Metal price movement remains key factor for Hind Zinc's future performance

The company has seen softness in the first half of FY19 in terms of production volumes

Hindustan Zinc posted a sequential improvement in performance in the December quarter, although the show compared to the year-ago quarter was weak, given the falling metal prices. Zinc prices on the London Metal Exchange (LME), at $2,631 a tonne, were 19 per cent lower year-on-year, but improved four per cent sequentially.

Lead prices on the LME, at $1,964, were down 21 per cent and seven per cent on year-on-year and sequential basis, respectively. Given the lower prices, a year-over-year decline in revenues was being anticipated. The company reported revenue decline of 6 per cent, partly offset by rupee depreciation, and some rise in volume.

The company that is changing its mining methodology from open-cast mining to underground mining has seen softness in the first half of FY19 in terms of production volumes, led by closure of open-cast mines. However, the December quarter showed improvement in volumes. Total mined metal production was up 6 per cent sequentially, and three per cent year-on-year at 247,000 tonne. This was driven by strong increase in underground ore production and improvement in ore grades. 

The rise in production, declining cost of production, helped by softening energy prices, lifted the December quarter performance. The company's revenue from operations during the quarter at Rs 5,540 crore, increased 16 per cent sequentially. 

Zinc’s cost of production (COP) before royalty during the quarter at $997 improved four per cent sequentially (one per cent in rupee terms). Given the higher volumes, operational efficiency, and lower diesel costs operating profit at Rs  2,851 crore was up 23.2 per cent sequentially (13 per cent lower year-on-year), better than the consensus estimates of Rs  2,811 crore. 

Net profit improved on the back of higher other income sources, led by the treasury income. At Rs  2,211 crore, the net profit rose 22 per cent sequentially (down 4 per cent y-o-y), better than the analyst estimates of Rs  2,050 crore. 

Moving forward, with the ongoing ramp-up of underground mines, mined metal production in FY 2019 is expected to be slightly higher than last year (despite a softer first half), in line with the annual guidance provided earlier. The company expects to achieve 1.2 million tonne per annum mined metal production-mark by FY20. Zinc COP, before royalty, is projected to be in the range of $950 to $975 per million tonne (mt) in the second half of FY19, helped by softer energy prices, increased coal linkages and operational efficiency. 

While rising volumes and declining cost of production will continue to benefit, all eyes will remain on zinc metal price movement. Base metal prices remain volatile on trade war concerns. Certain analysts are also expecting zinc supplies to increase, moving forward, with surplus in 2020, which can keep the prices under check. The management, however, does not expect significant rise in zinc supplies, and so there will be downward pressure on prices. 

Analysts at ICICI Securities post results said going forward the movement in zinc prices and trade developments between US and China would continue to remain key factors.