Horsehead Holding Corp. (Nasdaq:ZINC), a leading U.S. producer of specialty zinc and zinc-based products, today provided an update on its 2012-2013 hedging program. This program, implemented in June 2011 for no cash out of pocket, consisted of:
- purchased zinc put options with a strike price of $0.85/lb,
- sold call options with a strike price of $1.20/lb, and
- purchased call options with a strike price of $1.81/lb.
The combination of put and call options covered approximately 8,800 tons per month during the planned construction of a new zinc plant from January 2012 through June 2013. This structure effectively resulted in a “cashless collar” for the Company with a minimum zinc price of $0.85/lb and a maximum price of $1.20/lb. Exposure to future collateral requirements was “capped” by the purchased call options at $1.81/lb.
As previously reported, these hedges were LME-registered contracts arranged though an affiliate of MF Global Holdings Ltd. As has been widely reported, MF Global Holdings Ltd. and certain of its affiliates filed for bankruptcy protection under US and UK bankruptcy laws on October 31, 2011. Subsequently, Horsehead has successfully transferred all of these hedge positions to an alternate clearing member of the London Clearing House, with all of the hedges remaining fully intact.
With forward zinc prices lower than when the program was implemented, the Company recently bought back the $1.20/lb call options for approximately $15.7 million and will realize a gain, before taxes, of approximately $13.4 million. Through September 30, 2011, the Company had recorded a net unrealized gain of $19.1 million relating to these call options. The cancellation of these $1.20/lb call options effectively eliminates both the risk of a potential cash collateral requirement and the limitation to the Company’s profitability, in the event that zinc prices increase above $1.20/lb.