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Hindustan Zinc (HZ)
Metals & Mining
Excellent quarter. HZ reported an excellent quarter with an EBITDA of Rs19.7 bn and
net income of Rs17.7 bn, which were 16.2% and 23.9% ahead of our estimate. The
outperformance was led by (1) silver sales equivalent to 28 tonnes embedded in lead
concentrate sales and (2) strong growth in the zinc-lead segment. The company is set
for a strong growth over the next two years led by ramp-up of zinc-lead and silver
production. We raise our TP to Rs170 (Rs160 earlier). Maintain BUY rating.
Strong silver and concentrate sales drive our earnings growth
HZ reported excellent quarterly performance. EBITDA of Rs19.7 bn (+27.1%yoy, +30.6% qoq) was
16.2% ahead of our estimate of Rs17 bn. Net income of Rs17.7 bn was 23.9% above our
estimate, helped by higher-than-expected treasury income and lower-than-expected tax rate.
Operational outperformance can be attributed to (1) higher-than-expected refined zinc sales; and
(2) higher silver sales at 44.3 tonnes versus our estimate of 35 tonnes. Due to delay in
commissioning of lead smelter, HZ sold lead concentrate (which had silver particles) from the SK
mine. Silver content in lead concentrate sold during the quarter was ~28 tonnes, which was not
factored in our estimate.
Sindeshar Khurd mine on track for production at rated capacity in FY2012E
We expect HZ to mine ore at SK of 1.5 mn tonnes in FY2012E, i.e. at rated capacity; HZ has
already achieved capacity utilization of 85% in March on a monthly run rate basis. SK mine is
critical to achieving silver production target over the next two years. Likely silver content in ore in
FY2012E will be 141 ppm, which the management expects to increase to 220 ppm in FY2013E.
We have taken conservative assumptions and model silver production of 301 tonnes in FY2012E
and 420 tonnes in FY2013E. Company target on silver production may be a touch optimistic, in
our view.
Ore mining and concentrate production of lead may not be sufficient to feed expanded smelter
HZ will likely be commission100 ktpa lead smelter at Dariba by June 2011 taking the total lead
smelting capacity to 185 ktpa. However, the concentrate feed from HZL mines will likely be 30-40
ktpa lower than expanded lead smelting capacity. HZL may import lead concentrate to make full
use of expanded capacity. We lower our lead production estimate as a result by 27% for FY2012E.
A strong play in silver and volume growth. Maintain BUY rating
HZ is a strong play on volume growth, ramp-up of profitable silver refinery and firm zinc prices. The
stock trades at 5.9X FY2012E EV/EBITDA and 10.4X FY2012E EPS. We increase our EPS estimate by
11.3% and 9.2% to Rs14.6 and Rs16 for FY2012E and FY2013E, respectively. We raise our target
price to Rs170; we ascribe 6.75 X to FY2012E EBITDA; higher multiple partly captures the strong
growth potential beyond FY2012E. BUY.
Upgrades reserves and resources estimate
HZ has added 22mn tonnes to the reserves and resources, prior to a depletion of 7.5 mn
tonnes in FY2011. HZ upgraded contained zinc-lead metal by 1.4 mn tonnes, prior to a
depletion of 0.84 mn tonnes during the same period. Total reserves and resources at end-
March 2011 now stand at 313 mn tonnes containing 35mn tonnes of zinc-lead metal and
885 mn ounces of silver. We are not sure whether the upgrade is a result of further success
on drilling or change in economic assumptions to compute mineable reserves.
Key changes to our estimates
Exhibit 1 summarizes key change to our estimates. We have taken a conservative view on
refined lead production, especially noting the non-availability of captive feed for expanded
lead smelting capacity. Our silver production estimates are largely unchanged. We have also
raised our silver price assumption to US$32.8/oz from US$27.3/oz earlier for FY2012E and
FY2013E, respectively
Highlights from 4QFY11 results announcement
The company is targeting to achieve mined metal production to the extent of 85-
90% of its rated capacity in FY2012E.
The company expects to exit FY2012E with a rated silver capacity of 500 tonnes
and silver production in the region of 350-400 tonnes depending upon the date of
commissioning of the 100 ktpa lead smelter.
The company intends to incur capital expenditure to the tune of Rs15 bn in
FY2012E.
The company expects to continue paying tax under MAT as per the provisions of
Section 115JB of the Income Tax Act, 1961. The management expects the effective
rate for the company in FY2012E to be around 17%.
HZ expects cost of production (excluding royalty) for FY2012E to be at similar levels
to FY2011, i.e. US$800/tonne (excluding royalty).
The company is currently operating only one out of the four mines in Zawar which
is not located in any forest areas and is currently awaiting Supreme Court nod for
operating the other three mines which are located in forest areas.
The company converted 83% of the EBITDA generated into free cash flow in
FY2011.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Zinc (HZ)
Metals & Mining
Excellent quarter. HZ reported an excellent quarter with an EBITDA of Rs19.7 bn and
net income of Rs17.7 bn, which were 16.2% and 23.9% ahead of our estimate. The
outperformance was led by (1) silver sales equivalent to 28 tonnes embedded in lead
concentrate sales and (2) strong growth in the zinc-lead segment. The company is set
for a strong growth over the next two years led by ramp-up of zinc-lead and silver
production. We raise our TP to Rs170 (Rs160 earlier). Maintain BUY rating.
Strong silver and concentrate sales drive our earnings growth
HZ reported excellent quarterly performance. EBITDA of Rs19.7 bn (+27.1%yoy, +30.6% qoq) was
16.2% ahead of our estimate of Rs17 bn. Net income of Rs17.7 bn was 23.9% above our
estimate, helped by higher-than-expected treasury income and lower-than-expected tax rate.
Operational outperformance can be attributed to (1) higher-than-expected refined zinc sales; and
(2) higher silver sales at 44.3 tonnes versus our estimate of 35 tonnes. Due to delay in
commissioning of lead smelter, HZ sold lead concentrate (which had silver particles) from the SK
mine. Silver content in lead concentrate sold during the quarter was ~28 tonnes, which was not
factored in our estimate.
Sindeshar Khurd mine on track for production at rated capacity in FY2012E
We expect HZ to mine ore at SK of 1.5 mn tonnes in FY2012E, i.e. at rated capacity; HZ has
already achieved capacity utilization of 85% in March on a monthly run rate basis. SK mine is
critical to achieving silver production target over the next two years. Likely silver content in ore in
FY2012E will be 141 ppm, which the management expects to increase to 220 ppm in FY2013E.
We have taken conservative assumptions and model silver production of 301 tonnes in FY2012E
and 420 tonnes in FY2013E. Company target on silver production may be a touch optimistic, in
our view.
Ore mining and concentrate production of lead may not be sufficient to feed expanded smelter
HZ will likely be commission100 ktpa lead smelter at Dariba by June 2011 taking the total lead
smelting capacity to 185 ktpa. However, the concentrate feed from HZL mines will likely be 30-40
ktpa lower than expanded lead smelting capacity. HZL may import lead concentrate to make full
use of expanded capacity. We lower our lead production estimate as a result by 27% for FY2012E.
A strong play in silver and volume growth. Maintain BUY rating
HZ is a strong play on volume growth, ramp-up of profitable silver refinery and firm zinc prices. The
stock trades at 5.9X FY2012E EV/EBITDA and 10.4X FY2012E EPS. We increase our EPS estimate by
11.3% and 9.2% to Rs14.6 and Rs16 for FY2012E and FY2013E, respectively. We raise our target
price to Rs170; we ascribe 6.75 X to FY2012E EBITDA; higher multiple partly captures the strong
growth potential beyond FY2012E. BUY.
Upgrades reserves and resources estimate
HZ has added 22mn tonnes to the reserves and resources, prior to a depletion of 7.5 mn
tonnes in FY2011. HZ upgraded contained zinc-lead metal by 1.4 mn tonnes, prior to a
depletion of 0.84 mn tonnes during the same period. Total reserves and resources at end-
March 2011 now stand at 313 mn tonnes containing 35mn tonnes of zinc-lead metal and
885 mn ounces of silver. We are not sure whether the upgrade is a result of further success
on drilling or change in economic assumptions to compute mineable reserves.
Key changes to our estimates
Exhibit 1 summarizes key change to our estimates. We have taken a conservative view on
refined lead production, especially noting the non-availability of captive feed for expanded
lead smelting capacity. Our silver production estimates are largely unchanged. We have also
raised our silver price assumption to US$32.8/oz from US$27.3/oz earlier for FY2012E and
FY2013E, respectively
Highlights from 4QFY11 results announcement
The company is targeting to achieve mined metal production to the extent of 85-
90% of its rated capacity in FY2012E.
The company expects to exit FY2012E with a rated silver capacity of 500 tonnes
and silver production in the region of 350-400 tonnes depending upon the date of
commissioning of the 100 ktpa lead smelter.
The company intends to incur capital expenditure to the tune of Rs15 bn in
FY2012E.
The company expects to continue paying tax under MAT as per the provisions of
Section 115JB of the Income Tax Act, 1961. The management expects the effective
rate for the company in FY2012E to be around 17%.
HZ expects cost of production (excluding royalty) for FY2012E to be at similar levels
to FY2011, i.e. US$800/tonne (excluding royalty).
The company is currently operating only one out of the four mines in Zawar which
is not located in any forest areas and is currently awaiting Supreme Court nod for
operating the other three mines which are located in forest areas.
The company converted 83% of the EBITDA generated into free cash flow in
FY2011.
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