Hindustan Zinc well placed with rising volumes, supply situation

Shortage seen offsetting price volatility due to trade war

Though the broader markets have been under pressure, Hindustan Zinc continues to gain and has bounced back 13.8 per cent from its July lows. While trade war concerns have led to volatility in base metal prices, what offers comfort is the outlook for zinc given the supply shortages.

Further, while it posted softer volumes in the June quarter, there has been a recovery and analysts expect a better second half. The firm is on track to achieve a 1.2 million tonnes per annum (MTPA) run-rate by the end of FY19, as compared to 0.94 MTPA in FY18. It is further planning to ramp up volumes to 1.5 MTPA. Thus, improving volume outlook and zinc supply deficit should help support its stock prices.

Zinc prices on the London Metal Exchange have remained volatile. Analysts at Kotak Securities say the zinc market is expected to remain in a deficit this year and foresee Hindustan Zinc to benefit from the favorable zinc environment, resulting in cumulative free cash flow of Rs 210 billion by the end of FY20. 

Global zinc consumption is expected to grow 2.5 per cent to 14.8 MT in 2018, while mine supply will remain at 13.7MT, say analysts.

On volume front, August saw lead production volumes shoot up 35 per cent year-on-year (48 per cent month-on-month) to 18,100 tonnes.

Volumes have improved 28 per cent month-on-month to 58,500 tonnes as the underground transition at Rampur Agucha mines remains in progress. Analysts at Edelweiss expect mined metal production to revive to 80,000 tonnes in September.

The firm continues to be one of the lowest cost producers globally. What helps it further is its presence in the lower end of the cost curve globally (backed by high grade captive mines), a diversified revenue stream with increasing contribution from silver, and a strong balance sheet.