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Hindustan Zinc (HZ)
Metals & Mining
Key takeaways from mine and plant visit. Meetings, mine and plant visit of
Hindustan Zinc lend significant confidence on (1) expansion of Sindeshwar Khurd (SK)
mine, which is running ahead of schedule with the company running at close to 1.2
mtpa annualized rate of ore production, (2) strong volume growth in FY2012E, and (3)
significant step-up in contribution from silver to overall earnings; HZ is targeting silver
production of 400 tons in FY2012E. HZ trades at an inexpensive 5.1X FY2012E EBITDA;
BUY with a 12-month target price of Rs1,535.
Takeaways from plant and mine visit—strong volume growth ahead
HZ management is confident of 960 kt of zinc-lead volumes in FY2012E; this is higher than our
estimate of 893 kt. Zinc mine and smelter will likely ramp up to rated capacity by 4QFY11E, per
management. Commissioning of 100 ktpa lead smelter at Dariba smelting complex was delayed
due to delay in availability of visa for Chinese nationals; however, this would be completed by
end-March 2011.
Trial production at Sindeshwar Khurd (SK) mine has commenced and HZ is on track to mine
1.5 mt of ore in FY2012E. HZ will mine close to 100 kt of ore in March 2011 and is running at
an annualized rate of 1.2 mtpa. The company expects further ramp-up of SK mine to 2 mn ton
run rate by 2HFY12E. Concentrator mill is under trial run and already has 2 mtpa capacity.
SK mine is rich with silver content of 180 grams/ton of ore. High silver content in ore helps in
higher recovery rate; HZ management expects silver recovery of 85% from ore to concentrate
from SK mine. In addition, the company is working on improving silver recovery rate from
Rampura Agucha mine to 45% from the present 30-35%. HZ reiterated its target of FY2012E
exit capacity of 500 tons of silver and production of 400 tons from 180 tons currently.
The company is striving hard to keep cost of production under control. HZ expects cost of
production of concentrate to remain steady at US$300/ton despite ramp-up from low metal
containing SK mine. Cost of production of concentrate in Rampura Agucha mine is at US$240/
ton, while SK cost/ton may be 15-20% higher. However, increase in raw material and power
and fuel costs may lead to increase in cost of production of refined zinc. International coal
prices have increased by 30% in the past three months, while other raw material prices have
also increased substantially.
HZ expects new zinc mine, i.e. Kayar to start soon. HZ indicates that it has received all
regulatory clearances to start this mine. HZ has received approval to mine up to 300 ktpa. Kayar
is an open cast mine with average zinc grade of 11%.
We are impressed with the pace and scale of execution at Hindustan Zinc. A five-fold
increase in production within six years speaks volumes about the execution capabilities of
the group.
Zawar mines may take longer to re-open. HZ is awaiting forest clearance before it starts
Zawar mines. Only one of the four mines in the Zawar district is operational currently.
Note that HZ applied for renewal of Zawar mining lease; however, renewal requires forest
clearance, which the company is awaiting. Ore extraction from Zawar mine in FY2010
was 1 mn which will likely reduce to 250 ktpa in FY2011E. HZ expects Zawar mine to be
operational in FY2012E. Zawar contributed 5% to overall zinc concentrate production in
FY2010.
Scope for upgrade in our estimates; valuations remain attractive
We maintain our BUY recommendation and end-FY2012E fair value of Rs1,535. Our target
price is based on conservative zinc and lead price assumption of US$2,300/ton each as
compared to spot prices of US$2,464 and US$2,527/ton, respectively. Our FY2012E and
FY2013E EPS of Rs125.5 and Rs140.7 is based on tax rate of 29.5% and 30%; HZ indicates
that tax rates may remain at 20% levels for the next 3-4 years. Tax efficiency will likely
accrue from new silver refinery at Pantnagar, where it enjoys infrastructure status and tax
exemption of 100% for the five years and 30% for the next five years. Since silver is a
byproduct of the lead mine, cost of production is zero; hence, entire silver
realizations=EBITDA, which qualifies for 100% tax exemption (refer Exhibit 5).
We believe that our earnings have scope for upgrade on the back of (1) higher zinc-lead
production; we model 893 kt of zinc-lead production for FY2012E as compared to
management guidance of 960 kt, (2) likely upside to our silver production estimate of 210
tons for FY2012E, and (3) potential gains from efficient tax planning which may result in tax
rates lower than our estimate of 29.5%.
HZ is a strong play on volume growth, ramp-up of profitable silver refinery and firm zinc
prices. The stock trades at 5.1X FY2012E EV/EBITDA and 10.4X FY2012E EPS. Our earnings
estimate for FY2012E may increase by 7% if the zinc prices stay at current levels. We ascribe
6.5X to FY2012E EBITDA with cash and cash equivalents contributing Rs477/share to end-
FY2012E fair value of Rs1,535. Maintain BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Zinc (HZ)
Metals & Mining
Key takeaways from mine and plant visit. Meetings, mine and plant visit of
Hindustan Zinc lend significant confidence on (1) expansion of Sindeshwar Khurd (SK)
mine, which is running ahead of schedule with the company running at close to 1.2
mtpa annualized rate of ore production, (2) strong volume growth in FY2012E, and (3)
significant step-up in contribution from silver to overall earnings; HZ is targeting silver
production of 400 tons in FY2012E. HZ trades at an inexpensive 5.1X FY2012E EBITDA;
BUY with a 12-month target price of Rs1,535.
Takeaways from plant and mine visit—strong volume growth ahead
HZ management is confident of 960 kt of zinc-lead volumes in FY2012E; this is higher than our
estimate of 893 kt. Zinc mine and smelter will likely ramp up to rated capacity by 4QFY11E, per
management. Commissioning of 100 ktpa lead smelter at Dariba smelting complex was delayed
due to delay in availability of visa for Chinese nationals; however, this would be completed by
end-March 2011.
Trial production at Sindeshwar Khurd (SK) mine has commenced and HZ is on track to mine
1.5 mt of ore in FY2012E. HZ will mine close to 100 kt of ore in March 2011 and is running at
an annualized rate of 1.2 mtpa. The company expects further ramp-up of SK mine to 2 mn ton
run rate by 2HFY12E. Concentrator mill is under trial run and already has 2 mtpa capacity.
SK mine is rich with silver content of 180 grams/ton of ore. High silver content in ore helps in
higher recovery rate; HZ management expects silver recovery of 85% from ore to concentrate
from SK mine. In addition, the company is working on improving silver recovery rate from
Rampura Agucha mine to 45% from the present 30-35%. HZ reiterated its target of FY2012E
exit capacity of 500 tons of silver and production of 400 tons from 180 tons currently.
The company is striving hard to keep cost of production under control. HZ expects cost of
production of concentrate to remain steady at US$300/ton despite ramp-up from low metal
containing SK mine. Cost of production of concentrate in Rampura Agucha mine is at US$240/
ton, while SK cost/ton may be 15-20% higher. However, increase in raw material and power
and fuel costs may lead to increase in cost of production of refined zinc. International coal
prices have increased by 30% in the past three months, while other raw material prices have
also increased substantially.
HZ expects new zinc mine, i.e. Kayar to start soon. HZ indicates that it has received all
regulatory clearances to start this mine. HZ has received approval to mine up to 300 ktpa. Kayar
is an open cast mine with average zinc grade of 11%.
We are impressed with the pace and scale of execution at Hindustan Zinc. A five-fold
increase in production within six years speaks volumes about the execution capabilities of
the group.
Zawar mines may take longer to re-open. HZ is awaiting forest clearance before it starts
Zawar mines. Only one of the four mines in the Zawar district is operational currently.
Note that HZ applied for renewal of Zawar mining lease; however, renewal requires forest
clearance, which the company is awaiting. Ore extraction from Zawar mine in FY2010
was 1 mn which will likely reduce to 250 ktpa in FY2011E. HZ expects Zawar mine to be
operational in FY2012E. Zawar contributed 5% to overall zinc concentrate production in
FY2010.
Scope for upgrade in our estimates; valuations remain attractive
We maintain our BUY recommendation and end-FY2012E fair value of Rs1,535. Our target
price is based on conservative zinc and lead price assumption of US$2,300/ton each as
compared to spot prices of US$2,464 and US$2,527/ton, respectively. Our FY2012E and
FY2013E EPS of Rs125.5 and Rs140.7 is based on tax rate of 29.5% and 30%; HZ indicates
that tax rates may remain at 20% levels for the next 3-4 years. Tax efficiency will likely
accrue from new silver refinery at Pantnagar, where it enjoys infrastructure status and tax
exemption of 100% for the five years and 30% for the next five years. Since silver is a
byproduct of the lead mine, cost of production is zero; hence, entire silver
realizations=EBITDA, which qualifies for 100% tax exemption (refer Exhibit 5).
We believe that our earnings have scope for upgrade on the back of (1) higher zinc-lead
production; we model 893 kt of zinc-lead production for FY2012E as compared to
management guidance of 960 kt, (2) likely upside to our silver production estimate of 210
tons for FY2012E, and (3) potential gains from efficient tax planning which may result in tax
rates lower than our estimate of 29.5%.
HZ is a strong play on volume growth, ramp-up of profitable silver refinery and firm zinc
prices. The stock trades at 5.1X FY2012E EV/EBITDA and 10.4X FY2012E EPS. Our earnings
estimate for FY2012E may increase by 7% if the zinc prices stay at current levels. We ascribe
6.5X to FY2012E EBITDA with cash and cash equivalents contributing Rs477/share to end-
FY2012E fair value of Rs1,535. Maintain BUY.
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