Favourable price outlook, low output cost key triggers for Hindustan Zinc

The company, which is a low cost producer, is changing its mining methodology from open cast to underground mining

The Hindustan Zinc (HZL) stock has gained over 15 per cent since its February lows, on the back of rising zinc prices on the London Metal Exchange (LME). Zinc is trading at about $3,000 a tonne in April, compared to $2,603-levels in mid-February.

The near-term zinc price outlook remains steady, driven by multi-year low warehouse inventory (LME and Shanghai futures exchange inventory) and the deficit forecast for CY19 by the International Lead and Zinc Study Group, say analysts. It may be noted that the per-tonne zinc prices in 2018 had corrected from highs of around $3,600 to close at $2,300. 

While trade war concerns had impacted all base metal prices, the decline in zinc prices also took place in anticipation of rising supplies.

The increase in prices and a zinc deficit is good news for HZL, the country’s largest producer. The firm, which is a low-cost producer, is changing its mining methodology from open cast to underground mining. It is on course to achieving its mined metal production run rate of 1.2 million tonnes per annum (mtpa), by the end of FY20.

However, the change in mining methodology also throws intermittent challenges. For instance, analysts at Edelweiss expect mined metal production in the March quarter to be down 6 per cent year-on-year (YoY), primarily on geo-technical issues at the Rampur Agucha mines, thus resulting in lower Zinc production.

Average zinc prices were up 3 per cent sequentially, though they were down 21 per cent on a YoY basis. Hence, one may expect a soft quarterly performance. An analyst at a domestic brokerage said he remains watchful and will revise the estimates after the March quarter results. The zinc fumer project of the company will help recover metals from waste and thus improve profitability.

Analysts at JM financial are positive on HZL, given the low cost of production facilitated by high grade captive mines, captive power plants, sizeable scale of production, a diversified revenue stream with increasing contribution from silver sales, and a strong balance sheet with net cash of Rs 29 a share.

Meanwhile, rising zinc prices will boost domestic prospects for HZL’s parent Vedanta, which will benefit from rising production at Zinc International. Zinc contributes about a fourth to overall revenues, and remains the second largest revenue contributor for Vedanta.