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Hindustan Zinc Ltd (HZ)
N: Key takeaways from meeting with management
Costs likely stay at elevated levels following higher
commodity costs and high stripping ratios
Sindesar Khurd ramp-up progressing well; management
confident of high silver volumes in FY12/FY13
We are Neutral on HZ with a target price of INR1,450
We met up with senior management of HZ; below are our key takeaways.
Zinc costs likely to stay at elevated levels. Costs are currently high due to:
Higher stripping ratios at Rampura Agucha mine as it ramps up for higher production.
Mining is currently at 220 meters and HZ has started some underground mining as well.
In two to three years the operations will largely move underground at 370 meters.
Higher commodity (coal, copper sulphate, etc) costs, which have led to higher power
and smelting costs.
Overall, management expects costs to stay at elevated levels (cUSD800/t excluding
royalties) for the next few years given higher commodity costs and as Rampura Agucha
mining eventually moves underground in the next three years.
Mining ramp-up
Sindesar Khurd facilities ramping up well. Despite underground mining, the cost
of mining is just USD300/t due to higher efficiencies and mechanised operations.
Also, the management is confident of higher silver production for FY12e and FY13e
as lab grades from the SK mine are of satisfactory quality. We have already built
silver volumes of 352 tonnes and 475mt into our FY12e and FY13e estimates,
respectively.
Work on the new Kayar mine has started and is progressing well. The mine has
resources of 9mt with average grades of 10.6% zinc and 1.7% lead.
Work on Zawar mines (primary lead) is still suspended pending forest clearance by
the Ministry of Environment & Forests. The company will likely buy lead
concentrates (c30-40ktpa) for incremental lead production.
We are Neutral on HZ given our house view of muted zinc prices. With our
expectation of incentive pricing returning in 2012, we currently prefer aluminium to zinc.
We value HZ at INR1,450 on FY12e EV/EBITDA of 6.5x. Key positive (negative) risks
include favourable (unfavourable) zinc price movements and lower (higher) than expected
raw material costs.
Valuation and risks
We value HZ on FY12e EV/EBITDA of 6.5x. We retain our target price of INR1,450 and Neutral rating.
Our target price implies a potential return of c15% over the current market price of INR1,272 (as at the
close on 24 February 2011) after including the dividend yield of 0.5%. According to HSBC’s rating
system, the neutral band for non-volatile Indian stocks is 6-16%.
Higher(lower) than expected zinc prices are an upside(downside) risk to our estimates. Additional
downside risks stems from higher global commodity prices and increase in stripping costs as mines go
underground.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Zinc Ltd (HZ)
N: Key takeaways from meeting with management
Costs likely stay at elevated levels following higher
commodity costs and high stripping ratios
Sindesar Khurd ramp-up progressing well; management
confident of high silver volumes in FY12/FY13
We are Neutral on HZ with a target price of INR1,450
We met up with senior management of HZ; below are our key takeaways.
Zinc costs likely to stay at elevated levels. Costs are currently high due to:
Higher stripping ratios at Rampura Agucha mine as it ramps up for higher production.
Mining is currently at 220 meters and HZ has started some underground mining as well.
In two to three years the operations will largely move underground at 370 meters.
Higher commodity (coal, copper sulphate, etc) costs, which have led to higher power
and smelting costs.
Overall, management expects costs to stay at elevated levels (cUSD800/t excluding
royalties) for the next few years given higher commodity costs and as Rampura Agucha
mining eventually moves underground in the next three years.
Mining ramp-up
Sindesar Khurd facilities ramping up well. Despite underground mining, the cost
of mining is just USD300/t due to higher efficiencies and mechanised operations.
Also, the management is confident of higher silver production for FY12e and FY13e
as lab grades from the SK mine are of satisfactory quality. We have already built
silver volumes of 352 tonnes and 475mt into our FY12e and FY13e estimates,
respectively.
Work on the new Kayar mine has started and is progressing well. The mine has
resources of 9mt with average grades of 10.6% zinc and 1.7% lead.
Work on Zawar mines (primary lead) is still suspended pending forest clearance by
the Ministry of Environment & Forests. The company will likely buy lead
concentrates (c30-40ktpa) for incremental lead production.
We are Neutral on HZ given our house view of muted zinc prices. With our
expectation of incentive pricing returning in 2012, we currently prefer aluminium to zinc.
We value HZ at INR1,450 on FY12e EV/EBITDA of 6.5x. Key positive (negative) risks
include favourable (unfavourable) zinc price movements and lower (higher) than expected
raw material costs.
Valuation and risks
We value HZ on FY12e EV/EBITDA of 6.5x. We retain our target price of INR1,450 and Neutral rating.
Our target price implies a potential return of c15% over the current market price of INR1,272 (as at the
close on 24 February 2011) after including the dividend yield of 0.5%. According to HSBC’s rating
system, the neutral band for non-volatile Indian stocks is 6-16%.
Higher(lower) than expected zinc prices are an upside(downside) risk to our estimates. Additional
downside risks stems from higher global commodity prices and increase in stripping costs as mines go
underground.
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