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Hindustan Zinc (HZ)
Metals & Mining
Steady quarter. HZ reported net income of Rs14.9 bn, 11.8% ahead of our estimate
led by (1) 6% outperformance at the EBITDA level and (2) increase in treasury income.
HZ remains a strong play on aggressive and profitable volume growth. Valuations at
4.1X FY2013E EBITDA are attractive. We reduce our target multiple to build in potential
risk of implementation of mining tax; this is offset by roll over of TP to FY2013E
financials. TP of Rs170 remains unchanged. Our EBITDA and earnings for FY2013E will
reduce by 14.2% and 12.7% on implementation of mining tax.
Steady operational performance
HZ reported net income of Rs14.9 bn (+68% yoy, -16% qoq), 11.8% ahead of our estimate. Net
income outperformance was led by (1) higher-than-expected EBITDA of Rs15.9 bn versus our
estimate of Rs15 bn on the back of marginally higher realizations, (2) other income of Rs3.55 bn
versus our estimate of Rs3.2 bn and (3) lower-than-expected tax rate.
Mined metal production declined 18.4% sequentially to 188 kt due to unplanned shutdown
(problems with crusher) at Rampura Agucha mine. This did not impact refined zinc production (flat
qoq at 193 kt) as the company utilized concentrate inventories. Decline in mined metal production
reduced royalty cost though, which at 6.8% of revenues was one of the lowest in recent quarters.
Silver production targets may be optimistic; SK mine still in ramp-up mode
SK mine, critical to HZ’s silver production target, exited the quarter with ore production rate of 1.2
mtpa. Silver content in the ore in 1QFY12 was 120 ppm, significantly lower than the average silver
content in the ore of 180 ppm. We understand that the management target of silver production
for FY2012E and FY2013E is based on 141 ppm and 220 ppm from SK mine, optimistic in our
view. We have modeled silver content of 120 ppm and 140 ppm from SK mine resulting in overall
silver production of 268 tonnes and 363 tonnes for FY2012E and FY2013E, representing a cut of
10.8% and 13.6% compared to our earlier estimate.
Attractive valuations; maintain BUY, TP of Rs170
We have made moderate changes to our estimates resulting in 8.2% and 1.1% cut in FY2012E
and FY2013E EBITDA. HZ is a strong play on volume growth, ramp-up of profitable silver refinery
and firm zinc prices. The stock trades at attractive valuations of 5.6X FY2012E and 4.1X FY2013E
EBITDA. Maintain our BUY rating with an unchanged target price of Rs170. We reduce our target
multiple to build in potential risk of implementation of mining tax; this is offset by roll over of TP
to FY2013E financials. Without building in hit on our fair value from mining tax, our TP would
have been higher by 8.3%. Our FY2013E EBITDA and EPS will decline by 14.2% and 12.7%,
respectively, if the draft MMDR bill is approved in the current form.
Ore mining and concentrate production of lead may be not be sufficient to feed
expanded smelter
HZ is in the process of commissioning 100 ktpa lead smelter at Dariba, a delay of 6 months
from original target. HZ expects commercial production of saleable lead by mid-2QFY12E.
Post-commissioning of smelter, HZ’s lead smelting capacity will increase to 185 ktpa.
However, the concentrate feed from HZ mines will likely be 30-40 ktpa lower than expanded
lead smelting capacity. HZL may import lead concentrate to make full use of expanded
capacity. Exhibit 5 details working of the same.
Key changes to our estimates
Exhibit 1 summarizes key change to our estimates. We have reduced our EPS estimates by
5% and 0.4% for FY2012E and FY2013E to Rs13.8 and Rs15.9, respectively. Our EPS
estimate is based on zinc price forecast of US$2,300 and US$2,350 and lead price forecast
of US$2,350/tonne and US$2,450/tonne for FY2012E and FY2013E, respectively. We have
made marginal changes to our zinc, lead and silver volume estimates. We also factor in
revised currency forecast of Rs44.75 and Rs45.63 per US$ for FY2012E and FY2013E,
respectively.
Highlights from 1QFY12 earnings conference call
Revenues in 1QFY12 included 17 tonnes of silver embedded in lead concentrate; this is a
decline from 28 tonnes in 4QFY11. Break of lead concentrate sale of Rs2,200 mn (1) silver
content of 17 tonnes leading to revenues of Rs810 mn and (2) lead portion of 10,086
tonnes leading to revenues of Rs1,390 mn.
Refined silver sales declined 7.5% qoq to 39.6 tonnes. Realization increased to US$38/oz
in 1QFY12 versus US$31.9/oz in 4QFY11.
The company expects to exit FY2012E with a rated silver capacity of 500 tonnes and silver
production in the region of 300-350 tonnes depending upon the time taken for ramping
up of the 100 ktpa lead smelter.
HZ is currently operating only one out of the four mines in Zawar. Remaining three mines
are in forest area and require Supreme Court approval. According to the company, all
other clearances have been obtained.
The company expects to continue paying tax under MAT as per the provisions of Section
115JB of the Income Tax Act, 1961. The management expects the effective rate for the
company in FY2012E to be around 17%.
Unplanned shutdown at Rampura Agucha mine for around two weeks led to loss of
mined metal production. However, the company is confident of making up for the loss in
production over the next couple of quarters.
HZ expects cost of production (excluding royalty) for FY2012E to average around
US$850/tonne (excluding royalty).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Zinc (HZ)
Metals & Mining
Steady quarter. HZ reported net income of Rs14.9 bn, 11.8% ahead of our estimate
led by (1) 6% outperformance at the EBITDA level and (2) increase in treasury income.
HZ remains a strong play on aggressive and profitable volume growth. Valuations at
4.1X FY2013E EBITDA are attractive. We reduce our target multiple to build in potential
risk of implementation of mining tax; this is offset by roll over of TP to FY2013E
financials. TP of Rs170 remains unchanged. Our EBITDA and earnings for FY2013E will
reduce by 14.2% and 12.7% on implementation of mining tax.
Steady operational performance
HZ reported net income of Rs14.9 bn (+68% yoy, -16% qoq), 11.8% ahead of our estimate. Net
income outperformance was led by (1) higher-than-expected EBITDA of Rs15.9 bn versus our
estimate of Rs15 bn on the back of marginally higher realizations, (2) other income of Rs3.55 bn
versus our estimate of Rs3.2 bn and (3) lower-than-expected tax rate.
Mined metal production declined 18.4% sequentially to 188 kt due to unplanned shutdown
(problems with crusher) at Rampura Agucha mine. This did not impact refined zinc production (flat
qoq at 193 kt) as the company utilized concentrate inventories. Decline in mined metal production
reduced royalty cost though, which at 6.8% of revenues was one of the lowest in recent quarters.
Silver production targets may be optimistic; SK mine still in ramp-up mode
SK mine, critical to HZ’s silver production target, exited the quarter with ore production rate of 1.2
mtpa. Silver content in the ore in 1QFY12 was 120 ppm, significantly lower than the average silver
content in the ore of 180 ppm. We understand that the management target of silver production
for FY2012E and FY2013E is based on 141 ppm and 220 ppm from SK mine, optimistic in our
view. We have modeled silver content of 120 ppm and 140 ppm from SK mine resulting in overall
silver production of 268 tonnes and 363 tonnes for FY2012E and FY2013E, representing a cut of
10.8% and 13.6% compared to our earlier estimate.
Attractive valuations; maintain BUY, TP of Rs170
We have made moderate changes to our estimates resulting in 8.2% and 1.1% cut in FY2012E
and FY2013E EBITDA. HZ is a strong play on volume growth, ramp-up of profitable silver refinery
and firm zinc prices. The stock trades at attractive valuations of 5.6X FY2012E and 4.1X FY2013E
EBITDA. Maintain our BUY rating with an unchanged target price of Rs170. We reduce our target
multiple to build in potential risk of implementation of mining tax; this is offset by roll over of TP
to FY2013E financials. Without building in hit on our fair value from mining tax, our TP would
have been higher by 8.3%. Our FY2013E EBITDA and EPS will decline by 14.2% and 12.7%,
respectively, if the draft MMDR bill is approved in the current form.
Ore mining and concentrate production of lead may be not be sufficient to feed
expanded smelter
HZ is in the process of commissioning 100 ktpa lead smelter at Dariba, a delay of 6 months
from original target. HZ expects commercial production of saleable lead by mid-2QFY12E.
Post-commissioning of smelter, HZ’s lead smelting capacity will increase to 185 ktpa.
However, the concentrate feed from HZ mines will likely be 30-40 ktpa lower than expanded
lead smelting capacity. HZL may import lead concentrate to make full use of expanded
capacity. Exhibit 5 details working of the same.
Key changes to our estimates
Exhibit 1 summarizes key change to our estimates. We have reduced our EPS estimates by
5% and 0.4% for FY2012E and FY2013E to Rs13.8 and Rs15.9, respectively. Our EPS
estimate is based on zinc price forecast of US$2,300 and US$2,350 and lead price forecast
of US$2,350/tonne and US$2,450/tonne for FY2012E and FY2013E, respectively. We have
made marginal changes to our zinc, lead and silver volume estimates. We also factor in
revised currency forecast of Rs44.75 and Rs45.63 per US$ for FY2012E and FY2013E,
respectively.
Highlights from 1QFY12 earnings conference call
Revenues in 1QFY12 included 17 tonnes of silver embedded in lead concentrate; this is a
decline from 28 tonnes in 4QFY11. Break of lead concentrate sale of Rs2,200 mn (1) silver
content of 17 tonnes leading to revenues of Rs810 mn and (2) lead portion of 10,086
tonnes leading to revenues of Rs1,390 mn.
Refined silver sales declined 7.5% qoq to 39.6 tonnes. Realization increased to US$38/oz
in 1QFY12 versus US$31.9/oz in 4QFY11.
The company expects to exit FY2012E with a rated silver capacity of 500 tonnes and silver
production in the region of 300-350 tonnes depending upon the time taken for ramping
up of the 100 ktpa lead smelter.
HZ is currently operating only one out of the four mines in Zawar. Remaining three mines
are in forest area and require Supreme Court approval. According to the company, all
other clearances have been obtained.
The company expects to continue paying tax under MAT as per the provisions of Section
115JB of the Income Tax Act, 1961. The management expects the effective rate for the
company in FY2012E to be around 17%.
Unplanned shutdown at Rampura Agucha mine for around two weeks led to loss of
mined metal production. However, the company is confident of making up for the loss in
production over the next couple of quarters.
HZ expects cost of production (excluding royalty) for FY2012E to average around
US$850/tonne (excluding royalty).
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