BackHindustan Zinc’s output in form but soft metal prices a challenge
Sales rose by just 1.3% despite higher volume, but expenses declined by 2.2%, which contributed to a 4.5% increase in operating profit
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Hindustan Zinc Ltd’s output growth in the December quarter was significant and it is expecting healthy growth in the March quarter as well. That is why it is confident of meeting its output guidance for FY15, despite lagging behind its targeted run rate.
Strong output growth in the March quarter should be good for its revenues, but it also comes in the backdrop of a further weakening in the prices of non-ferrous metals. Still, if Hindustan Zinc manages to further lower its cost of production per tonne, it could put up a good show. After all, similar conditions existed in the December quarter, in spite of which profitability improved.
A disappointing aspect about Hindustan Zinc’s performance in the first half of FY15 was the relatively sedate growth in output, which was in accordance with its mining plan. The company had said output would increase in the second half. Thus, total mined metal output rose by 13.6% sequentially in the December quarter.
A higher mined metal output resulted in a lower per-tonne cost of production—declining by 10.3% in dollar terms. This allowed the company to absorb falling realizations: zinc prices were down by 3.3%, lead prices by 8.3% and silver by 16.7% in the December quarter, over the preceding one.
Overall, sales rose by just 1.3% despite higher volume, but expenses declined by 2.2% and, thereby, contributed to a 4.5% increase in operating profit. Declining energy costs helped cut down on fuel and power costs. Mining royalty saw a sharp increase of 22%, partly due to the higher royalty rates, excluding which, operating profit growth could have been higher. The company’s net profit rose by 9% sequentially, aided by higher other income growth.
Commenting on its expansion plans, the firm said its plans for underground mining at Rampura Agucha are delayed, and it is implementing a new plan to extend the life of its open cast mining operations. On the brighter side, the expansion at its Sindesar Khurd mine is progressing well.
The company had projected that total mined metal volume in FY15 would be marginally higher than last year’s level of 880,000 tonnes. Till December, output was down by 9.1%. Since the company is sticking to its full year guidance, it will mean that the March quarter’s output will increase by at least 8.3%. But zinc prices on the London Metal Exchange have been falling, and are down by 3.5% since January and by 9.4% over their November-levels. Unless, Hindustan Zinc’s cost of production declines sufficiently, it may find its profitability under strain.
The author has no positions in the stocks mentioned in this article.
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