After weak Q4, Hindustan Zinc's prospects hinge on recovery in zinc prices

Lower volumes, weak realisations and higher costs impacted the company's performance in the March quarter

Hindustan Zinc’s March quarter (Q4) operating performance remained impacted by lower mined metal production, weak base metal prices, and cost pressures. 

India’s largest and the world’s second-biggest zinc-lead miner — which is changing its production methodology to underground mining — saw 24 per cent jump in output from underground mines (245,000 tonnes). However, the closure of open cast mining meant total mined production was still down 4 per cent year-on-year. 

Per-tonne zinc and lead prices at $2,702 and $2,036 have improved 3-4 per cent sequentially, but were 21 and 19 per cent lower, respectively, YoY. Thus, while revenues at Rs 5,491 crore were just a per cent lower sequentially, they were down 12.5 per cent YoY and missed Bloomberg estimates of Rs 5,540 crore.

The cost of zinc production softened sequentially (down 3 per cent in rupee terms on lower coal, diesel prices) but the surge in staff costs, lower volumes, rupee depreciation and higher mine development expenses meant that production costs were still up 17 per cent YoY. 

Thus, Ebitda at Rs 2,797 crore fell 23 per cent YoY (2 per cent sequentially), and net profit at Rs 2,012 crore was down about 20 per cent YoY, slightly ahead of expectations of Rs 2,785 crore and Rs 2,015 crore, respectively.

The soft performance impacted Street sentiment, given that the stock fell by over 2 per cent on Wednesday.

Moving forward, volumes should improve as the company has guided for production of more than 1 million tonnes (mt) for FY20 as against 936,000 tonnes last fiscal year. 

Geotechnical issues at its Rampur Agucha mines, too, have been resolved. Though production costs may improve due to lower fuel costs, higher mine development expenses hint that the decline may not be significant. Some benefits on products and profitability, however, may come through expansion projects. Thus, for a meaningful recovery in earnings, zinc prices hold key. 

Zinc prices on the LME (London Metal Exchange) are on a recovery path in 2019, and the Street will be looking at the trend closely to gauge the firm’s near-term earnings prospects. Long-term prospects, however, remain firm led by high grade captive mines, captive power plants, scale of production, and a diversified revenue stream, with increasing contribution from silver sales and supported by a strong balance sheet.