UPDATE 3-Horsehead seeks to transfer MF Global zinc hedges

Most hedging contracts were with MF Global

* Hopes to transfer contracts to new clearing agent

* Stock down 8 percent

By Steve James

Nov 4 (Reuters) - Horsehead Holding Corp , the largest U.S. zinc smelter, is trying to transfer hedging contracts with its clearing agent, a British branch of futures brokerage MF Global Holdings Ltd , which has filed for Chapter 11 bankruptcy protection.

Company shares fell 8 percent to $8.13 on the Nasdaq on Friday afternoon after the revelation in a press release announcing Horsehead's better-than-expected third-quarter financial results.

"We have no cash on account with MF Global," Chief Financial Officer Robert Scherich told Wall Street analysts on a conference call.

"These are LME (London Metal Exchange) registered contracts," he said. "We are talking with numerous clearing members. We have no reason to believe it (transfer) won't happen and expect to complete it in a matter of weeks."

The company started using hedging contracts, including all put and call options for 2012 and 2013, to protect it from zinc price volatility during a period when it is investing heavily in a new smelter in North Carolina, Scherich said.

During the third quarter, the price of zinc fluctuated between a high of $1.15 per pound and a low of 84 cents. The metal is currently selling for about 89 cents per pound -- way off its all-time high in 2006 of just over $2.

Scherich said the hedges on 75 percent of expected zinc production in 2012 and 2013 had a floor of 85 cents per pound and a ceiling of $1.20.

Pittsburgh-based Horsehead said the clearing agent for the majority of its hedging contracts was MF Global UK Ltd, a British affiliate of MF Global. It gave no details on the number of contracts.

The company said it thought it could transfer all of them to other members of the London Clearing House without incurring any loss.

Earlier on Friday, Jon Corzine said he had resigned as MF Global's chairman and chief executive officer four days after the futures brokerage filed for bankruptcy protection.

The bankruptcy filing came after MF Global's bets on European sovereign debt scared away clients, counterparties and investors. The company's decline accelerated after major credit rating agencies downgraded it to "junk" status last week.

In an interview with Reuters, Scherich said the mark-to-market of the hedges fluctuated day to day with the price of the metal. "The collar was at zero when we introduced them and at the end of June we would have had a negative $15 million, because the zinc price was up at the end of June.

"But it went down at the end of September and the mark up would then be $24 million," he said. "That's the volatility of the zinc price and the purpose of the hedges."

Scherich said Horsehead expected to lay the foundations for a new smelter in North Carolina in the first quarter of next year. It will replace the 85-year-old Monaca smelter near Pittsburgh.

"The hedges were put in place to give us a level of commodity price protection in an investment period. We didn't want the commodities to go down so much that it would disrupt this (smelter construction)."

Capstone Investments analyst Carter Driscoll said he was not too concerned. "These are futures contracts so it shouldn't be too difficult to find a new partner. There isn't any real cash impact until 2012."

Horsehead earlier reported its third-quarter net loss narrowed to $700,000, or 2 cents per share, from a loss of $2.4 million, or 5 cents per share, a year earlier.

Including a noncash mark-to-market adjustment for open hedge positions, earnings were $23.1 million, or 52 cents per share. On that basis, they beat Wall Street estimates of 10 cents per share, according to Thomson Reuters I/B/E/S.

Chief Executive Officer Jim Hensler said that although demand was strong, there were unusually high operating costs and reduced shipments due to production difficulties at the Monaca smelter as well as planned maintenance outages and higher energy costs.
http://www.reuters.com/article/2011/11/04/horsehead-idUSN1E7A30DU20111104