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Hindustan Zinc (HZ)
Metals & Mining
On track for a strong FY2012E performance. Meeting with Hindustan Zinc
management reinforced confidence on (1) strong execution—Sindeshwar Khurd mine
expansion one year ahead of schedule, (2) strong volume growth in FY2012E,
(3) significant step-up in contribution from silver to overall earnings, and (4) positive
earnings surprises—from continued tax benefits even if EOU tax benefits are not
extended. HZ trades at inexpensive 4.8X FY2012E EBITDA; BUY with a 12-month target
price of Rs1,535. Our target price is based on zinc price of US$2,300 for FY2012E.
Strong volume growth of 18% in FY2012E
HZ management is confident of 958 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. Note that HZ expanded zinc mine (Rampura Agucha) and smelting capacity to 879
ktpa in March 2010. Commissioning of 100 ktpa lead smelter at Dariba smelting complex was
delayed due to delay in availability of visa for Chinese Nationals. Trial production at SIndeshwar
Khurd (SK) mine has commenced and HZ is on track to mine 1.5 mt of ore in FY2012E.
Silver production will start making a difference in FY2012E
SK mine is rich with silver content of 162 grams/ton of ore. High silver content in ore helps in
higher recovery rate; HZ management expects silver recovery of 75-85% 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. A back of the envelope calculation
indicates that HZ can generate EBITDA of Rs8.2 bn in FY2012E at the current silver prices.
Cost of production may increase in the near term but may be offset by higher zinc prices
Cost of production may increase led by (1) increase in mix of production led by SK mine ramp-up,
which have lower metal content in the ore as compared to Rampura Agucha mine; HZ
management indicates that mining cost at SK may be 20% higher than Rampura Agucha mine,
(2) increase in raw material and power and fuel costs. International coal prices have increased by
30% in the past three months, while other raw material prices have also increased substantially,
and (3) increase in strip ratio at Rampura Agucha mine, which may stay at elevated levels for the
next 2-3 years. However, this may be more than offset by cost-push increase in zinc and lead
prices and strong earnings growth from increase in silver production.
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 958 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 4.8X FY2012E EV/EBITDA and 10.1X 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.
Other points from management discussion
�� Further increase in reserves and resources likely. HZ has added 148 mn to reserves
and resources over the past seven years without deterioration in average grade of metal
in the ore. The company is confident of further accretion based on comprehensive drilling
and exploration program.
�� Zawar mines may take longer to reopen. 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 currently. 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.
�� 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%.
�� Company may utilize excess cash for overseas acquisitions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Zinc (HZ)
Metals & Mining
On track for a strong FY2012E performance. Meeting with Hindustan Zinc
management reinforced confidence on (1) strong execution—Sindeshwar Khurd mine
expansion one year ahead of schedule, (2) strong volume growth in FY2012E,
(3) significant step-up in contribution from silver to overall earnings, and (4) positive
earnings surprises—from continued tax benefits even if EOU tax benefits are not
extended. HZ trades at inexpensive 4.8X FY2012E EBITDA; BUY with a 12-month target
price of Rs1,535. Our target price is based on zinc price of US$2,300 for FY2012E.
Strong volume growth of 18% in FY2012E
HZ management is confident of 958 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. Note that HZ expanded zinc mine (Rampura Agucha) and smelting capacity to 879
ktpa in March 2010. Commissioning of 100 ktpa lead smelter at Dariba smelting complex was
delayed due to delay in availability of visa for Chinese Nationals. Trial production at SIndeshwar
Khurd (SK) mine has commenced and HZ is on track to mine 1.5 mt of ore in FY2012E.
Silver production will start making a difference in FY2012E
SK mine is rich with silver content of 162 grams/ton of ore. High silver content in ore helps in
higher recovery rate; HZ management expects silver recovery of 75-85% 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. A back of the envelope calculation
indicates that HZ can generate EBITDA of Rs8.2 bn in FY2012E at the current silver prices.
Cost of production may increase in the near term but may be offset by higher zinc prices
Cost of production may increase led by (1) increase in mix of production led by SK mine ramp-up,
which have lower metal content in the ore as compared to Rampura Agucha mine; HZ
management indicates that mining cost at SK may be 20% higher than Rampura Agucha mine,
(2) increase in raw material and power and fuel costs. International coal prices have increased by
30% in the past three months, while other raw material prices have also increased substantially,
and (3) increase in strip ratio at Rampura Agucha mine, which may stay at elevated levels for the
next 2-3 years. However, this may be more than offset by cost-push increase in zinc and lead
prices and strong earnings growth from increase in silver production.
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 958 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 4.8X FY2012E EV/EBITDA and 10.1X 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.
Other points from management discussion
�� Further increase in reserves and resources likely. HZ has added 148 mn to reserves
and resources over the past seven years without deterioration in average grade of metal
in the ore. The company is confident of further accretion based on comprehensive drilling
and exploration program.
�� Zawar mines may take longer to reopen. 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 currently. 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.
�� 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%.
�� Company may utilize excess cash for overseas acquisitions.
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