Hindustan Zinc: awaiting a better second half


The only risk that Hindustan Zinc Ltd faces is if zinc prices do an about-turn. Otherwise, things are going pretty much its way. Mined metal output has been increasing as planned, as the ramp-up of its underground mining plan progresses. In the September quarter, output rose by 51%. More mined metal also meant more refined zinc and lead output. The outcome was a 38.6% increase in sales to Rs3,468 crore over the June quarter.

Metal prices have been rising, with zinc prices up by 18% and that of lead by 9% while silver is up by 17%, on a sequential basis. That led to Hindustan Zinc’s Ebitda (earnings before interest, tax, depreciation and amortization) rising by 84%. It got help from another quarter, a part of its mining expenses were deferred in accordance with the new accounting standards. That led to its cost of production declining by 12.5%, but these expenses will be booked when production picks up. Still, the cost of production per tonne is expected to decline in the second half due to a ramp-up in volumes and cost-control measures.

The company has maintained it is on track to achieve a slight increase in mined metal output in fiscal year 2017 over FY16. That implies an increase of nearly a third in its output in the second half. As things stand, higher output and lower per-tonne costs should result in improved profitability. The only risk that remains is if zinc prices turn weak. London Metal Exchange (LME) warehouse inventories have been rising. That may, of course, be attributable to financial investors taking positions but an inventory overhang can also cause more volatility.

Nyrstar NV, the second largest zinc metal producer, recently said it believed macro indicators favoured an increase in zinc prices. It cited lower treatment charges for zinc concentrate, which points to a shortage of concentrate. Steel output has been increasing in emerging market countries such as China and India, which is also seen as a positive for zinc.

Hindustan Zinc’s investors have seen the stock rise by 44% in the past six months, on the back of rising prices and expectations that its output will improve. Output appears set to increase in the second half, but prices have taken a breather. October has seen a slight dip in zinc prices. If rising global output is what is spooking zinc prices, then that could throw some cold water over high investor expectations.