Lower prices, production take sheen off Hindustan Zinc's Q3 performance

Hindustan Zinc’s (HZL’s) lower-than-expected net profit for the quarter ended December 2019 (third quarter, or Q3) led to a 1.9 per cent fall in its share price on Tuesday. While the overall metal production was lower, volatility in base metal prices continues to hurt the company’s financial performance.

In Q3, the average zinc prices on the London Metal Exchange at $2,388 a tonne was down 9 per cent year-on-year (YoY); sequentially, it was up marginally by 2 per cent. Lead prices, however have seen some recovery, and were 4 per cent YoY and a per cent over the September quarter.

The price of silver — a byproduct of mining copper, lead, and zinc — is up 19 per cent YoY and has provided some respite. Yet, given the high contribution of zinc, the company’s total sales at Rs 4,672 crore declined 16 per cent YoY in Q3.

The fall in sales was also on account of a 5-per cent YoY fall in mined metal production to 235,000 tonnes due to lower grades at HZL’s Kayad and SK mines. The company, which is switching to underground mining from opencast, also faced some geological issues. However, there is some improvement on a sequential basis, as mined metal production is up 7 per cent over the September quarter.

Against this backdrop, the operating profit at Rs 2,288 crore was down 20 per cent YoY, but 8 per cent higher over the September quarter. Consequently, net profit at Rs 1,620 crore was down 27 per cent YoY, and was also lower than the consensus estimate of Rs 1,700 crore, according to Bloomberg.

Moving forward, HZL expects to improve production and end 2019-20 at an exit rate of 1.2 million tonnes (mt) per annum. The first nine months have seen mined metal production of 0.668 mt.

The confidence stems from the commissioning of underground shaft at Rampura Agucha mines, while ore hauling from shaft will start in the current quarter.

At Zawar mines, too, two backfill plants are under commissioning and expected to commence operations from February, said the company.

While efforts on volume growth are in the right direction and will yield results, caution persists on volatility in base metal prices. Near-term challenges may also persist on cost of production, with rising coal prices and electricity duty by Rajasthan government on captive power generation.

Yet, given the over 20 per cent correction since April 2019 highs and improving production, analysts believe India’s largest integrated zinc producer, which is also available at a high dividend yield of over 9 per cent (based on 2018-19 payout), can be accumulated on dips by long-term investors.