Mining and exploration to drive growth ahead
We went on a plant visit to HZL sites on 3rd and 4th July 2012 and interacted with the top
management including key personnel at mines (Sindesar Khurd and Rampura Agucha) and
smelters (Rajpura Dariba and Chanderiya). We were impressed with the company’s
strategic focus on increasing mining and exploration for achieving long term integrated
volume growth. We were also satisfied with the progress on expansions in silver and lead
divisions and expect the company to meet its guidance on silver and lead volumes in
FY13E/14E. We maintain our positive stance on the stock with a buy rating.
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Rampura Agucha Mine (RAM) to go underground from Q3FY13E; cost of mining to remain
stable – RAM is expected to start underground mine production from Sep-2012 after the ore body
at 370 mts depth is touched by August through ramps. HZL indicated that underground mining
production output would be ~0.2 MT in FY13E and ~1.2MT in FY14E. Open cast mining is currently
at a depth of ~230 mts and would continue for the next 6 years till a depth of 370 mts is reached
and after FY18 the mine will be completely underground. HZL maintains that the total mining cost
would remain ~US$320/tonne after underground mining starts as strip ratio is expected to come
down from current levels of ~14 and will compensate for the increase in hauling costs from
underground mines. RAM is expected to continue operating at 6 mtpa capacity through a mix of
open cast and underground mining in the next 5-6 years.
Sindesar Khurd Mine (SKM) expansion on track – SKM is currently producing ~1.5 lakh tonne of
ore on a monthly basis through underground mining at two ramps and is getting a silver content
of 125ppm in the ore. HZL expects to touch 2 mtpa run rate soon and also expects silver content
in the ore to improve to 140ppm in FY14E as the average silver content in the mine is ~175ppm.
The company also indicated a possible increase in mining capacity at SKM through increase in size
of one of the smaller ramps.
Increased focus on exploration and higher capex on mining activities – HZL has shown strong
focus on exploration with a target of drilling 1 lac mts in FY13E and applying 10 RPs every year.
The company is hopeful of finding new resources in Andhra Pradesh and is also aggressively
exploring areas in Madhya Pradesh, Karnataka and Rajasthan. HZL has hired Terry Barclay (one of
the world’s top 5 geologists) to aid exploration activities. HZL has guided for a capex of ~Rs18bn
in FY13E of which Rs3.5bn would be towards maintenance and ~Rs15bn towards expansions in
mining and exploration activities.
Tax rate to be lower than 20% by 200-300 bps – HZL management indicated that they expect
tax rate in mid teens rather than high teens and could be lower than 20% by 200-300bps. This is
on account of various tax efficiencies and usage of MAT. We expect lower tax rate to potentially
boost PAT by 2-3% over our and street’s current expectations but wait for further clarity in
quarterly results.
Zawar mine opening a potential positive trigger ahead – HZL expects early solution to the
court case related to Zawar mines and has factored in production from these mines in its business
plans from Q3FY13E. Zawar mines have an average metal content of ~5% and could result in ~1
mtpa of ore production in the initial stages. We estimate metal production of 35-40k tonne in
FY14E on the restart of Zawar mines by the end of FY13E. This could result in incremental EBITDA
of ~Rs1.5bn and increase the lead and silver integration at HZL. Kayar mine is the other key
mining resource with 11 MT resource and capacity of ~1 mtpa with average zinc grade of 11%. It is
expected to commence production by the end of FY14E.
Zinc and lead plants shut down in Q1FY13E, but full year guidance remains strong – HZL said
there were some shutdowns at the new lead smelter and also at Dariba zinc smelter but remained
upbeat on achieving higher metal production on a full year basis with better output in H2FY13E.
HZL has guided for integrated lead and silver production of 110kt and 350 tonne respectively.
Total lead and silver production is expected to be 140kt and 400 tonne respectively in FY13E.
Valuations remain attractive; reiterate Buy: We continue to like the stock due to the expected
strong volume growth in lead and silver, lower overall cost proposition, improvement in LME zinc
and lead prices going forward and attractive valuations with favorable risk-reward. We continue
to value the stock at 5x FY14E EV/EBITDA. We maintain Buy rating on the stock with a target price
of Rs 151.
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