Hindustan Zinc to play volume strategy to beat margin pressure

Apart from increasing zinc production, the company is upping its lead and consequently silver production

Hindustan Zinc Limited, after posting record high profit of Rs 5,526 crore in FY12, 13% higher from the previous year, expects to be vulnerable to fluctuating zinc prices. However, the company has a plan to play up its volumes and manage its cost to curb the impact.

“Like any other zinc producer globally, Hindustan Zinc's operating margins are impacted by the zinc prices (LME),” Akhilesh Joshi, Chief Executive Officer, Hindustan Zinc, told Business Standard. “However, to guard against the market fundamentals, the company is implementing a multi-pronged strategy of increasing zinc production and upping its lead and consequently silver production.”

“This will help in cost optimization, and take pressure off operating margins for the company,” he said.

LME three-month zinc prices have declined 5.39% since March 31,2012 to date, while spot zinc prices on the Bombay Metal Exchange have gone up by 4.69% in the same period. According to the Emkay Global the company obtained six prospecting licenses in the last one year, while it applied or three mining leases.

Joshi confirmed that, “the company plans to continuously engage in exploration, cost optimization and increase its volumes to meet the fluctuations at the LME and domestic zinc prices,” Joshi said.

When a company needs to grow in volumes, increasing its reserves and resources (R&R) is the first step. Hindustan Zinc’s Rampura Agucha mine is the world's largest zinc producing mine and smelting complex at Chanderiya in Rajasthan It is the world’s largest single location zinc smelting complex.

With cumulative R&R of 143.7 million tonne in 2002, the HZL stands comfortable with about 333 million tonne of R&R that contains about 35 million tonnes of zinc-lead metal, 25 years of mine life.

After this, increasing volume is only a matter of course. Since 2002, Hindustan Zinc has grown Five-fold in volumes, from 169,000 tonnes of zinc in 2002 to 880,000 tonne in 2012 after completing three phases of expansions.

HZL plans to engage in de-bottlenecking, a continuous process for the company to increase its output. When Chanderia was commissioned its output was 170,000 tonne at each of its Hydro I & II smelters, which was enhanced to 210,000 tonne each using de-bottlenecking. Likewise, the company also enhanced output at its Dariba mine by 8,000 tonne to reach 88,000 tonne, he said.

Another key strategy the company is going to use is developing its increasing its lead and silver output. Nirmal Bang’s mine visit report stated, “HZL is looking at higher lead and silver output and cost efficiency as major profit drivers in the year.”

The company is expecting 350 tonne integrated silver production in FY13. The company informed  that HZL plans to increase its silver production from current levels of 240-500 tonne by 2013-14, which would significantly add to the revenues and profits.

Not only can we expect a good quarter for the company, looking forward, the company may see a comfortable fiscal too.