Portfolio

Hind Zinc slumps after muted Q4

Satya Sontanam | | | Updated on: May 02, 2018
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While near-term performance could be under pressure, long-term appears sound

The stock of Hindustan Zinc fell by 5.8 per cent on Wednesday, owing to a drop in the March quarter net profit by 18 per cent y-o-y. The weak production guidance given by the company for fiscal 2018-19 has further dampened sentiments. However, a ramp-up in production in the company’s underground mines, higher consistency in grade levels and expected lower cost of production over the next two to three years, remain positives for the stock.

In the quarter gone by, the company recorded a revenue of ₹6,277 crore, flat y-o-y and an increase of 6 per cent q-o-q. The flat performance on y-o-y basis was due to lower zinc volumes. This was primarily caused by unfavourable mine mix — the overall ore grades dipped as the company used up its ore from the open cast mine in the month of March (of relatively lower quality). The company has now transitioned completely to underground mining.

For fiscal 2018-19, the company has given a flat guidance for its metal production which is again due to the transition from open cast to underground mining. The mined metal production for 2017-18 was 9,47,000 tonnes (4 per cent higher y-o-y); this is expected to be around one million tonnes for FY19. The weak guidance is on account of the company losing the production contribution from its open cast to the extent of 2,23,000 tonnes.

However, the management is confident of making up for the loss in production from the open cast mine in 2018-19. It further aims to produce 1.2 mtpa by 2019-20. Also, the transition to underground mining is expected to bring in better consistency in grade quality over the years.

Sound long-term prospects

Though the performance of the company in the next few quarters could be subdued, it has good prospects in the longer run.

The board of the company has also approved the phase 1 of expansion, which will increase the mined metal and smelting capacity to 1.3 mtpa over the next three years at a capex of about ₹4,500 crore. To achieve its stated production target over the next few years, the company will add additional ore capacity of 0.5 mtpa each at Rampura Agucha, Sindesar Khurd, and Rajpura Dariba mines, while capacity of the Zawar mine will be increased by 1.2 mtpa.

Further, zinc cost of production (COP) in the March quarter has come off from the elevated levels seen in the December quarter. It declined 10 per cent q-o-q to ₹59,569 or $925 a tonne on account of higher metal production and higher percentage of linkage coal.

The company expects the cost of production to fall further due to the installation of shafts leading to higher productivity and fumer plants aiding higher recovery of lead and silver from waste. The improvement in overall ore grade from the transition to underground mine will also start paying off in the long run.

Published on May 02, 2018

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