Hindustan Zinc: All eyes on production growth

Improving production and realisations continue to drive Hindustan Zinc’s (HZL’s) performance. For the quarter ending March (fourth or Q4 of 2016-17), it saw mined metal production surge 66 per cent year-on-year and 13 per cent sequentially, to 312,000 tonnes.

With the average per-tonne price of zinc on the London Metal Exchange at $2,770 (up 65 per cent over a year) and lead at $2,269 (up 30 per cent) in Q4, the company was expected to post a strong performance. In Q4, revenue at Rs 6,699 crore almost doubled from the year-before period. Attributed to strong zinc, lead and silver prices, as well as higher production and sale of mined metal. 

Strong revenue growth also helped offset rising cost. With a change in the depreciation calculation from a straight line to a written down value method, the charge more than doubled from Rs 201 crore to Rs 532 crore, year-on-year. Rising coal and diesel costs pushed up the fuel bill by 80 per cent, to Rs 393 crore. Mining royalty had already gone up and at Rs 846 in Q4 was almost 2.5 times compared to the year-ago quarter.

Even so, robust revenue growth saw operating earnings surge 190 per cent over a year to Rs 3,770 crore, much better than the Bloomberg consensus estimate of Rs 3,537 crore. Thus, the net profit at Rs 3,057 crore was better than analysts’ combined expectation of Rs 2,851 crore. The stock closed 4.3 per cent higher at Rs 282.90 during the last half-hour of trade when the results came in. 

All eyes will be on a further increase in production, to help drive volumes. HZL achieved 907,000 tonnes of metal production during FY17, up two per cent over a year before. It is targeting for 1.2 million tonnes (mt) over two years. Though analysts remain positive on the zinc price outlook, there are some near-term challenges. With geopolitical developments, zinc prices have already seen some correction from about $2,850 a tonne to $2,550 a tonne in less than a month. Lead prices have also fallen. Thus, any further softness in realisations can only be compensated with rising production. 

The company says it remains confident on achieving 1.2 mt by FY20 and highlights that new mines are on track for completion in FY19. It said refined zinc-lead production will be about 950,000 tonnes, evenly spread through the year. This is positive, as mined metal production was soft in the first half of FY17, later picking up.

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