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WIKI ANALYSIS
Hindustan Zinc Limited (Bombay Stock Exchange BOM:500188), the only integrated zinc producer in India, is the world's second largest integrated zinc producer[1] with revenue of Rs. 85.47 billion per year.[2] Thanks to the world's third largest open-pit mine in Rampura Agucha and Indian's labor cost advantages, Hindustan Zinc is also the world's lowest cost zinc producer.[3]
With 98% of its earnings coming from zinc and lead, Hindustan Zinc's earnings are dependent on global metal market prices.[4] Notwithstanding the sharp 48% decline in zinc spot prices [5], HZL has been able to maintain an operating profit margin of 71%.[6] This was made possible by increased operating efficiency due to increased volumes and higher by-product revenue.[7] In spite of the lower zinc spot prices, HCL's wide operating margin allows them to continue to invest in expanding production capacity and absorb low price pressure.
On 24th April 2008, the company announced plans to expand zinc and lead production capacity to 1 million tonnes per year, which will make HZL the world's largest integrated zinc-lead producer by 2010.[8]
Business Overview
Hindustan Zinc Limited was founded in 1966 as a public sector undertaking, or government-owned corporation. In April 2002, Sterlite Industries (India) Ltd. (STERLITEIND-BY) Limited bought the 26% stock divested by the Government of India and gained management control over the company.[9] The new management's focus has been to achieve cost effectiveness by pursuing greater operational efficiency and higher production volume. The open pit mine of Rampura Agucha Mine is the third largest and the most cost effective zinc mine in the world and produces 73% of HZL's mining output.[10]
Generating captive power to cover its energy needs is an important aspect of achieving cost effectiveness by vertical integration. The company now has a 234MW coal based power generation capacity[11] and 123.2 MW[12] wind power generation capacity at Karnataka, Gujarat and Maharashtra.[13]On April 24th, 2008, the company announced plans to further add 160MW of coal power generation capacity and 148.8MW of wind power capacity.[13]
Business and Financial Metrics
The Indian miner maintains a conservative book with almost no leverage.[15] This is in spite of incurring considerable capital expenditure in investments in new smelters and other capacity improvisation operations. The company's operating margin of over 71%[6] and the reinvestment ratio of 93.85% make this possible.[16]From FY2004 to FY2007, the sales revenues have grown from Rs 1,841 crore to Rs 8,560 crore, at average annual rate of over 120%.[17] The net profit for the same period grew from Rs 445 crore to Rs 4,442 crore, at average annual rate of over 330%.[17] From FY2007 to FY2008, the sales decreased from Rs 8,560 crore to Rs 7,878 crore by 7.9% and net profit also showed a decline of 1.03% from Rs 4,396 crore to Rs 4,442 crore.[17] In the quarter ended September 30 2008, HZL showed 17.88% decline in its net profit.[18] Although the company has undergone capacity expansion, the sales figures declined because of the fall in zinc spot prices by over 48%.[5] The net profit has not shown as steep a decline as the decline in sales because of the improved efficiency brought in by higher volume of operation and better by-product revenues.[7]
Share holding pattern:
Sterlite industries now holds the majority of HZL shares with nearly 65% ownership of the company; the Government of India owns nearly 30% of the company but Sterlite Industries has an option to buy the government's stake. In case the option is exercised, the government has the option to divest 3.5 per cent stake in favor of HZL employees.[19]
| Entity | Percentage |
|---|---|
| Sterlite Industries (India) Ltd. (STERLITEIND-BY) | 64.92% |
| Government of India | 29.54% |
| FII's | 2.18% |
| General Public | 1.46% |
| Banks Fin. Inst. and Insurance | 0.53% |
| Private Corporate Bodies | 0.48% |
Business Segments
Mining Operations: HZL operates four mines at Rampura Agucha, Sindesar Khurd, Rajpura Dariba, and Zawar -- all located in Rajasthan.[11] On 24th April 2008, expansion plans were announced to increase mining output to 1 million tonnes per year.[8] The important operating metrics for the mines are given in the table below.
| Operating metrics [11] | ||||||
|---|---|---|---|---|---|---|
| Name of the mine | Type | Production in FY2008 in tonnes | FY2008 capacity(Million tonnes) | Planned capacity for 2010(Million tonnes) | Reserves(Million tonnes) | Resources(Million tonnes) |
| Rampura Agucha mine | Open Cast | 4,068,215 | 5 | 6 | 63.56 | 43.77 |
| Sindesar Khurd mine | Underground | 295,200 | 0.3 | 1.5 | 1.96 | 35.31 |
| Rajpura Dariba mine | Underground | 518,049 | 0.6 | NA | 7.07 | 17.60 |
| Zawar mines | Underground | 901,635 | 1.2 | NA | 7.18 | 41.91 |
Smelting Operations: Standalone smelters receive treatment and refining charges (TcRc) for processing the zinc concentrate. The TcRc is volatile in nature and is dependent on the zinc price in the market. Since HZL is an integrated player, its smelting operations are insulated from the risk of lower TcRc. HZL operates three smelters -- Chanderiya and Debari in Rajasthan, and one in Vizag, Andhra Pradesh.[21] On 24th April 2008, the company announced two brown field smelter projects to increase the production capacities of zinc and lead by 210,000 tonnes and 100,000 tonnes respectively at Rajpura Dariba.[8]
- Zinc and Lead - Over 98% of the company revenues are contributed by zinc and lead.[4] In fiscal year 2008, the production capacity of zinc and lead were 669,000 tonnes and 85,000 tonnes respectively.[11] The zinc production increased by 22.4 percent to 426,323 tonnes, while company's lead production increased by 30.7 percent to 58,247 tonnes, as compared to 2007.[22]
- By-Products - HZL also produces silver, sulphuric acid, cadmium ingots and copper cathode as by-products. In Fiscal year 2008, the silver production was 80,405 kg, while sulphuric acid and cadmium metal production stood at 753,966 tonnes and 537 tonnes, respectively.[22] On 24th April 2008, the company announced to increase silver production to 500 tonnes per year.[8]
Key Trends and Forces
Global economic slowdown and the corresponding lower spending by constuction and transportation Industries, the biggest consumers of zinc
Zinc is used to galvanizing steel to prevent it from rusting as well as to make copper based alloys like brass. This special galvanized steel finds end use in outdoor construction and transportation related activities.[24] An economic slowdown or recession has a direct bearing with the per capita GDP of a country and it results in lower consumer spending. A 2008 financial crisis induced global economic slowdown would reduce public and private spending on infrastructure development and construction activities and would lower the demand for zinc. Lower demand leads to zinc price reductions, which in turn reduces the profit margin of HZL. In the quarter ended September 30 2008, HZL showed 17.88% decline in its net profit.[18] This can largely be attributed to the slowing global economy.[25]
The economic inviability and consequent shutdown of existing mines due to low price reducing the stock of zinc in the market
The increased supply of zinc from mine expansions in China, Australia, Bolivia, Kazakhstan, India and Canada has led to a global surplus inventory of about 150,000 tonnes in 2008.[26] The spot price of zinc has decreased by more than 48% within the year.[5] The lower prices have reduced the already narrow margin of some of the more cost ineffective mines around world. Intec, Aim Resources and Hudson Bay Minerals have suspended operations and stopped development works at their mines.[5] Perilya and CBH Resources also have announced to cut down the production by over 20% in their mines.[5] The continuation of the trend would ensure the survival of only the relatively cost effective producers. Taking advantage of it's lower cost of production, HZL has announced plans to increase its production to over 1 million tonnes/annum.[8] This step would increase the market share of HZL in the zinc commodities market.
INR / USD relationship
Exports contribute 32.3% to HZL's total revenues.[27] The value of the Indian rupee (INR) compared to the US dollar impacts the earnings of the miner. Any appreciation in the value of the INR results in to lower margins, thereby resulting in lower share price and dividend payments. Further if HZL fails to predict the amount of exports in a given period and thereby does not hedge its foreign earnings, currency movements impact earnings. During 2008, the INR/USD relationship remained volatile. The flight of foreign capital amidst fears of a slowing Indian economy led to a weak INR as compared to USD[28], thereby benefiting HZL. But with the government taking steps to restore investor confidence in the economy, the Rupee is again appreciating.[29]
Competition
HZL is the second largest integrated zinc producer of the world.[1] It competes globally with integrated players, miners and smelters. Some of its Important competitors are mentioned below.
Integrated Players
- Xstrata - It is headquartered in Zug, Switzerland and is a diversified mining company. The company produces copper, coking coal, thermal coal, ferrochrome, nickel, vanadium, and zinc.[30] It has production sites in Germany, the United Kingdom, Spain, and mines in Australia.[31]
- Teck Cominco - Headquartered in Vancouver, Canada, the Group's principal activities are Smelting and Refining which includes zinc and lead, electrical power, fertilizers and specialty metals. It also produces gold, copper, molybdenum, niobium, silver and metallurgical coal. In 2007, it acquired 93% of Aur Resources Inc.[32]
- Glencore - Glencore is headquartered in Baar, Switzerland. It operates in Metals and Minerals, Energy Products, and Agricultural Products. Apart from Zinc, the company produces aluminium, alumina, lead, copper, nickel and cobalt.[33]
- New Boliden - New Boliden is a mining and smelting company headquartered in Stockholm, Sweden. It has operations in exploration, mining , smelting, refining, and recycling. Apart from zinc the company produces copper, lead, gold, and silver. In all the company has eight mines.[34]
Miners
- Zinifex - The company is headquartered in Melbourne, Australia. Its operations include exploration of zinc, copper, silver, gold, lead, nickel, and other metals.[35] The company operates through eight divisions, each dedicated to the operation at each of the main mines and the smelter.[36]
- Anglo American - Anglo American,is headquartered in London, UK. The company and its subsidiaries are leading producer of Gold (AngloGold Ashanti), Platinum (Anglo Platinum), Diamond(De Beers), Iron Ore, coal (Anglo Coal), chromium,zinc, lead, steel and packaging and paper.[37]
Smelters
- Nyrstar - Nyrstar is headquartered in Belgium. It is the worlds biggest smelter. It was formed in 2007 as a joint venture between Umicore and Zinifex. It processes more than one million tonnes of zinc per year of which more than half is sold to Europe.[38]
- Korea Zinc - Headquartered in Korea, Korea Zinc primarily produces zinc and lead. It also produces gold, silver, platinum, and copper. Korea Zinc acquired Big River Zinc in 1996 and began operations in the US. But the company closed up shop at Big River Zinc in February 2006 due to rising costs in zinc ore.[39]
Financial Comparison of the competitors:
| Financial metrics FY2007 | |||
|---|---|---|---|
| Name | Revenue in Million $ | Net Profit in Million $ | Operating Margin |
| Xstrata[40] | 28,542 | 5,543 | 38.14% |
| Teck Cominco[41] | 6,371 | 1,615 | 43% |
| New Boliden[42] | 4,277 | 488 | 16.34% |
| Zinifex[43] | 1,516 | 907 | 59% |
| Anglo American[44] | 25,470 | 8,172 | 32.47% |
| Nyrstar[45] | 3,330 | 397 | 14% |
| Korea Zinc[46] | 3,641 | 464 | 16.66% |
Market Share
Although HZL is the second largest integrated zinc producer, it ranks fifth in terms of mining companies and seventh in terms of smelting companies.
References
- ↑ 1.0 1.1 , Page 6 Annual Report 2007-08
- ↑ , Page 73 Annual Report 2007-08
- ↑ Lead and Zinc mine cost study
- ↑ 4.0 4.1 , Segmental performance: Capital Market Plus
- ↑ 5.0 5.1 5.2 5.3 5.4 , 24th November 2008, Business line
- ↑ 6.0 6.1 The Wall Street Journal
- ↑ 7.0 7.1 , Page 1 Company report
- ↑ 8.0 8.1 8.2 8.3 8.4 Announcement on 24th April 2008
- ↑ , HZL company website
- ↑ , RAMPURA AGUCHA MINE - HINDUSTAN ZINC LIMITED
- ↑ 11.0 11.1 11.2 11.3 , Page 02 Annual Report 2007-08
- ↑ , Hindustan Zinc Limited Results for the First Quarter ended 30 June 2008
- ↑ 13.0 13.1 , News wire today
- ↑ , Rediff Money wiz, Hindustan Zinc Limited P&L
- ↑ , Page 72 42nd Annual Report 2007-08
- ↑ , Hindustan Zinc Limited, Ratios, rediff money wiz
- ↑ 17.0 17.1 17.2 Hindustan Zinc Limited, Profit and Loss statement, Rediff money
- ↑ 18.0 18.1 , Commodity Online
- ↑ , 30th August 2007, Hindustan Times
- ↑ , Hindustan Zinc Limited share holding pattern, rediff Money wiz
- ↑ , Thomson Financial Business Description, Alacra Store
- ↑ 22.0 22.1 , Hindustan Zinc Limited company profile, Vault
- ↑ ILZSG, International Zinc Association
- ↑ , Uses of Galvanized steel
- ↑ , VOA news.com
- ↑ , 19th Nov 2008, The Economic Times
- ↑ , Page 25, Marketing, 42nd Annual report, 2007-08
- ↑ , New strains on the balance of payments, People's Democracy
- ↑ , India Rupee Ends 3-Week Slide as Spending Plan May Boost Growth, Bloomberg.com
- ↑ , Linked In, Company profile:Xstrata
- ↑ , Yahoo Finance, Company profile:Xstrata
- ↑ , Wright Reports, Teck Cominco Limited - Company Profile Snapshot
- ↑ , Linked in, company profile Glencore
- ↑ , Linked in, Company profile Boliden
- ↑ , Linked In, Company Profile: Zinifex
- ↑ , Right reports, Company profile: ZInifex
- ↑ , Yahoo Finance, Company Profile: Anglo American
- ↑ , Yahoo Finance, Company profile: Nyrstar
- ↑ , Yahoo Finance, Company Profile: Korea Zinc
- ↑ , Xstrata Annual report
- ↑ , Yahoo Finance, Teck Cominco Financial Results
- ↑ , New Boliden Financial statements
- ↑ , CBRonline, Zinifex
- ↑ , Anglo American Annual report
- ↑ , Nyrstar Annual report
- ↑ , Alacra store, Korea Zinc company report
- ↑ , NYRSTAR, 2008 International Zinc Conference
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