Stocks to Buy: There's a Huge Opportunity in this Metals Producer

Our latest report on stocks to buy focuses on a metals-related play that's highly undervalued - and about to introduce a game-changing development to its business.

As base metals and material stocks have sold off in recent weeks, most of the attention has fallen on the shinier metals like gold and silver.

Unnoticed by most traders is the fact that zinc has dropped as well, although not as sharply. Prices of zinc have dropped about 8% in the past month and this is setting up a major buying opportunity in this North American zinc producer.

Although rarely discussed with the same fervor or regularity as its metallic brethren, zinc is actually the fourth most used metal in the world, and will see sharp demand pick up when the economy improves.

Over 12 million tons of the metal is produced annually for a range of uses. Although not as widely discussed as other precious and industrial metals zinc is something we all use every day knowingly or not.

Zinc is part of several alloys including brass, aluminum solder and commercial bronze. Zinc is also the primary metal used in production of the U.S. penny coin and has been since 1982. The metal is used in pigments for paints, a catalyst for rubber production, a fire retardant and a rocket propellant.

Zinc is far more reactive than iron or steel and attracts oxidization so it is often used as a galvanizing agent with these metals. For example, zinc is regularly used in the boating industry to protect propellers and the rudder from oxidization caused by seawater.

All these mean zinc will continue to be important to a variety of industries. That's why we like the long-term potential of a U.S. zinc producer whose shares are trading at a discount.

The following company is making huge moves to be the world's lowest cost zinc producer, which should lead to higher earnings and a much higher stock price

Stocks to Buy: How to Play Zinc's Profit Potential

Horsehead Holding Corp. (Nasdaq: ZINC) is the largest U.S.-based producer of zinc. It is also the largest producer of zinc oxide for pigmentation as well as zinc powder.

The company boasts the only electrothermic smelting furnace in the Western hemisphere, which means it can use a wide range of zinc feedstock in its production. It also recycles electric arc furnace dust (EAF), a hazardous waste produced by steel mini mills that contains zinc.

Horsehead is the largest recycler of this element in the world, which means it has a low-cost source of zinc feedstock. The company currently has six production or recycling centers in the United States and one in Canada.

The real potential with Horsehead, however, is not its existing facilities, but its new plant nearing completion in North Carolina. The new plant is a game changer for Horsehead.

That's because the new facility will use a green technology to extract the metal for zinc feedstock. That means it will use less energy and have higher labor productivity for a much lower cost structure.

Along with its EAF facilities, the new plant will put Horsehead among the lowest cost zinc producers in the world.  The new plant will also increase capacity from 140,000 tons per year to 155,000 tons according to a recent management presentation.

It will produce a wider range of zinc products and allow the company to add special high grade and continuous galvanizing grade zinc to its product line.

Management estimates that the new facility will increase EBITDA (earnings before interest, taxes, depreciation, and amortization) by $9 million - $110 million annually. Last year the company saw EBITDA decline to less than $50 million - this new plant has the potential to triple that.

If the company does in fact achieve the EBITDA target, the value of the company will increase at least 100% in a short period of time. The plant is on schedule to enter production in the third quarter of this year and achieve full capacity in six months.

Wall Street is taking its usual short-sighted approach in regards to Horsehead stock.

Analysts do not seem to be giving consideration to the cost efficiency and production increases of the new plant at all in their forecasts for Horsehead.

The stock has sold off with the recent decline in metals overall and because the company fell short of earning expectations in the last quarter. The stock is down more than 12% in the past month and this creates a buying opportunity for patient, long-term investors.

For another profit opportunity in an undervalued metals-related stock, read this: This Cheap Metals Play Has 10-Bagger Potential