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Silver's legendary rise augurs well for Hindustan Zinc's timely expansion at Sindersur Khurd.
We analyse the sensitivity of Hindustan Zinc's earnings and revisit our valuations. We
appeared cautious given our old silver price assumptions: we now raise those assumptions
for FY12 and FY13.
We raise our FY12 and FY13 silver price forecasts
Silver has risen by over 120%, 320% and 700% over the last one, five and 10 years and this
trend appears unabated. Our prior FY12 and FY13 forecast for LME silver at US$20/oz was
44% lower than the current spot price of US$37/oz. We raise our FY12 and FY13 price
assumption to US$30/oz and are still at a discount of ~20% to the current spot price.
Recent Sindersur Khurd (SK Mine) and Dariba smelter re-affirms positive stance
We recently visited the silver rich SK mine and Dariba smelter, which will process the lead
ore from the SK mine. Silver is easier to extract from lead ore and the Dariba smelter will
drive the bulk of the growth in silver output from 150t currently to 500t of exit capacity that the
company is targeting by the end of FY12. Our assumptions are fairly conservative at this
stage, in our view, and factor silver sales volumes at 227t and 274t in FY12/13 compared to
management guidance of more than 400t of output in FY12 alone. Being a by-product,
almost all the silver revenues will flow through to EBITDA. We estimate silver EBITDA of
Rs10.2bn/12.2bn in FY12/13. (with a 13%/14% contribution to total EBITDA). While the
Dariba lead smelter is expected to become operational shortly, the gradual ramp-up at the
SK mine means that the smelter may not achieve its full output of 100kt of lead in FY12.
FY12/13 earnings up 3.2%/3.4%: target price up to Rs167
Following revisions to our silver price assumptions for FY12/13, we raise our FY12/13 earnings
by 3.2%/3.4%. We now value earnings from silver operations separately as it now forms a
substantial part of our overall EBITDA forecasts. We value the silver business at 10x our FY12F
EBITDA based on a 20% discount to the peer group average of the largest listed silver
companies in the space on Bloomberg consensus forecasts. We continue to value the Zinc and
Lead business at 5.7x our FY12F EV/EBITDA. We arrive at a new target price of Rs167 (from
Rs152.5) and maintain our Buy rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Silver's legendary rise augurs well for Hindustan Zinc's timely expansion at Sindersur Khurd.
We analyse the sensitivity of Hindustan Zinc's earnings and revisit our valuations. We
appeared cautious given our old silver price assumptions: we now raise those assumptions
for FY12 and FY13.
We raise our FY12 and FY13 silver price forecasts
Silver has risen by over 120%, 320% and 700% over the last one, five and 10 years and this
trend appears unabated. Our prior FY12 and FY13 forecast for LME silver at US$20/oz was
44% lower than the current spot price of US$37/oz. We raise our FY12 and FY13 price
assumption to US$30/oz and are still at a discount of ~20% to the current spot price.
Recent Sindersur Khurd (SK Mine) and Dariba smelter re-affirms positive stance
We recently visited the silver rich SK mine and Dariba smelter, which will process the lead
ore from the SK mine. Silver is easier to extract from lead ore and the Dariba smelter will
drive the bulk of the growth in silver output from 150t currently to 500t of exit capacity that the
company is targeting by the end of FY12. Our assumptions are fairly conservative at this
stage, in our view, and factor silver sales volumes at 227t and 274t in FY12/13 compared to
management guidance of more than 400t of output in FY12 alone. Being a by-product,
almost all the silver revenues will flow through to EBITDA. We estimate silver EBITDA of
Rs10.2bn/12.2bn in FY12/13. (with a 13%/14% contribution to total EBITDA). While the
Dariba lead smelter is expected to become operational shortly, the gradual ramp-up at the
SK mine means that the smelter may not achieve its full output of 100kt of lead in FY12.
FY12/13 earnings up 3.2%/3.4%: target price up to Rs167
Following revisions to our silver price assumptions for FY12/13, we raise our FY12/13 earnings
by 3.2%/3.4%. We now value earnings from silver operations separately as it now forms a
substantial part of our overall EBITDA forecasts. We value the silver business at 10x our FY12F
EBITDA based on a 20% discount to the peer group average of the largest listed silver
companies in the space on Bloomberg consensus forecasts. We continue to value the Zinc and
Lead business at 5.7x our FY12F EV/EBITDA. We arrive at a new target price of Rs167 (from
Rs152.5) and maintain our Buy rating.
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