We are on the right side of the cost curve, says HZL's Arun Misra

Topics Hindustan Zinc

“There will be contraction (in demand) compared to last year but the fact that the mines have cut production would help prices,” says CEO-designate Arun Misra, Hindustan Zinc
The global zinc capacity has come down by about 7 per cent which helped Hindustan Zinc Ltd produce the metal at a viable price. The company’s net revenue saw a decline of 20 per cent in Q1 at Rs 3,989 crore due to a 29 per cent fall in zinc prices, an 11 per cent fall in lead prices and Covid-19 impacted lower volumes. Its silver division, however, outshined with an 80 per cent margin. In an interview with Jyoti Mukul & Aditi Divekar, the company's CEO designate Arun Misra says the company is on its way to increasing silver production. Edited Excerpts:

How much of your business was impacted by the lockdown? And, what are the expectations in the current quarter?

The effect of Covid-19 started from the end of March, with everything coming to a standstill abruptly. We started working under the guidelines from the central and Rajasthan governments. We slowly started operations in our mines and smelters and by April-end we were working at 50% capacity in mines and at about 70-80 per cent in smelters. However, we were able to ramp up and May-June turned out to be very good months compared to last year, or the year before that. About 80,000 tonne of metal has been produced in the first month, which is not uncommon for the first quarter of the year. We are now at about 90 per cent capacity utilization.

The only issue is that the LME prices, which had softened badly since the month of February, and due to Covid-19 were down at $1900 levels, have now started to pick up to $2000. Prices of silver are also up. We have given a guidance between 925-950,000 tonne of metal for the year. Hence, we are quite optimistic of Q2 and for the months ahead.

Do you see an uptick in zinc prices?

There is an overall 7 per cent decline in mining capacity. There are some US mines which are curtailing their capacity by about 500,000 tonne, and as a result we are expecting a 5 per cent contraction in mining capacity. However, some of the countries, which went through Covid-19 pains early, have started opening their economy. China, too, is seeing an uptick in infrastructure development and has started consuming more zinc. We believe the situation will will remain like this for some time.

But will there be enough pick-up in demand?

There will be a contraction compared to ther last year, but the fact that mines have cut production, and to that extent, it would help prices. Overall, smelters had some inventories, which have been liquidated, however, on the consumer side, there is about a 5 per cent cut in demand. The pick-up in construction activities is sharper than during the restarting of the mines so there would be a gap in supply and demand.

Did you have to curtail operation due to weak prices?

We were at an advantage in that we started the mines quickly because we are on the right side of the cost curve. Even at a lower LME, we are in a position to start the mines and did not have the problem the other mines had in terms of cost of production due to weak LME.

How far did silver help in overall profitability in the last quarter and will it continue to give good margins?

Silver price rallies are a recent phenomenon. Over the quarter our silver production is much less compared to the same quarter last year. It depends on investor confidence in other forms of investment vis-a-vis investment in gold and silver. As long as uncertainty prevails in economies due to Covid-19, it will push gold and silver prices.

Are you planning to increase the production volume for silver?

We are not making any new investments in silver. But our first zinc fumer plant is about to be commissioned in Q2, provided international flights are restored and foreign experts, who are supposed to come for commissioning, are able to come. Once the fumer plant is commissioned, it will add to the silver capacity. Project-wise it should add about 30 tonne of silver.

Are you looking at gold mining?

We are a part of the Vedanta group which is known as a global resource company. We are open to any metal where we have experience.

Would you be going for a cut in capital expenditure?

Capex conservation is a natural reaction in any such meltdown, but our growth projects were at the last stage. We are working on a 1.5 million tonne expansion project for which life of the mine plan has been made and basic engineering work has to begin. HZL has been growing in the last few years and it has been the fastest growing metal company. Capex is just a corollary. You start with an idea and a project, capex is a means to achieve it.

What will be the domestic and export demand ratio?

In April, when we restarted our operations, the domestic demand was very weak and we had to primarily export. But slowly, the domestic market proportion has gone up. Exports are still there, but as unlocking in India spreads, domestic demand will pick up further. We see demand for zinc coming from domestic steel industries and gradually exports will come down.

How far have low coal prices helped the company?

We have a mix of imported coal and domestic which is linkage coal and which we buy from Coal India. For both, we have hunted for coal which is lower in price not only for procurement but also as used in power generation. We have got the benefit of efficient coal value. Our cost of power generation has been lower than what it was in the corresponding quarter last year. We have also reduced our purchase of power from the grid.

What are the steps being taken for sustainable operations?

Our operations are not just zinc and silver led, but are also about being sustainable and taking care of the environment and community. We have grown in production capacity with a good safety record and our sustainability records are excellent. We have invested in minor metals and extracting them from the residue. Overall, we have 39 MW solar and 217 MW wind power generation capacity.

We have recently been declared 2.41 times water positive which means we add more water to the ground than we consume. We have created a 60 million litre a day sewage treatment plant near Udaipur in various phases. Till last year, we were 45 mld. This can clean the entire sewage of the Udaipur city. We take 70 per cent of the water for plant consumption instead of depending on a water body. Balance water is let out in the river for use in agriculture. We have created rain water harvesting and water body facilities near our plant. We have a ground water recharging facility so we put back more water than we consume. By 2025, we will be five times water positive.

If margins continue to be under pressure, what are the cost cutting measures you are looking at?

We have reorganised ourselves in terms of our taskforce and are relooking at costs. We have made structural changes. We have looked at commodity prices –and renegotiated met coke prices, coal prices, took a benefit price fall across globe and input prices have been curtailed. Consumption level in terms of plant efficiency parameters have been reworked and have benefitted. We have also worked on lowering import of power from the grid, maximizing the use of our captive power plant.

Did you resort to any lay-offs or changes in hiring strategy?

No lay-offs. We have focused on improving productivity. Our way of operations is contracted operations and we buy services from people. These are big companies that provide services in mining activities or operation of smelters. So I buy service from outside on merit. Service partners will decide what productivity level they will operate at and their strategy. As far as HZL is concerned there is no change in recruitment strategy. We are not looking for operations for a year. So for the skills that we need, we are focused on them from a long term perspective



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