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Hindustan Zinc (HZ)
Metals & Mining
Marginal miss, downgrade to ADD noting lower potential upside. Hindustan Zinc
reported EBITDA of Rs14.7 bn (+30.2%yoy, -8% qoq) was 4.8% lower than our
estimate of Rs15.4 bn. EBITDA miss was largely on account of lower-than-expected lead
concentrate and refined zinc sales. Net income of Rs13.4 bn declined 10% qoq and
included VRS cost of Rs238 mn. Noting lower upside potential to our revised target
price after the 14% cut in our TP to Rs140, we downgrade the stock a notch to ADD.
We cut our EPS estimate FY2012/13E EPS estimate by 4.7/6.2% on the back of a
revision in our zinc/ lead price assumptions.
Lower-than-expected volume leads to earnings miss
HZ reported EBITDA of Rs14.7 bn (+30.2%yoy, -8% qoq), 4.8% lower than our estimate of
Rs15.4 bn. Underperformance can be attributed to (1) lower refined zinc deliveries at 184kt versus
our expectations of 192kt, HZ had its annual plant shutdown in 2QFY12 and (2) no sale of any
zinc-lead metal-in-concentrate. Net income fell 10% sequentially to Rs13.4 bn, marginally lower
than our estimate. Net income was impacted by Rs238 mn of employee VRS expenses. COP of zinc
declined US$27 qoq to US$847/ tonne excluding royalty.
Silver refinery to be commissioned in 3QFY12
HZ commissioned a 100ktpa Dariba Lead smelter in 2QFY12; its production ramp up should start
in 3QFY12. HZ expects the commissioning of its 350 tpa silver refinery in November with
production ramp up expected to take 3-6 months. Silver grade of 120 ppm from the ore mined at
Sindesar Khurd continues to be below expectations though management expects improvement in
FY2013E. We are encouraged by the good progress in ramping up SK ore mining capacity to
2mtpa by end of the year. We model silver production of 238tonnes in FY2012E and 363 tonnes
in FY2013E.
Moderating zinc price forecast
High inventory levels and surplus production have led to a correction in zinc prices to sub
US$2,000 levels. Mine closures and a decline in grade will likely lead to global supply trailing
demand starting 2013/14, near term surplus will weigh on prices. We lower FY2012-13E zinc price
forecast to US$2,075 /2,125. We expect prices to move in a band of US$2,000-2,300 with support
provided by price correction to below marginal cost of production of a number of small mines in
China.
Downgrade to ADD noting lower upside potential
We cut FY2012/13E EPS by 4.7/6.2% to Rs12.5/13.8 and end-FY2013E TP to Rs140. Noting lower
upside potential to our revised target price after the 14% cut in our TP, we downgrade the stock a
notch to ADD. We like the HZ story due to (1) reasonably strong volume growth with increasing
earnings contribution from silver and (2) impressive FCF generation.
Our fair value on HZ will reduce to Rs123 at spot zinc and lead prices. In addition, our EPS
estimate will decline to Rs12/11.5 for FY2012/13E at spot prices from our base case of
Rs12.5/13.8. We value HZ at 5.5X FY2013E EBITDA. Our valuation multiple captures the risk
of the imposition of a mining tax in FY2013E. Put differently, our FY2013/14E EPS will
decline by 15.1/14.9% to Rs11.7/13 in case of an imposition of a mining tax.
Steps up dividend payout and lays out dividend policy, a positive
HZ has declared interim dividend of Rs1.5/share. Return of cash to shareholders is a strong
positive, in our view. Note that HZ has cash of Rs162 bn at end-September 2011.
Updates on expansion projects
The company recently commissioned the 100ktpa lead smelter at Dariba taking the total
lead capacity to 185ktpa and total zinc-lead capacity to 1.0644mtpa. This smelter is in the
process of ramping up and the company expects incremental contribution of 40kt from
this capacity in FY2012E with the smelter reaching a capacity utilization of 85-90% in
Q4FY12. However, the concentrate feed from HZ mines will likely be lower than
expanded lead smelting capacity. HZL may import lead concentrate to make full use of
expanded capacity
Ramp up of the Sindesar Khurd mine, critical to HZ’s silver production target, is on track
and the company expects an FY2012E exit capacity of 2mtpa. The new 350ktpa silver
refinery is believed to be close to completion with its commissioning expected sometime
during the quarter in progress.
The company has also commenced mining related work at the Kayar mine, an
underground mine (with average zinc grade of around 10-11%) with reserves and
resources estimates at 11mn tonnes. The company has environmental clearance approval
of 0.35mn tonnes and expects to commence commercial ore production in FY2014E.
Having already commissioned 105MW out of the planned 150MW wind power
generation expansion, the company expects to commission the balance capacity in
Q3FY12.
Highlights from 2QFY12 earnings conference call
The company expects to exit FY2012E with a rated silver capacity of 500 tonnes
and silver production in the region of 350-400 tonnes which will ramp up to 450
tonnes in FY2013E.
HZ’s 2QFY12 net zinc metal cost of production (excluding royalty) increased
marginally on a yoy basis to US$847/ tonne. However, on a qoq basis, this cost has
come down around US$30/tonne. The management expects this cost to trend
down over the next couple of quarters through operational efficiencies and tighter
control.
The company is currently operating only one of the four mines in Zawar, which is
not located in any forest areas. The company is currently awaiting clearance from
the Supreme Court to operate the other three mines which are located in forest
areas.
The company did not sell any zinc-in-concentrate / lead-in-concentrate during
2QFY12. The company further highlighted that it has no intention of selling the
same over the next few quarters.
The company continues its emphasis on mine exploration and is currently exploring
over 6,200 sq km area in 10 Reconnaissance Permits (RP’s) and has applied for a
few more RP’s. At current production levels, the existing mines have a mine life of
25 years.
The cash and cash equivalents as at 30th September, 2011 stood at Rs162 bn.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Zinc (HZ)
Metals & Mining
Marginal miss, downgrade to ADD noting lower potential upside. Hindustan Zinc
reported EBITDA of Rs14.7 bn (+30.2%yoy, -8% qoq) was 4.8% lower than our
estimate of Rs15.4 bn. EBITDA miss was largely on account of lower-than-expected lead
concentrate and refined zinc sales. Net income of Rs13.4 bn declined 10% qoq and
included VRS cost of Rs238 mn. Noting lower upside potential to our revised target
price after the 14% cut in our TP to Rs140, we downgrade the stock a notch to ADD.
We cut our EPS estimate FY2012/13E EPS estimate by 4.7/6.2% on the back of a
revision in our zinc/ lead price assumptions.
Lower-than-expected volume leads to earnings miss
HZ reported EBITDA of Rs14.7 bn (+30.2%yoy, -8% qoq), 4.8% lower than our estimate of
Rs15.4 bn. Underperformance can be attributed to (1) lower refined zinc deliveries at 184kt versus
our expectations of 192kt, HZ had its annual plant shutdown in 2QFY12 and (2) no sale of any
zinc-lead metal-in-concentrate. Net income fell 10% sequentially to Rs13.4 bn, marginally lower
than our estimate. Net income was impacted by Rs238 mn of employee VRS expenses. COP of zinc
declined US$27 qoq to US$847/ tonne excluding royalty.
Silver refinery to be commissioned in 3QFY12
HZ commissioned a 100ktpa Dariba Lead smelter in 2QFY12; its production ramp up should start
in 3QFY12. HZ expects the commissioning of its 350 tpa silver refinery in November with
production ramp up expected to take 3-6 months. Silver grade of 120 ppm from the ore mined at
Sindesar Khurd continues to be below expectations though management expects improvement in
FY2013E. We are encouraged by the good progress in ramping up SK ore mining capacity to
2mtpa by end of the year. We model silver production of 238tonnes in FY2012E and 363 tonnes
in FY2013E.
Moderating zinc price forecast
High inventory levels and surplus production have led to a correction in zinc prices to sub
US$2,000 levels. Mine closures and a decline in grade will likely lead to global supply trailing
demand starting 2013/14, near term surplus will weigh on prices. We lower FY2012-13E zinc price
forecast to US$2,075 /2,125. We expect prices to move in a band of US$2,000-2,300 with support
provided by price correction to below marginal cost of production of a number of small mines in
China.
Downgrade to ADD noting lower upside potential
We cut FY2012/13E EPS by 4.7/6.2% to Rs12.5/13.8 and end-FY2013E TP to Rs140. Noting lower
upside potential to our revised target price after the 14% cut in our TP, we downgrade the stock a
notch to ADD. We like the HZ story due to (1) reasonably strong volume growth with increasing
earnings contribution from silver and (2) impressive FCF generation.
Our fair value on HZ will reduce to Rs123 at spot zinc and lead prices. In addition, our EPS
estimate will decline to Rs12/11.5 for FY2012/13E at spot prices from our base case of
Rs12.5/13.8. We value HZ at 5.5X FY2013E EBITDA. Our valuation multiple captures the risk
of the imposition of a mining tax in FY2013E. Put differently, our FY2013/14E EPS will
decline by 15.1/14.9% to Rs11.7/13 in case of an imposition of a mining tax.
Steps up dividend payout and lays out dividend policy, a positive
HZ has declared interim dividend of Rs1.5/share. Return of cash to shareholders is a strong
positive, in our view. Note that HZ has cash of Rs162 bn at end-September 2011.
Updates on expansion projects
The company recently commissioned the 100ktpa lead smelter at Dariba taking the total
lead capacity to 185ktpa and total zinc-lead capacity to 1.0644mtpa. This smelter is in the
process of ramping up and the company expects incremental contribution of 40kt from
this capacity in FY2012E with the smelter reaching a capacity utilization of 85-90% in
Q4FY12. However, the concentrate feed from HZ mines will likely be lower than
expanded lead smelting capacity. HZL may import lead concentrate to make full use of
expanded capacity
Ramp up of the Sindesar Khurd mine, critical to HZ’s silver production target, is on track
and the company expects an FY2012E exit capacity of 2mtpa. The new 350ktpa silver
refinery is believed to be close to completion with its commissioning expected sometime
during the quarter in progress.
The company has also commenced mining related work at the Kayar mine, an
underground mine (with average zinc grade of around 10-11%) with reserves and
resources estimates at 11mn tonnes. The company has environmental clearance approval
of 0.35mn tonnes and expects to commence commercial ore production in FY2014E.
Having already commissioned 105MW out of the planned 150MW wind power
generation expansion, the company expects to commission the balance capacity in
Q3FY12.
Highlights from 2QFY12 earnings conference call
The company expects to exit FY2012E with a rated silver capacity of 500 tonnes
and silver production in the region of 350-400 tonnes which will ramp up to 450
tonnes in FY2013E.
HZ’s 2QFY12 net zinc metal cost of production (excluding royalty) increased
marginally on a yoy basis to US$847/ tonne. However, on a qoq basis, this cost has
come down around US$30/tonne. The management expects this cost to trend
down over the next couple of quarters through operational efficiencies and tighter
control.
The company is currently operating only one of the four mines in Zawar, which is
not located in any forest areas. The company is currently awaiting clearance from
the Supreme Court to operate the other three mines which are located in forest
areas.
The company did not sell any zinc-in-concentrate / lead-in-concentrate during
2QFY12. The company further highlighted that it has no intention of selling the
same over the next few quarters.
The company continues its emphasis on mine exploration and is currently exploring
over 6,200 sq km area in 10 Reconnaissance Permits (RP’s) and has applied for a
few more RP’s. At current production levels, the existing mines have a mine life of
25 years.
The cash and cash equivalents as at 30th September, 2011 stood at Rs162 bn.
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