Hindustan Zinc:Strong Focus On Mining, Exploration : Nirmal Bang,

Strong Focus On Mining, Exploration We took part in the visit organised by Hindustan Zinc (HZL) covering its Rampura Agucha mine (RAM), Sindesar Khurd mine (SKM), Chanderiya smelting complex and Dariba smelting complex, all located in Rajasthan. The company largely focuses on exploration and mining activities, but most of the benefits would accrue from FY14-15. In the interim, HZL is looking at higher lead and silver output and cost efficiency as major profit drivers. We retain our Buy rating on HZL with a TP of Rs151, which is 20% above the CMP.

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Focused on exploration and mining: The company largely focuses on exploration activity to increase its mining base. It has drilled around 95,000 metres in FY12 and expects similar kind of drilling in FY13 as well with an investment of around US$10mn. Apart from Rajasthan, it pays major attention to the Andhra Pradesh/Karnataka regions in respect of drilling and expects these regions to have significant reserves. Update on RAM: Underground mining operations at RAM would commence at the beginning of 3QFY13 and the company expects production of around 1mt of ore through underground mining and 5mt via open-cast mining. Mining costs are likely to be similar, or marginally lower, compared to open-cast mining as the company operates at a peak stripping ratio of 14x. The stripping ratio is expected to remain the same in FY14 as well and thereafter it would start declining. By the end of FY18-19, the company expects its entire mining operations to be underground. Update on Zawar mine: Due to lack of forest clearance, mining activity over a large part of Zawar mine has stopped since 29 March 2010. The matter relating to renewal of mining lease is pending in the Supreme Court. The management remains hopeful about re-starting entire mine in the near future. Recently, the mining lease of Rajpura Dariba mine was renewed, while the mining lease of RA mine expires in 2020. Looking at tax efficiency: The company is evaluating tax efficiency, which would result in lower effective tax rate for the next couple of quarters, but it doesn’t materially lead to a change in our projections and valuations as the tax outgo (including MAT) would remain similar to our expectation. SKM update: The mine operates at its full capacity of around 2mt and silver ppm is estimated at 130gm/tn in FY13E, which would be enhanced to 140-145gm/tn in FY14E. The company maintains that the mine would have silver ppm of 180gm/tn over its life span. It is also looking at improving the recovery ratio from 82% to 88% in FY14E. Other highlights: Rajpura Dariba mine’s output is likely to improve from 0.59mt to 0.75mt in FY13E and to around 0.90mt in FY14E. HZL is looking at integrated lead output of 100,000-110,000tn (without Zawar mine) in FY13E and register a run-rate of 150,000-160,000tn with the Zawar mine. The company is looking at integrated silver production of 350tn and total silver production, including custom, would be 450tn in FY13. The company maintained its FY13 capex guidance of Rs15-18bn, including sustainable capex of Rs3.5bn. It indicated the capex would remain high on RA mine as development of underground mining is almost like developing a greenfield project.