It was not the kind of anniversary party Horsehead Holding Chairman, Chief Executive Officer and President James M. Hensler had in mind.

A year after shares of the Monaca zinc producer debuted at $18, they have lost more than half their value, and one of Horsehead's largest shareholders is making noises about how to remedy that.

In an Aug. 27 letter, Cobalt Capital Management strongly advised that with no debt, $68 million in cash and another $60 million available from a revolving credit facility, Horsehead Holding [Ticker: ZINC] should repurchase at least 30 percent of its shares. Given its strong balance sheet, Horsehead should not be so reticent about taking on debt to buy back shares at depressed prices, Cobalt Capital President Wayne Cooperman told Mr. Hensler.

"The value and liquidity are there. Management and the board need to take advantage of this opportunity," Mr. Cooperman wrote. "We need to be clear that we expect this letter to be taken seriously by the company and its board of directors and that we would view a passive approach to current market conditions as unacceptable."

The letter was disclosed in an Aug. 29 securities filing in which Cobalt also revealed it has a 6.7 percent stake in the company. Investors already had an inkling something was in the works. Nearly 4 million shares of Horsehead -- nearly 10 times the average daily volume -- were traded the previous day and another 2.6 million changed hands the day Cobalt revealed its agenda.

Mr. Cooperman also told Mr. Hensler that Horsehead should purchase less high-priced zinc scrap and rely more on zinc recovered from the electric furnaces steelmakers use to convert scrap into new steel. Much of the scrap contains zinc, with which steelmakers coat steel to make it corrosion resistant. Rather than pay to landfill the furnace residue, steelmakers pay Horsehead to take it off their hands.

Smelting zinc recycled from steel furnaces is more economical than making it from higher-priced sources of zinc scrap, Mr. Cooperman wrote. While that means lower production, it would allow Horsehead to idle a furnace at its Monaca smelting plant and realize an estimated $22 million in cost reductions, he told Mr. Hensler.

Last week, Horsehead announced it would reduce its intake of the high-priced scrap and idle a Monaca furnace.

"We've been working on that for several months," Mr. Hensler said, adding that the initiative was not sparked by Cobalt's letter.

Mr. Hensler declined to comment on Mr. Cooperman's advice, saying, "it's a matter that needs to be taken up with our board."

Mr. Cooperman and Cobalt are no strangers to Western Pennsylvania. Securities and Exchange Commission documents indicate that as of June 30, the firm's two largest investments were Atlas America [ATLS], in which it holds an 11 percent stake, and Atlas Energy Resources [ATN], where it owns a 6.7 percent stake. The affiliated Moon companies develop and produce natural gas and oil. Cobalt also has smaller positions in coal producer Consol Energy [CNX] and titanium producer RTI International Metals [RTI].

The price investors are willing to pay for Horsehead's shares is linked to how much people are willing to pay for zinc. Depressed zinc prices of 35 cents per pound in 2002 contributed to the bankruptcy of Horsehead's predecessor; their recovery to $2 a pound in late 2006 lubricated the market for Horsehead's initial public offering.

Over the past 52 weeks, the stock has traded as low as $6.81 on Aug. 26 and as high as $26.14 last September. It closed Friday at $8.30, off 51 percent for the year.

A 42 percent drop in zinc prices led to a sharp drop in Horsehead's second-quarter profits, which totaled $13.9 million, or 39 cents per diluted share, vs. earnings of $22.4 million, or 75 cents per diluted share, in the year-ago quarter. Sales fell 10 percent to $130.5 million.

The results would have been even worse without a 12 percent jump in shipments and hedges that afforded some insurance against tumbling zinc prices. In December, Horsehead hedged about 60 percent of its anticipated 2008 sales, locking in prices at $1 a pound. Approximately the same amount of 2009 production is hedged at 90 cents per pound.

Zinc, currently priced at about 80 cents a pound, should bottom out at 70 cents a pound next year before rising to 80 cents in 2010, Citigroup analyst Alan Heap said in a Sept. 1 report to clients.

During a conference call discussing the results, Mr. Hensler told investors Horsehead was taking actions that would produce annualized savings of $35 million. He also outlined other initiatives similar to what Cobalt Capital subsequently recommended, including trying to get paid more for the iron contained in the recycled materials Horsehead receives from steel producers.

Mr. Cooperman assured Mr. Hensler that Cobalt was "not looking to make a quick buck and move on," a typical refrain of activist investors. They don't always stick around. Whether Cobalt is around for Horsehead's second anniversary party and what kind of celebration the company will be able to throw remains to be seen.