Our commodity team has upgraded our near-term zinc price forecasts. Production cuts, coupled with buying by the Chinese State Reserves Bureau (SRB), have led to some tightness in the market and, hence, rebounding zinc prices.
We have upgraded FY09 and FY10 zinc price forecasts by 4% and 3% to $1,572 and $1,251, respectively. However, FY11 and FY12 zinc price forecasts have been downgraded by 4% and 18% to $1,488 and $1,819, respectively.
Against our forecast of Rs46.5 / US$, the rupee is trading around Rs52, hence, the domestic realization is at a premium to our assumptions.
Hindustan Zinc has the best-quality zinc mine with an average grade of 12%, making it the lowest cost producer of zinc.
The management has quoted cash costs for 3Q at $780/tonne but is looking to reduce costs to $670/tonne in 4Q with help from the decline in imported coal costs.
The company plans to spend around $720 million to expand capacity by another 50% to 1mtpa by CY10. Even so, we expect cash per share to increase from the current Rs240 / share to Rs363 / share by FY3/12.
We have upgraded FY09 and FY10 EPS estimates by 4% and 3%, respectively, while reducing our FY11 EPS estimate by 6%.
Hindustan Zinc remains one of the safest plays in the current market, in our view, with net cash of Rs250/share, or 70% of market cap. Even at these low zinc prices, the company can make 40% operating margins. We maintain our target price of Rs508.