarterly shipment levels for 2012 due to production difficulties and the impending closure of the Monaca facility. Zinc oxide shipments, at our Zochem facility, improved 13% over 2012 shipments as expansion milestones were completed and production shifted from Monaca. INMETCO shipment tons remained steady in 2013 while tolling receipts increased 15% over 2012 receipts. During the fourth quarter, we processed a quantity of dust approximately 7% higher than our dust receipts during the quarter and as a result, in December 2013, we idled one of our ten waelz kilns to balance capacity with supply.

Factors Affecting Our Operating Results

Market Price for Zinc and Nickel.  Since we generate the substantial majority of our net sales from the sale of zinc and nickel-based products, our operating results depend heavily on the prevailing market price for zinc and nickel. Our principal raw materials are zinc extracted from recycled EAF dust, for which we receive revenue from the carbon steel mini-mill companies, and other zinc-bearing secondary materials (“purchased feedstock” or “purchased feed”) that we purchase from third parties. Costs to acquire and recycle EAF dust, which, during 2013, comprised approximately 87% of our raw materials at our Monaca, Pennsylvania facility, were not impacted significantly by fluctuations in the market price of zinc on the LME. However, the cost for the remaining portion of our raw materials is directly impacted by changes in the market price of zinc. Our Zochem facility relies entirely on purchased feedstock that is dependent on the LME zinc price. The price of our finished products is impacted directly by changes in the market price of zinc and nickel, which can result in rapid and significant changes in our monthly revenues.

38


Monthly average zinc prices rose throughout 2005 and 2006, then began a steady decline through 2008, which was particularly sharp in the fourth quarter of 2008. Monthly average zinc prices began to gradually strengthen in 2009 and continued to strengthen throughout 2010 and through the first half of 2011. During the second half of 2011, the monthly average zinc prices began a steady decline which continued through the end of 2011 but then stabilized during 2012 and 2013.

Average monthly, daily and yearly LME zinc prices for the years 2005 through 2013 were as follows:
LME Zinc Prices
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
Monthly Average

 

 

 

 

 

 

 

 

High
$
0.83

 
$
2.00

 
$
1.74

 
$
1.14

 
$
1.08

 
$
1.10

 
$
1.12

 
$
0.93

 
$
0.97

Low
$
0.54

 
$
0.95

 
$
1.07

 
$
0.50

 
$
0.50

 
$
0.79

 
$
0.84

 
$
0.82

 
$
0.83

Daily High
$
0.86

 
$
2.08

 
$
1.93

 
$
1.28

 
$
1.17

 
$
1.20

 
$
1.15

 
$
0.99

 
$
0.99

Daily Low
$
0.53

 
$
0.87

 
$
1.00

 
$
0.47

 
$
0.48

 
$
0.72

 
$
0.79

 
$
0.80

 
$
0.81

Average
$
0.63

 
$
1.48

 
$
1.47

 
$
0.85

 
$
0.75

 
$
0.98

 
$
0.99

 
$
0.88

 
$
0.87


In 2010, we purchased put options for 2011 for a financial hedge of approximately 99,000 tons of zinc for 2011 having a strike price of $0.65 per pound. The purchases represented approximately 70% of our expected zinc production in 2011. We also sold put options for approximately 35,000 tons of zinc for 2011 having a strike price of $0.55 per pound. These options expired during 2011 with no settlement amounts due to us and no settlement amounts due from us.

At December 31, 2011, we had zinc put options with an $0.85 per pound strike price outstanding, which covered approximately 160,000 tons of zinc production, representing approximately 75% of the expected shipments for the period from January 2012 through June 2013. These put options were put in place to provide protection to operating cash flow in the event that zinc prices decline below that level during the construction of the new zinc facility. In June 2011, we originally entered into these hedge arrangements in which we bought put options with a strike price of $0.85 per pound, sold call options with a strike price of $1.20 per pound and bought call options with a strike price of $1.81 per pound. The value of these bought and sold positions resulted in a zero cash outlay. The hedges reduced our exposure to future declines in zinc prices below $0.85 per pound. We would not, however, have been able to participate in increased zinc prices beyond $1.20 per pound until the zinc price reached $1.81 per pound. The $1.81 per pound call options were bought in order to cap the potential collateral requirements surrounding these hedge arrangements. During the fourth quarter of 2011, with forward zinc prices lower than when the program was implemented, we bought back the $1.20 per pound sold call option positions at a cost of $15.7 million and realized a gain of $13.4 million. The repurchase of these $1.20 per pound call options effectively eliminated both the risk of a potential cash collateral requirement and the limitation to our profitability, in the event that zinc prices increased above the $1.20 per pound during that period. The value of the zinc call options with a $1.81 per pound strike price was negligible at December 31, 2011.

The 2012 put options settled monthly on an average LME pricing basis. The average LME monthly zinc price for June, July and August was lower than the strike price for the contract and we received $0.8 million in cash from settlement of these contracts during 2012. The monthly average LME zinc price for the remaining months, during the year ended December 31, 2012, was above the strike prices for the contracts and they consequently expired with no additional settlement payment due to us. Since the average monthly LME zinc price was lower than $1.81 per pound, we did not exercise any call options during the year ended December 31, 2012.

At December 31, 2012, we had zinc put options with an $0.85 per pound strike price outstanding, which covered approximately 106,000 tons of zinc production representing 75% of the expected shipments for the period from January 2013 through December 2013. We purchased the zinc put options, for the second half of 2013 at a cost of $4.9 million. These put options were put in place to provide protection to operating cash flow in the event that zinc prices decline below that level during the completion of construction of the new zinc facility. The Company also had zinc call options with a $1.81 per pound strike price outstanding but their value was negligible at December 31, 2012. The remaining zinc call options expired during the six months ended June 30, 2013.
During the first quarter of 2013, the Company purchased put options, with an $0.85 per pound strike price, for the first quarter of 2014 that covered approximately 13,200 tons of production at a cost of $0.8 million. These put options were put in place to provide protection to operating cash flow in the event that zinc prices decline below that level during the completion of construction and start up of the new zinc facility. During August 2013, the Company put in place equivalent $0.85 per pound strike price put options covering an additional 4,400 tons per month of zinc production for the period of January 2014 through March 2014 and converted $0.85 per pound strike price put options covering 5,000 tons per month of zinc production from October 2013 through March 2014 to fixed price swap contracts for the same period at an average price of approximately $0.903 per pound.

39


The sale of the put options resulted in a $1.3 million cash benefit, and the Company was able to put the swaps in place without any additional payment. In December 2013, the Company entered into additional fixed price swap contracts for the first quarter of 2014 at an average price of approximately $0.90 per pound. These swaps were transacted without any payment by the Company. At December 31, 2013, the total quantity covered under forward fixed price swaps for the first quarter of 2014 is 26,600 tons. The Company converted a portion of their put options into swaps in order to reduce the effect of changes in the zinc price on cash flow during the period of planned transition of operations to the new zinc facility. At December 31, 2013, the Company also continues to have put options in place with a strike price of $0.85 per pound covering approximately 11,600 tons of zinc production through the first quarter of 2014.
During the first quarter of 2014, we added fixed price swaps for the second quarter of 2014, at an average price of approximately $0.94 per pound for a total quantity covered of 26,500 tons for the second quarter.
The 2013 and 2012 put options settled monthly on an average LME pricing basis. The average LME monthly zinc price for six of the twelve months in the year ended December 31, 2013 were lower than the strike price for the contracts and the Company received a total of $1.4 million during the year ended December 31, 2013. The average LME monthly zinc price for three months during the twelve months ended December 31, 2012 were lower than the strike price for the contract and the Company received a total of $0.8 million during the year ended December 31, 2012.
The Company received $1.1 million from the settlement of fixed price swaps during the fourth quarter of 2013.

Daily high, low and yearly average LME nickel prices for the years 2010 through 2013 were as follows:
LME Nickel Prices
2010
 
2011
 
2012
 
2013
Daily High
$
11.81

 
$
13.17

 
$
9.90

 
$
8.44

Daily Low
$
8.36

 
$
7.68

 
$
6.89

 
$
5.97

Average
$
9.89

 
$
10.36

 
$
7.97

 
$
6.81


Demand for Zinc and Nickel-Based Products.  We generate revenue from the sale of zinc metal, zinc oxide, zinc-based powders, nickel-based products and services, as well as from the collection and recycling of EAF dust. Demand for our products and services decreased significantly in the fourth quarter of 2008 due to the severe economic slowdown and continued into the first quarter of 2009. Demand for our products began to increase in the second quarter of 2009 and has continued to increase through 2012, as our smelting facility and recycling plants operated at near-capacity during 2012, reflecting some increase in market share and some strengthening of underlying market demand. During 2013, we elected to reduce shipments of zinc products in order to build inventory to support customer demand during the transition of metal and oxide production from Monaca to North Carolina and Zochem. At the end of 2013, we began to ship some of the inventory that we had been building during 2013. Our zinc equivalent production of zinc products at our Monaca, Pennsylvania facility for 2013 was 125,000 tons compared to 146,000 and 137,000 tons in 2012 and 2011, respectively.

Weekly steel industry capacity utilization was at its lowest level in several years during the first half of 2009, but began to increase during the second quarter of 2009 through the second quarter of 2010 then leveled during the third and fourth quarters of 2010. During the fourth quarter of 2011, we wrote off the remaining assets of our Beaumont, Texas facility, our smallest and highest cost facility, which had been idled and its assets written down to net realizable value in 2009. We began operations at the first kiln at our Barnwell, South Carolina facility in April of 2010 and the second kiln in September of 2010. Weekly steel capacity utilization continued its general upward trend from 2010 through the first quarter of 2011 and has remained relatively constant in the mid 70% range throughout the first half of 2012 but dipped in the fourth quarter of 2012 to its lowest average quarterly level since 2010. During 2013, weekly steel industry capacity increased back to the mid 70% range for most of the year.

The table below illustrates historical sales volumes and revenues for zinc and nickel-based products and EAF dust:
 
Shipments/EAF Dust Receipts
 
Revenue/Ton
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Product:
(Tons, in thousands)
 
(In U.S. dollars)
Zinc Products (1)
169

 
189

 
152

 
$
1,981

 
$
1,875

 
$
2,024

EAF Dust
607

 
618

 
528

 
$
72

 
$
69

 
$
69

Nickel-based products
28

 
28

 
28

 
$
1,568

 
$
1,717

 
$
1,930

(1) Includes Zochem since November 1, 2011 and HZP since November 16, 2012.


40


Cost of Sales (excluding depreciation and amortization).  Our cost of producing zinc and nickel products consists principally of purchased feedstock, energy, maintenance and labor costs. In 2013, our zinc related purchased feedstock costs at our Monaca facility comprised approximately 14% of our production costs compared to 19% for 2012 and 18% for 2011. Purchased feedstock related costs are driven by the percentage of purchased feed used in the feed mix, the average LME zinc price and the price paid for the purchased feed expressed as a percentage of the LME average zinc price. Purchased feedstock sells at a discount to the LME price of zinc. For 2013, the conversion related costs were 50% and EAF based feedstock represented 36% of our production costs at our Monaca facility. Purchased feedstock costs at our Zochem facility, which comprised 87% of production costs, consisted entirely of purchased SHG zinc metal. The price of these metal blocks is based on the LME zinc price. Conversion related costs represented 13% of our 2013 production costs at our Zochem facility.

A portion of our conversion costs do not change proportionally with changes in production volume. Consequently, as volume changes our conversion cost per ton changes inversely. 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 and nickel prices, production and shipment volumes, efficiencies, energy costs and our ability to implement cost control measures aimed at improving productivity.

We value the majority of our inventories using the weighted average actual cost method. Under this method, the cost of our purchased feedstock generally takes three to four months to flow through our cost of sales. In an environment of declining LME average zinc and nickel prices, our inventory cost can exceed the market value of our finished goods. Lower-of-cost-or-market (“LCM”) adjustments can result. During 2013, 2012 and 2011, we recorded LCM adjustments of $3.7 million, $1.4 million and $0.8 million, respectively. Zochem values its inventory using the first in-first out method and therefore the majority of the cost of their purchased feedstock generally flows through cost of sales during the same month it is purchased.

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, costs associated with acquisitions, 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. 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 selling prices.

Refinery incident at our Monaca, Pennsylvania facility on July 22, 2010 and fire at our INMETCO facility on October 28, 2012
On July 22, 2010, a refinery incident occurred at our Monaca, Pennsylvania zinc oxide refining facility. The zinc refinery was shut down for repairs and an investigation and assessment of the damage. Each of the ten columns used to produce zinc oxide and refined zinc metal in the refining facility was redesigned and rebuilt. Production resumed in the fourth quarter of 2010. The smelting facility at the Monaca plant was returned to full capacity late in the fourth quarter of 2010. Although it operated at a reduced rate during the third quarter, we were able to offset a portion of the lost revenue from zinc oxide with additional zinc metal sales beyond our traditional markets. We pursued recovery of the cost of repairs, lost profit and other losses from our zinc oxide and refined metal, subject to customary deductibles, under our business interruption and property insurance. We submitted a claim totaling $33.8 million and reached a final settlement in the amount of $29.6 million in the first quarter of 2011. As of December 31, 2011, the entire insurance recoveries of $29.6 million had been received in cash.

On October 28, 2012, a fire occurred at the Company’s INMETCO facility. As INMETCO began its annual maintenance shutdown of the rotary hearth furnace and the submerged arc furnace, they experienced an unrelated fire in the material preparation and blending section of the plant, incurring damage to that portion of the building. The planned maintenance outage was only extended a day as a result of delays caused by the fire but we were not able to operate at full capacity until mid-December because power was not fully restored to some ancillary operations. All of the repairs were substantially complete by the end of the first quarter of 2013. The damages from the fire exceeded our insurance deductible of $0.5 million and an estimated claim of $4.9 million was submitted for property damage insurance recovery and we reached a final settlement in the amount of $4.0 million during the second quarter of 2013. As of December 2013, the entire insurance recovery of $4.0 million had been received in cash.
See Footnote DD - Insurance Recoveries in our Audited Consolidated Financial Statements.
Trends Affecting Our Business

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


41


LME price of zinc and nickel;
changes in cost of energy and fuels;
gain and loss of customers;
pricing pressures from competitors, including new entrants into the zinc product markets, EAF dust or nickel-bearing waste recycling markets;
production levels in the domestic steel industry;
increases and decreases in the use of zinc and nickel-based products;
expansions into new products and expansion of our capacity, which requires us to incur costs prior to generating revenues;
expenditures required to comply with environmental and other operational regulations;
access to credit by our customers; and
our operational efficiency improvement programs.

We have experienced fluctuations in our sales and operating profits in recent years due to fluctuations in zinc, energy and fuel prices. Historically, zinc prices have been extremely volatile, and we expect that volatility to continue. Changes in zinc pricing have impacted our sales 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 some of our feedstocks are based on LME zinc prices. Therefore, since a large portion of our sales and a portion of our costs 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 in an attempt to reduce the impact of decreases in the selling prices of a portion of our expected production.

Energy is one of our most significant costs. Our processes rely on electricity, coke and natural gas to operate. Our freight operations depend heavily on diesel fuel. Energy prices, particularly for coke and diesel fuel, have been volatile in recent years and currently exceed long-term historical averages. These fluctuations impact our manufacturing costs and contribute to earnings volatility. In September 2011, we entered into a new power purchase agreement to supply our electrical power needs at our Monaca, Pennsylvania facility at rates lower than the cost at which we are currently able to produce power on-site, which led to our decision to idle our Monaca, Pennsylvania power plant in September 2011. During the fourth quarter of 2012, the power plant was written down to its net realizable value as we determined that it will not be restarted prior to the final closure of the Monaca facility.

The historically high zinc prices from 2006 into 2008 also made it attractive for new competitors to enter the EAF dust recycling market to compete for dust generated by existing EAF producers as well as new EAF capacity. The entry of new competitors could have an adverse impact on our price realization and market share from EAF dust recycling. For example, Steel Dust Recycling started up its Waelz kiln facility located in Alabama in 2008.

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 stainless steel customers face competition from producers of material containing lower levels of nickel, which could have an impact on the demand for our nickel-based products. 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 policies are described below.

Revenue Recognition


42


We recognize revenues from the sale of finished goods at the point of passage of title or risk of loss, which is generally at the time of shipment. Our service fee revenue is generally recognized at the time of receipt of EAF dust, which we collect from steel mini-mill operators.

Inventories

Inventories, which consist primarily of zinc and nickel-bearing materials, and supplies and spare parts, are valued at the lower-of-cost-or-market using a weighted average actual cost method. Zochem values its inventory using the first-in first-out 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 and nickel are traded as commodities on the LME and, accordingly, product inventories are subject to price fluctuations. When reviewing inventory for the lower of cost or market, we consider the forward metal prices as quoted on the LME as of the reporting date in determining our estimate of net realizable value and to determine if an adjustment is required. Our product revenues are based on the current or prior months’ LME average prices. The LME average price upon which our product revenue is based has been reasonably correlated with the forward LME prices that we use to make the lower of cost or market adjustments.

Insurance Claim Liabilities

The Company accrues for costs associated with self-insured retention under certain insurance policies (primarily workers’ compensation) based on estimates of claims, including projected development, from information provided by the third party administrator and a third party actuarial firm. Accruals for estimated costs are undiscounted and are subject to change based on development of such claims. Changes in the estimates of the reserves are included in net income in the period determined. Amounts estimated to be paid within one year have been classified as current liabilities, with the remainder included in non-current liabilities in the Consolidated Balance Sheets.


Share-Based Compensation

The Company has a share-based compensation plan. Employee stock options granted on or after January 1, 2006 are expensed by the Company over the requisite service period, based on the estimated fair value of the award on the date of the grant using the Black-Scholes option-pricing model. Restricted stock unit service or performance related grants are expensed by the Company over the vesting period, with the cost measured based on the stock price on the grant-date multiplied by the number of restricted stock units granted. Restricted stock unit market based grants are expensed using a valuation model based on commonly accepted economic theory which is used for all valuations of awards with market conditions. This economic theory is also used as a basis for the Black Scholes and Monte Carlo valuations.

Fair Value

Fair value is measured using inputs from the three levels of the fair value hierarchy. Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. The three levels are described as follows:

Level 1 - Unadjusted quoted prices in active markets for identical assets and liabilities. Cash and cash equivalents including the money market demand account, accounts receivable, notes payable due within one year, accounts payable, and accrued expenses are considered to be in Level 1 of the fair value hierarchy as they approximate their fair value due to the short-term nature of these instruments. (see Note I - Cash and Cash Equivalents in our Audited Consolidated Financial Statements). Borrowings under our credit facilities are considered to be in Level 1 of the fair value hierarchy (see Note P - Long Term Debt in our Audited Consolidated Financial Statements).

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the determination of the fair value of the asset or liability, either directly or indirectly. The financial swap and financial option instruments are carried at fair value and are considered to be in Level 2 of the fair value hierarchy. These derivatives are not designated as cash flow hedges and we recognize changes in fair value within the consolidated statements of operations as they occur (see Note V - Accounting for Derivative Instruments and Hedging Activities in our Audited Consolidated Financial Statements). The pension assets are carried at fair value and are considered to be in Level 2 of the fair value hierarchy (see Note T - Employee Benefit Plans in our Audited Consolidated Financial Statements).


43


Level 3 - Unobservable inputs that are significant to the determination of fair value of the asset or liability. The Convertible Notes, issued on July 27, 2011, were initially valued at fair value and subsequently are carried at amortized cost. The fair value is considered to be in Level 3 of the fair value hierarchy (see Note P - Long-Term Debt in our Audited Consolidated Financial Statements). The Senior Secured Notes, issued on July 26, 2012 and the Additional Notes, issued on June 3, 2013, were initially valued at fair value and subsequently are carried at amortized cost. The fair value is considered to be in Level 3 of the fair value hierarchy (see Note P - Long-Term Debt in our Audited Consolidated Financial Statements).

When developing the fair value measurements, we use quoted market prices whenever available or seek to maximize the use of observable inputs and minimize the use of unobservable inputs when quoted market prices are not available.

Derivatives

We do not enter into derivative financial instruments unless we have an existing asset or obligation or anticipate a future activity that could 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.

We record derivative instruments in other assets or other liabilities in the Consolidated Balance Sheets at fair value. These derivatives are not designated as cash flow hedges and we recognize changes in fair value within the Consolidated Statements of Operations as they occur. The fair values of derivative instruments are based upon a comparison of our internal valuations to the valuations provided by third party counterparties with whom we have entered into substantially identical derivative contracts. We also compare the counterparties valuations to ensure that there is an acceptable level of consistency among them. The valuations utilize forward pricing and an implied volatility of the underlying commodity as well as interest rate forwards and are therefore subject to fluctuation based on the movements of the commodity markets. Cash flows from derivatives are recognized in the Consolidated Statements of Cash Flows in a manner consistent with the underlying transactions.

We are exposed to credit loss should counter-parties or clearing agents with which we have entered into derivative transactions become unable to satisfy their obligations in accordance with the underlying agreements. To reduce the risk of such losses, we utilize LME-registered contracts entered into with the London Clearing House for some of the contracts. In addition, we minimize credit loss by utilizing 7 different brokers for our derivative contracts. (See Note V - Accounting for Derivative Instruments and Hedging Activities in our Audited Consolidated Financial Statements).

Impairment

Long lived assets are reviewed for impairment when events and circumstances indicated that the carrying amount of an asset may not be recoverable. Our policy is to record an impairment loss when it is determined that the carrying amount of the asset exceeds the sum of the expected undiscounted future cash flows resulting from use of the asset, and its eventual disposition. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds its fair value, normally as determined in either open market transactions or through the use of a discounted cash flow model. Long lived assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

We have no goodwill.

Acquisitions

We recognize the assets acquired and the liabilities assumed at their fair values as of the acquisition date. Contingent purchase consideration is recorded at fair value at the date of acquisition. Measuring assets and liabilities at fair value requires us to determine the price that would be paid by a third party market participant based on the highest and best use of the assets or interest acquired. The excess of the fair value of the net assets acquired over the purchase price is recorded as a bargain purchase gain. Acquisition costs are expensed as incurred. (See Note E - Acquisition of Business in our Audited Consolidated Financial Statements).


44


Results of Operations

The following table sets forth the percentages of sales that certain items of operating data constitute for the periods indicated.
 
2013
 
2012
 
2011
Net sales
100.0
 %
 
100.0
 %
 
100.0
%
Cost of sales (excluding depreciation and amortization)
93.9

 
99.3

 
83.6

Depreciation and amortization
6.7

 
6.0

 
4.9

Selling, general and administrative expenses
5.0

 
4.8

 
5.1

(Loss) income from operations
(5.6
)
 
(10.1
)
 
6.4

Interest expense
0.6

 
1.8

 
0.7

Gain on bargain purchase of a business

 
0.4

 
1.1

Interest and other income
1.4

 
0.6

 
0.4

(Loss) income before income taxes
(4.8
)
 
(10.9
)
 
7.2

Income tax (benefit) expense
(1.6
)
 
(3.9
)
 
2.4

Net (loss) income
(3.2
)%
 
(7.0
)%
 
4.8
%
 
 
 
 
 
 
Net (loss) income per share
 
 
 
 
 
Basic
$
(0.31
)
 
$
(0.69
)
 
$
0.49

Diluted
$
(0.31
)
 
$
(0.69
)
 
$
0.49



    

45


The following table sets forth the activity and the fair values of our hedging instruments at the reporting dates.
 
Put and Call Option Settlement Periods
 
 
 
 
 
2011
 
2012
 
2013
 
2014
 
Swaps
 
Total
Fair value December 31, 2010
$
579

 
$

 
$

 
$

 
$
405

 
$
984

Purchases

 

 

 

 

 

Write-off of expired positions
(1
)
 

 

 

 
(334
)
 
(335
)
Mark to market adjustments on open positions
(427
)
 

 

 

 
(34
)
 
(461
)
Fair value March 31, 2011
151

 

 

 

 
37

 
188

Purchases

 
*

 
*

 

 

 

Write-off of expired positions

 

 

 

 
(66
)
 
(66
)
Mark to market adjustments on open positions
(117
)
 
(10,288
)
 
(4,931
)
 

 
963

 
(14,373
)
Fair value June 30, 2011
34

 
(10,288
)
 
(4,931
)
 

 
934

 
(14,251
)
Purchases

 

 

 

 

 

Write-off of expired positions

 

 

 

 
(556
)
 
(556
)
Mark to market adjustments on open positions
38

 
25,834

 
13,148

 

 
(12
)
 
39,008

Fair value September 30, 2011
72

 
15,546

 
8,217

 

 
366

 
24,201

Purchases

 
7,835

 
7,908

 

 
32

 
15,775

Write-off of expired positions
(72
)
 
(3,404
)
 
(2,281
)
 

 
(339
)
 
(6,096
)
Mark to market adjustments on open positions

 
(2,254
)
 
(141
)
 

 
(1,029
)
 
(3,424
)
Fair value December 31, 2011

 
17,723

 
13,703

 

 
(970
)
 
30,456

Purchases

 

 

 

 

 

Write-off of expired positions

 
(2,620
)
 

 

 
287

 
(2,333
)
Mark to market adjustments on open positions

 
(9,160
)
 
(5,306
)
 

 
1,640

 
(12,826
)
Fair value March 31, 2012

 
5,943

 
8,397

 

 
957

 
15,297

Purchases

 

 

 

 

 

Write-off of expired positions

 
(743
)
 

 

 
(254
)
 
(997
)
Mark to market adjustments on open positions

 
(807
)
 
(293
)
 

 
(441
)
 
(1,541
)
Fair value June 30, 2012

 
4,393

 
8,104

 

 
262

 
12,759

Purchases/Sales

 

 
1,608

 

 

 
1,608

Write-off of expired/sold positions

 
(1,464
)
 

 

 
(154
)
 
(1,618
)
Mark to market adjustments on open positions

 
(2,622
)
 
(5,198
)
 

 
624

 
(7,196
)
Fair value September 30, 2012

 
307

 
4,514

 

 
732

 
5,553

Purchases/Sales

 

 
3,337

 

 

 
3,337

Write-off of expired/sold positions

 
(307
)
 

 

 
(562
)
 
(869
)
Mark to market adjustments on open positions

 

 
(3,449
)
 

 
188

 
(3,261
)
Fair value December 31, 2012

 

 
4,402

 

 
358

 
4,760

Purchases

 

 

 
774

 

 
774

Write-off of expired positions

 

 
(172
)
 

 
(177
)
 
(349
)
Mark to market adjustments on open positions

 

 
901

 
535

 
(39
)
 
1,397

Fair value March 31, 2013

 

 
5,131

 
1,309

 
142

 
6,582

Purchases

 

 

 

 

 

Write-off of expired positions

 

 
(1,035
)
 

 
27

 
(1,008
)
Mark to market adjustments on open positions

 

 
(294
)
 
(29
)
 
481

 
158

Fair value June 30, 2013

 

 
3,802

 
1,280

 
650

 
5,732

Purchases

 

 
(540
)
 
(155
)
 

 
(695
)
Write-off of expired positions

 

 
(2,304
)
 
(5
)
 
(274
)
 
(2,583
)
Mark to market adjustments on open positions

 

 
(625
)
 
(504
)
 
2,014

 
885

Fair value September 30, 2013

 

 
333

 
616

 
2,390

 
3,339

Purchases

 

 

 

 

 

Write-off of expired positions

 

 
(333
)
 

 
(1,646
)
 
(1,979
)
Mark to market adjustments on open positions

 

 

 
(578
)
 
(2,176
)
 
(2,754
)
Fair value December 31, 2013
$

 
$

 
$

 
$
38

 
$
(1,432
)
 
$
(1,394
)
* Put and call options were purchased and call options were sold having a net zero cash outlay

46



A significant portion of our zinc oxide shipments are priced based on prior months’ LME average zinc price. Consequently, changes in the LME average zinc price are not fully realized until subsequent periods. The LME average zinc prices for the most recent eight quarters and the average LME zinc prices for the year to date as of the end of each quarter are listed in the table below:
  
2012
 
2013
 
 
Quarter ended
 
Quarter ended
Average LME zinc price
 
March 31
 
June 30
 
September 30
 
December 31
 
March 31
 
June 30
 
September 30
 
December 31
Quarter
 
$
0.92

 
$
0.87

 
$
0.86

 
$
0.88

 
$
0.92

 
$
0.83

 
$
0.84

 
$
0.86

Year-to-date
 
$
0.92

 
$
0.90

 
$
0.88

 
$
0.88

 
$
0.92

 
$
0.88

 
$
0.87

 
$
0.87

Year Ended December 31, 2013 Compared with Year Ended December 31, 2012
Consolidated net sales. Consolidated net sales increased $6.2 million, or 1.4%, to $441.9 million for 2013 compared to $435.7 million for 2012. Net sales for 2013 were reduced by $5.7 million from unrealized non-cash adjustments related to hedging activities. Net sales for 2012 were reduced by $30.7 million from unrealized non-cash adjustments related to hedging activities. Excluding the net adjustments related to hedging activities, consolidated net sales decreased $18.7 million, or 4.0%, to $447.6 million for 2013 from $466.3 million for 2012. The decrease includes a $15.8 million decrease in net sales for zinc products and services (“Zinc”) and a $2.9 million decrease in nickel products and services (“Nickel”).
Consolidated cost of sales (excluding depreciation and amortization). Consolidated cost of sales decreased $17.8 million, or 4.1%, to $414.8 million for 2013 compared to $432.6 million for 2012. Nickel cost of sales for 2013 and 2012 includes benefits from property damage insurance recoveries of $2.3 million and $1.1 million, respectively, net of additional cost of repairs and clean up. Zinc cost of sales for 2013 and 2012 includes impairment charges of $9.3 million and $25.3 million. Zinc cost of sales for 2013 also includes one time charges for severance and inventory writeoffs of $10.4 million related to the impending closure of the Monaca, Pennsylvania facility. Excluding the net insurance benefits, the impairment charges, and one time charges related to the closure of the Monaca facility, cost of sales decreased $10.9 million for 2013 compared to 2012. The decrease includes a $11.2 million decrease in Zinc cost of sales and a $0.3 million increase in Nickel cost of sales.
Consolidated depreciation and amortization. Consolidated depreciation and amortization increased $3.5 million, or 13.4%, to $29.7 million for 2013 compared to $26.2 million for 2012. The increase reflects an increase of excess depreciation expense of $0.4 million, related to the eventual closing of the Monaca, Pennsylvania facility, depreciation and amortization related to HZP of $1.4 million and depreciation on property, plant and equipment additions since December 31, 2012.

Consolidated selling, general and administrative expenses. Consolidated selling, general and administrative expenses increased $1.3 million, or 6.2%, to $22.2 million for 2013 compared to $20.9 million for 2012. The increase was primarily due to an increase in non cash compensation and a favorable adjustment in 2012 of $0.4 million related to non income related taxes.
Consolidated other income (expense). Net consolidated other income (expense) was $3.4 million for 2013 compared to $(3.4) million for 2012. Total actual interest expense for 2013, increased by $13.8 million over 2012, due primarily to interest associated with the Senior Secured Notes issued on July 26, 2012, Additional Notes issued on June 3, 2013 and increased borrowings on the Credit Agreement and three credit facilities. This additional interest expense, however, was offset by capitalized interest of $29.4 million during 2013, related to construction of the new zinc facility. During 2013 and 2012, Shell extended its option on our Monaca facility and, pursuant to the contract, we recorded income of $3.4 million and $0.5 million, respectively. During 2012, we recorded $1.8 million in gains on a bargain purchase related to the acquisition of HZP.
Consolidated income tax benefit. Our consolidated income tax benefit was $7.5 million for 2013 compared to an income tax benefit of $16.9 million for 2012. Our effective tax rates were 34.8% for 2013 and 35.8% for 2012. The decrease in the effective tax rate primarily reflects the combined effect of a change in our pre-tax income for 2013 and the related impact of permanent differences. In addition, a valuation allowance was recorded in 2013, which reduced the effective rate.
Consolidated net income (loss). Net loss for 2013 was $(13.9) million. Excluding a net insurance benefit of $1.5 million, impairment charges of $6.1 million and one time charges related to our Monaca facility of severance and inventory writeoffs of $6.8 million, our net loss for 2013 was $(2.5) million.
Business Segments

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Zinc Products and Services (“Zinc”)
Net sales. Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, decreased $15.8 million, or 3.9%, to $394.0 million for 2013 compared to $409.8 million for 2012. The decrease was a result of a $47.6 million decrease in sales volume primarily reflecting decreased shipments of zinc metal, zinc oxide and EAF dust receipt tons partially offset by a $10.9 million increase in price realization compared to 2012. The increase in price realization was the result of higher realized premiums per pound on zinc oxide tons sold for 2013 compared to 2012. The average LME zinc price, however, was 1.9% lower for 2013 compared to 2012. Net sales includes an increase in sales for HZP, acquired on November 16, 2012, of $18.3 million. Miscellaneous and other sales increased $2.6 million for 2013 as compared to 2012 primarily related to the sale of WOX and zinc calcine. Net sales for 2013 were reduced by unrealized non-cash adjustments of $5.6 million relating to our hedging activities. Net sales for 2012 were reduced by unrealized non-cash adjustments of $30.9 million, relating to our hedging activities.
Zinc product shipments were 169,376 tons for 2013, or 152,964 tons on a zinc contained basis, compared to 189,044 tons, or 170,123 tons on a zinc contained basis, for 2012. The average sales price realization for zinc products on a zinc contained basis, excluding the effects from the non-cash mark to market adjustments of our open hedge positions, was $1.10 per pound for 2013 compared to $1.04 per pound for 2012. The increase reflects higher realized premiums to the LME zinc price when compared to 2012.
Net sales of zinc metal decreased $26.0 million, or 15.0%, to $147.6 million for 2013 compared to $173.6 million for 2012. The decrease was attributable to a decline in volume partially related to our efforts to increase product premiums during 2013 while building inventory to support customer demand during the transition of production facilities to North Carolina. In addition, metal sales to HZP were treated as intercompany sales during 2013 and eliminated in consolidation.
Net sales of zinc oxide decreased $12.6 million or 7.2%, to $163.3 million for 2013, compared to $175.9 million for 2012. The decrease was primarily due to a $23.3 million decline in sales volume partially offset by an increase in price realization of $10.7 million. The increase in price realization resulted from zinc oxide price increases which became effective in 2013 and significantly increased the oxide premium to the average LME zinc price. This increase in zinc oxide premium was partially offset by a 1.9% lower LME zinc price for 2013 compared to 2012.
Net sales of zinc and copper-based powders increased $19.2 million to $33.8 million for 2013 compared to $14.6 million for 2012. The increase resulted from an increase in volume of $19.9 million primarily due to the inclusion of HZP, which was acquired on November 16, 2012. The increase in volume was partially offset by a $0.7 million decrease in price realization primarily related to our copper-based powders. In December 2013, we sold our copper powders based business.
Revenues from EAF dust recycling increased $1.0 million, or 2.3%, to $43.6 million for 2013 from $42.6 million for 2012. The increase was primarily due to an increase in price realization of $1.8 million partially offset by an decrease of $0.8 million in volume. EAF dust receipts for 2013 were 607,463 tons compared to 618,366 tons for 2012.
Cost of sales (excluding depreciation and amortization). Cost of sales for zinc product and services, after excluding, in 2013, an impairment charge of $9.3 million and one time charges for severance and inventory write-offs of $10.4 million related to the impending closure of the Monaca, Pennsylvania facility and excluding $25.3 million in impairment charges recorded in 2012, decreased $11.2 million to $360.7 million for 2013, compared to $371.9 million for 2012. For the 2013 and 2012, cost of sales was 91.5% and 90.8%, respectively, of net sales, after excluding from net sales the unfavorable non-cash adjustments relating to hedging of $5.6 million for 2013 and $30.9 million for 2012 and excluding from cost of sales charges for impairment, severance and inventory write-offs for 2013 and impairment charges for 2012.
Cost of sales for zinc material and other products, after excluding an impairment charge of $9.3 million, one time charges for severance and inventory write-offs of $10.4 million in 2013 and an impairment charge of $25.3 million in 2012, all related to the closure of Monaca, Pennsylvania facility, decreased $13.0 million, or 3.8%, to $325.8 million for 2013 compared to $338.8 million for 2012. The decrease was a result of a $43.1 million decrease in volume partially offset by a $11.7 million increase in the cost of zinc products produced. The cost of zinc material and other products sold includes additional production costs of $16.6 million during 2013 related to HZP which was acquired in November 2012. Miscellaneous and other costs increased $1.8 million in 2013 compared to 2012 primarily due to 2013 sales of WOX and calcine. The cost of zinc material includes LCM inventory adjustments of $3.7 million and $1.4 million for 2013 and 2012, respectively, primarily due to the continued attrition of the LME zinc price. Conversion costs at the Monaca, Pennsylvania facility reflect a 14.7% decrease in production levels due to the impending shutdown of the Monaca facility which increased employee turnover at that facility. Production also decreased as a result of an unplanned shutdown and rebuild of two metal columns and one oxide refining column during April 2013 which reduced downstream capacity to process metal from the smelter. Additionally, during the third quarter, we were forced to operate at a five furnace level for most of the quarter due to the temporary shutdown of two smelting furnaces and continued to operate at a five furnace level for most of the fourth quarter of 2013. As a result of this decrease in

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production, conversion costs decreased $5.4 million. Coke costs decreased $5.1 million and maintenance and services decreased $1.0 million. These decreases were partially offset by an increase in utilities of $1.9 million. The cost of purchased feeds expressed as a percentage of the LME at the Monaca facility for 2013 decreased 9.6% compared to 2012.
The cost of EAF dust services increased $1.8 million, or 5.4%, to $34.9 million for 2013 from $33.1 million for 2012. The increase was the result of higher transportation costs of $2.4 million partially offset by a decrease of $0.6 million in volume. EAF dust receipts tons decreased 1.8% for 2013 compared to 2012.
Income (loss) before income taxes. For the reasons stated above, our loss before income taxes in 2013 was $(33.0) million for 2013, which includes $5.6 million in unfavorable unrealized non cash adjustments from our hedging activities. Our loss before income taxes in 2012 was $(56.8) million, which included $30.9 million in unfavorable unrealized non cash adjustments from our hedging activities.
Nickel Products and Services (“Nickel”)
Net sales. Net sales decreased $3.2 million, or 5.6%, to $53.5 million for 2013 compared to $56.7 million for 2012. The decrease was mainly the result of a $2.9 million reduction from lower price realization and a $0.9 million increase due to higher shipment volume. Lower LME nickel prices for 2013 compared with 2012 were the primary reason for the lower price realization. Environmental service revenue decreased $0.9 million for 2013 compared with 2012. Net sales for 2013 included $0.1 million unfavorable non-cash adjustments related to nickel hedging activities while net sales for 2012 included favorable $0.2 million non cash adjustments related to nickel hedging activities. 

Cost of sales (excluding depreciation and amortization). Cost of sales, excluding net insurance benefits of $2.3 million in 2013 and $1.1 million in 2012, increased $0.3 million, or 0.8%, to $36.7 million for 2013 compared to $36.4 million for 2012. The increase was mainly the result of a $0.7 million increase due to higher shipment volume and a $0.4 million reduction related to lower costs of product shipped. The decrease in the cost of product shipped was due to lower raw material costs resulting from a 14.4% lower average LME nickel price in 2013 as compared to 2012.
Income before income taxes. For the reasons stated above, income before income taxes, excluding a $2.3 million benefit related to insurance recoveries in 2013 and a $1.1 million insurance benefit in 2012, was $10.2 million for 2013 compared to $13.9 million for 2012.

Year Ended December 31, 2012 Compared with Year Ended December 31, 2011

Consolidated net sales. Consolidated net sales decreased $15.5 million, or 3.4%, to $435.7 million for 2012 compared to $451.2 million for 2011. Net sales for 2012 include $30.6 million of net unrealized losses relating to hedging activities. Net sales for 2011 includes net realized gains of $13.4 million related to the purchase of previously sold call positions and net unrealized gains of $0.3 million related to other hedging activities. Excluding the net unrealized adjustments related to hedging activities, consolidated net sales increased $15.4 million, or 3.4%, to $466.3 million in 2012 from $450.9 million for 2011. The increase includes a $21.4 million increase in net sales for Zinc and $6.0 million decrease in Nickel. 2011 Zinc net sales include the sales of Zochem, which was acquired on November 1, 2011, for the two month period ending December 31, 2011.

Consolidated cost of sales (excluding depreciation and amortization). Consolidated cost of sales increased $55.2 million, or 14.6%, to $432.6 million for 2012 compared to $377.4 million for 2011. Cost of sales for 2012 and 2011 include impairment charges of $25.3 and $9.8 million, respectively, related to the Monaca, Pennsylvania facility. Zinc cost of sales for 2011 include benefits from business interruption and property damage insurance recoveries, net of additional cost of repairs and clean-up, of $9.4 million. Nickel cost of sales for 2012 include benefits from property damage insurance recoveries, net of additional cost of repairs and clean-up of $1.1 million. Excluding the additional costs and insurance recoveries and the impairment charges, cost of sales increased $31.4 million, or 8.3%, to $408.4 million for 2012 from $377.0 million for 2011. The increase includes a $32.4 million increase in Zinc cost of sales, which included an increase of 24.3% in zinc products shipped primarily due to a full year of Zochem sales. Nickel cost of sales decreased $1.0 million.

Consolidated depreciation and amortization. Consolidated depreciation and amortization increased $4.2 million, or 18.9% to $26.2 million for 2012 compared to $22.0 million for 2011. The increase primarily reflects $1.6 million in accelerated depreciation resulting from shortening the useful lives of the Monaca refinery and smelting plant assets, a full year of Zochem depreciation of $0.4 and increased depreciation by $2.2 million in 2012.

Consolidated selling, general and administrative expenses. Consolidated selling, general and administrative expenses decreased $2.1 million, or 9.0% to $20.9 million for 2012 compared to $22.9 million for 2011. The decrease primarily reflects a decrease of $0.7 million in labor costs of which $0.5 million relates to non cash stock based compensation expense and a decrease

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of $0.4 million in non income related taxes. In addition, 2011 includes approximately $1.0 million of costs related to the acquisition of Zochem on November 1, 2011. Selling, general and administrative costs for 2012 includes an entire year of Zochem costs.

Consolidated other income (expense). Consolidated other income (expense) decreased $6.9 million, on a net basis, to $(3.4) million of expense in 2012 compared to $3.5 million income in 2011. Other income (expense) for 2012 and 2011 include gains on bargain purchases related to the acquisitions of HZP and Zochem, of $1.8 million and $4.9 million, respectively. Interest expense increased $4.5 million, excluding capitalized interest, primarily due to the issuance of the Senior Secured Notes on July 26, 2012. Interest and other income increased $0.7 million.

Consolidated income tax (benefit) provision. The consolidated income tax benefit was $(16.9) million for 2012 compared to an income tax provision of $10.9 million for 2011. Our effective tax rate for