Hindustan Zinc takes partial insurance against fall in prices2 min read . Updated: 24 Oct 2017, 08:25 AM IST
Hindustan Zinc's long-term story appears intact, with its capital investment plans going ahead as planned
Hindustan Zinc Ltd continues to benefit from the rising tide of zinc prices, but input costs too continue to increase and the September quarter also saw output decline sequentially. Zinc prices on the London Metal Exchange have been on a roll, with average prices in the September quarter up by 31% over a year ago and by 14% sequentially.
But mined output during the quarter declined by 6% sequentially, which the company said was due to lower treatment of ore. Quarterly variations in output apart, Hindustan Zinc has maintained its output guidance for fiscal year 2018 (FY18), saying it will be slightly above 2017.
What has changed is its outlook for cost of production. After its FY17 results, the company had said that the cost of production for 2018 in dollar terms would be slightly higher than the $830/tonne level. That stands revised to a level of $900-950/tonne.
This is chiefly due to higher prices of coal and metallurgical coal while expenses on mine development contributed as well.
While rising costs can be a concern, when realizations are rising they can be absorbed with relatively little impact. Hindustan Zinc’s margins have risen sequentially, for instance (though they declined from a year ago).
The company’s operating profit increased by 45.6% over a year ago and by 26.8% sequentially. Net profit rose by 34% over a year ago and by 35% sequentially.
The situation can change if prices decline though there are no evident reasons to fear it, for the moment. Still, the company has departed from its normal practice of selling on the spot market, and sold part of its metal output forward, comprising about one-fourth of its annual output. These are for the March 2018 and the June 2018 quarters. While the management said this was in response to the volatility in prices, it protects the company in case prices decline but costs don’t.
Hindustan Zinc’s long-term story appears intact, with its capital investment plans going ahead as planned. Its shares are up by a fifth since early-July and track the rising trend seen in zinc prices. On Monday, the company’s shares were down by 1.4% after its results were announced, which could be partly due to the decline in output and the increase in costs.
The main risk to watch here is if zinc prices reverse due to any unexpected event. Even a situation where zinc prices slow down but costs don’t is a risk, although Hindustan Zinc is now partially hedged against this risk. There is the opportunity cost, however, if zinc prices move up beyond the price it has sold forward at. Investors may still console themselves from the fact that the company can still earn significant profits on the rest of its output.