Hindustan Zinc: Silver lining continues

Zinc production increased to 168,000 tonnes in the December quarter, before increasing further to 181,000 tonnes in the March quarter

Consequent to the fall in base metal prices and the hangover of stake sale by the government, the Hindustan Zinc stock fell by 27 per cent from its 52-week high of Rs 147 on December 18, 2012, to its 52-week low of Rs 107 on April 17. The sharp decline in silver prices in mid-April (12 per cent in two days to $23 an ounce on April 17, taking the monthly decline to 22 per cent) was also responsible for the weak sentiment.

While the stock thereafter has recovered to Rs 122 levels, the company's performance in the fourth quarter should allay fears on the earnings front. Its profits were up 53 per cent year-on-year (and 35 per cent sequentially) in the quarter to Rs 2,182 crore. Rising volumes and low cost of production should help the company cushion the potential impact on account of the decline in metal and silver prices. In this backdrop, most analysts (41 of 49 polled by Bloomberg) have a buy rating on the stock, with consensus target price of Rs 148.

The company saw its silver production rising to a 100 tonnes in the March quarter compared to 62 tonnes in the December 2012 quarter, taking annual production to 321 tonnes, a good 35 per cent increase over 237 tonnes in FY12. Lead production at 32,000 tonnes was higher than 22,000 tonnes in the previous quarter. The SK mines of the company that had seen less mined metal production in the first half of FY13, leading to lower output of zinc (153,000 tonnes each in first two quarters of FY13) are now seeing higher production. Zinc production had thereby increased to 168,000 tonnes in the December 2012 quarter before increasing to 181,000 tonnes in the March 2013 quarter.

While the company's cost of production is among the lowest in the world, due to its fully-integrated operations, the increasing silver production (bi-product of lead production) bodes well. Ebitda margins for silver produced are over 95 per cent. Thus, the company's overall Ebitda margins at 54.1 per cent during the March quarter were much higher than 47 per cent during the December quarter and 52.9 per cent in the year-ago quarter. In FY13, the company has seen an increase in its reserve base by 16 million tonnes to 348.3 million tonnes, which includes 35.1 million tonnes of zinc-lead metal and 910 million ounces of silver, implying a mine life of over 25 years. For FY14, the company has forecast a 15 per cent growth in mined metal production to one million tonnes in FY14, on the back of increased production in the Zawar, SK and Kayar mines. The net saleable silver production (after accounting for own consumption) is guided to grow 25 per cent year-on-year to 360 tonnes (analysts see it achieving 350-360 tonnes) from 288 tonnes in FY13.

In this backdrop, the fears of a decline in earnings have largely been put to rest. While Bhavesh Chauhan at Angel Broking sees flat earnings for the company in FY14 before increasing in FY15, Giriraj Daga at Nirmal Bang sees the earnings increasing four per cent in FY14.

Ashish Kejriwal at Elara Capital says "Due to low production costs (excluding royalty of less than $1,000 per tonne) and debt-free status (net cash of Rs 51 per share at FY13-end), Hindustan Zinc will continue to register profits even in the worst of zinc cycles. The company continues to make return-on-equity of 20 per cent and is available at a cheap valuation of 3.7 times FY14 estimated enterprise value/ Ebitda." These valuations are the lowest in four years.