Big rally in zinc prices leaves Hindustan Zinc investors cold
A rally in zinc prices should ordinarily mean good tidings for Hindustan Zinc Ltd’s shares. But investors have shown a lukewarm reaction to the sharp jump in international prices.
Spot zinc prices on the London Metal Exchange are up by 13.5% in the past month, buoyed by a favourable outlook. The contributing factors are not new but are getting more weightage.
Zinc supply has been limited after mine closures. Recently, a declining trend in zinc inventories, and bullish signals from China (that have benefited prices of most metals) have added to the bullish discourse.
It also helps that central banks have kept monetary conditions easy, which gives commodities an edge over the dollar.
Rising prices of zinc and other metals have sent zinc producer Glencore Xstrata Plc’s stock price up by 11.6% in the past one month. Hindustan Zinc’s shares have risen by a much lesser 4.3%. One reason could be that Hindustan Zinc’s price has already run-up, up a fifth over three months ago, compared to Glencore’s 15% gain.
A weak outlook for volumes could be a factor too. Hindustan Zinc’s volumes declined sequentially in the June quarter, but production is expected to pick up in the second half. Even in July, government data shows that the company’s zinc output rose by 8.6% sequentially. If it can maintain that trend, a sequential increase in output would be welcome.
Output is slower as the company is shifting to an underground mining system, which also entails more expenditure. Lower output means costs get spread over a smaller base of revenue. That is one reason for its higher cost of production but higher coal costs have contributed too. Its Ebitda (earnings before interest, tax, depreciation and amortization) declined more than the Street expected, in the June quarter. Coal costs continue to trend up in the current quarter as well.
Hindustan Zinc’s output is set to increase in the second half, though it may ramp-up gradually. If prices maintain their uptrend, then it will see a much better performance in the second half, as it will earn more per tonne and costs are spread over a higher base. The worry, of course, is if the tide of rising prices reverses by then. A sharp jump runs the risk of an equally sharp reversal too. Also, for a commodity stock, Hindustan Zinc already trades at 12.2 times its estimated fiscal year 2018 earnings per share, according to estimates compiled by Reuters.