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Hindustan Zinc: high zinc prices may support earnings even as input cost weighs

Hindustan Zinc’s cost of production during the December quarter at $1148 per tonne was up 21% year-on-year.Premium
Hindustan Zinc’s cost of production during the December quarter at $1148 per tonne was up 21% year-on-year.

  • Hindustan Zinc crossed 1.0 MTPA production run rate during the December quarter. It saw its best ever refined metal production at 261,000 tonnes during Q3. While this is a positive, touching a higher run rate of 1.2 mtpa will be watched for, with 1.35 mtpa likely to take longer

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Hindustan Zinc shares have corrected more than 20% from peaks seen in October last year. Concerns over weak demand from China has weighed on investor sentiment. On the other hand, rising cost of production due to a sharp jump in coal prices have added to the discomfort. An expected pent-up demand, too, has been impacted by the fresh surge in covid infections, led by the Omicron variant.

Meanwhile, zinc and lead prices though volatile have been remained favorable. Zinc prices on the London metals exchange (LME) during the December ended quarter (Q3) averaged $3,364 per tonne, up 28% year-on-year, while lead prices averaged  $2,331 per tonne, also 28% on year.

Analysts at Antique Stock Broking Ltd said, “Zinc and lead outlook would be supported by smelter shutdowns caused by higher energy costs and low global inventory levels. Firm silver prices and higher metal volumes post 1.2MT per annum (MTPA) capacity expansion would support earnings"

On the volume front, the company crossed 1.0 MTPA production run rate during the December quarter. It saw its best ever refined metal production at 261,000 tonnes during Q3. While this is a positive, touching a higher run rate of 1.2 mtpa will be watched for, with 1.35 mtpa likely to take longer, feel analysts.

Analysts at Motilal Oswal Financial Services Ltd said, “We factor in 1.19mt mined metal production in FY23 and 1.2mt in FY24."

All in all, the rising costs are the biggest concerns. The company’s cost of production during the December quarter at $1148 per tonne was up 21% year-on-year, as high coal costs weighed. A part of the rise was fuelled by supply shortage from Coal India Ltd, analysts said, adding that the share of linkage coal in the mix fell to 4% from 30% typically. 

With about 1 million tonne of backlog from Coal India should help lower costs going ahead, said analysts at Credit Suisse in a note dated 24 January. This may provide some respite even as international coal prices have remained substantially higher so far in the fourth quarter as well.

Meanwhile, current valuations may limit upside, said analysts. Those Antique Stock Broking have maintained a ‘Hold’ rating as valuations are rich and they would prefer more attractive entry levels. Analysts at Motilal Oswal Financial Services Ltd have maintained ‘Neutral’ ratings.

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