GM: Zochem profitable despite Ch. 11 difficulties

SCOTTSDALE, Ariz.—The general manager of zinc oxide producer Zochem Inc. said the Chapter 11 bankruptcy petitions filed by it and its parent company will have “virtually no impact” on its operations or ability to supply its customers.

One reason for that is Zochem on its own is profitable and has not been sourcing zinc from its Pittsburgh-based parent Horsehead Holding Corp., according to Joshua Belczyk, GM of Brampton, Ontario-headquartered Zochem.

“We source our raw materials from third parties, which we always have,” Belczyk said at the International Zinc Association's Zinc Oxide Conference, held Feb. 23-24 in Scottsdale, Ariz.

He said that was because in the past, Horsehead produced only prime western zinc, and Zochem uses only special high-grade zinc. Even when Horsehead began producing some of that grade zinc at its troubled factory in Mooresboro, N.C., Belczyk said so little was produced that it all was earmarked for other customers.

Horsehead Holding and three of its subsidiaries—including Zochem—filed voluntary Chapter 11 petitions Feb. 2 for protection under the U.S. Bankruptcy Code. Horsehead in its filing listed liabilities of $544.7 million and total assets of $1 billion.

In its filing, Horsehead blamed much of its financial difficulties on falling metals prices along with problems ramping up production in Mooresboro. The company said startup costs for the zinc facility—opened in 2014—rose to about $550 million, while during the third quarter of 2015 it operated at just 23 percent of full capacity.

Zochem has been operated as a stand-alone entity and was included in the bankruptcy filing because it could provide support and collateral for the investors looking to provide interim, debtor-in-possession financing, Belczyk said.

“Zochem has been a great success by a lot of different metrics,” he said. “We're certainly doing our part to support the rest of the company through the restructuring that they need to do in the U.S.”

Through the first nine months of 2015, Zochem posted earnings before taxes of $4.44 million on sales of $101.7 million, compared with pre-tax profits of $10.6 million on sales of $109 million in the year-earlier period.

Overall, Horsehead recorded a pre-tax loss of $78.6 million on sales of $331.9 million for the first three quarters of 2015.

“We are certainly going to continue to execute at a high level and continue to develop our strategy and achieve our vision for Zochem's growth and continued strong performance to our customers and stakeholders,” Belczyk said.

Zochem has the capacity to produce 65,000 metric tons per year of zinc oxide at its Brampton facility, and the GM said about 40 percent of the output is used in the production of tires and other rubber products.

Zinc oxide's prime use in the rubber industry is as an activator in the vulcanization process. About 90 percent of the firm's sales are in North America, though it recently opened a warehouse/ distribution center in the Netherlands as it looks to boost sales around the globe.

The firm was proactive in communicating with customers and vendors, stressing it was difficulties with the U.S. operations that brought about the Chapter 11 filing, he said. “Zochem is really being included ironically because of our financial strength to provide support to the other divisions.”

Belczyk added that it would be counterproductive during the restructuring process to do anything to adversely impact the operations of a healthy entity such as Zochem.

“There are certain exemptions even in these processes ... that ensure that profitable divisions continue to flow products to customers without interruption,” he said. “This isn't the first time a company has had to file Chapter 11 protection and include a solvent entity in that filing. So there are well-established systems in place to ensure that businesses like ours that find themselves in these situations can continue to do just that—execute at a high level.”

That doesn't mean, though, that customers and vendors have no concerns going forward, the Zochem GM said, adding that it comes with the territory.

“You have to rely on your relationships and the trust and execution that they'll have representation,” Belczyk said. “You have to hope that the courts and the process see it the same way.”

The executive doesn't expect the Chapter 11 proceedings to drag on for Horsehead and its subsidiaries.

“This is expected to be a very fast restructuring process,” he said. “Another reason we don't expect there to be much if any impact on Zochem is because there's really a very short timeline for Horsehead to put out a plan of reorganization and to implement it and exit Chapter 11 within the next few months.”