Hindustan Zinc sees weak June quarter, recovery may take some more time

Volume and costs are expected to improve going forward, but trade war concerns might keep base metal and stock prices volatile in the near term

Hindustan Zinc, India's largest domestic zinc producer which has been aggressively eyeing volume expansion, saw an unusually weak June quarter, impacted mainly by a change in mining plan and lower base metal prices.

The company changed its mining plan and increased production from underground mines, while open-cast mines saw closure, pushing down total mined metal production by 9 per cent on a year-on-year basis and 17 per cent sequentially. As a result, the fixed costs were spread over lower production; this, along with higher coal prices and wages, meant an increase in per-tonne costs and impacted profitability.

The cost of production before royalty (COP) for zinc, at Rs 69,907 ($1,043) during the quarter, spiked 11 per cent (7 per cent in dollar terms) year-on-year, and 17 per cent (13 per cent in dollar terms) sequentially. The annual increase was primarily on account of a decline in overall volumes, thanks to open-cast mine closure, about 20 per cent increase in prices of metcoke, coal and diesel, and also due to the impact of long-term wage settlement. Additionally, the maintenance-related shutdown costs led to a higher impact on a sequential basis, as zinc and lead average prices on the London Metal Exchange (LME) were also down by nine per cent and five per cent, respectively. The company said it had concluded a five-year long-term settlement with its recognised union, causing a COP impact of $33 per tonne.

Though the spike in costs was not unexpected, it was slightly higher than anticipated.

Base metal prices have also been weak in recent months, thanks to trade war concerns. Although the per-tonne zinc and average lead prices on the LME, at $3,112 and $2,388, were up 20 per cent and 11 per cent year-on-year, respectively; sequentially there was a decline. For instance, compared with $3,331 at the end of the March quarter, zinc closed the June quarter at $2,947, down over 11 per cent. Revenues, at Rs 53.10 billion, were up 16 per cent year-on-year, but lower than the Rs 54.71 billion indicated by the Bloomberg consensus estimates.

This meant an earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 27.85 billion, which was up 16 per cent year-on-year (down 23.5 per cent sequentially) – way lower than the Rs 29.51 billion consensus estimates. Lower investment income on account of the mark-to-market loss on debt investments due to a spike in interest rates further hit net profit, which, at Rs 19.18 billion, was lower than the Rs 21.32 billion analyst estimates.

Despite volume and cost impact in the June quarter, the company remains confident of its full-year guidance. “We are steadily increasing production from underground mines to fill the gap caused by the closure of open-cast operation. As the year progresses, we will deliver record performance,” said Agnivesh Agarwal, chairman of Hindustan Zinc.

What's more, it expects to achieve its targeted 1.2 million tonnes per annum (mtpa) production run-rate in the next few quarters and the management has started planning for its next phase of expansion to 1.35 mtpa. The management also expects zinc COP to come down to $950-975 a tonne as expansions progress (production from the main shaft starting by Q3, FY19) and rising linkage coal supplies, which are cheaper.

The zinc pricing outlook in the medium term remains strong, given the tight demand-supply dynamics. Analysts at Antique Stock Broking referring to ILZSG (International Lead and Zinc Study Group) said that global zinc demand for CY18 was estimated at 14.0 MT and forecast to exceed the supply of 13.7 MT, leading to a deficit of 0.3 MT. The zinc demand is also projected to grow at 2.1 per cent.

While the expectations of higher output and prices are positive, analysts also believe that base metal prices might remain volatile in the near term, with escalated fears of a trade war and rising dollar impacting street sentiment. The LME zinc prices have now fallen by 27 per cent from their 2018 peak levels of $3,617 to $2,630 a tonne, and need to be watched.