Hindustan Zinc Limited (BOM:500188)

QUOTE AND NEWS
The Economic Times  9 hrs ago  Comment 
Hindustan Zinc is a 'BUY' call with a target of Rs 126 and a stop loss of Rs 119.
The Times of India  May 16  Comment 
The law ministry has set the stage for allowing Anil Agarwal’s Sterlite Industries and the Tatas to buy the remaining government stake in companies such as Balco, Hindustan Zinc and VSNL, which were disinvested during the NDA regime.     
The Economic Times  Apr 26  Comment 
Higher silver production and lower costs helped the company post a huge year-on-year jump of 53.3% in net profit.
The Hindu Business Line  Apr 25  Comment 
Vedanta group firm Hindustan Zinc Ltd (HZL) on Thursday reported 53.29 per cent jump in net profit at Rs 2,165.81 crore for the January—March quarter on the back of higher revenues and rupee depre...
The Hindu Business Line  Mar 22  Comment 
A delegation led by Vice President of Zambia Guy Scott discussed various areas including exchange of technology, human resource, investment opportunities, environment-friendly tech...
The Hindu Business Line  Mar 6  Comment 
 We recommend a buy in the stock of Hindustan Zinc from a short-term perspective. It is apparent from the charts of the stock that since December 2011, the stock has been in a broad s...
The Economic Times  Mar 6  Comment 
The government may enter into negotiations with the Vedanta and ask for a premium for the residual stakes that it holds in Hindustan Zinc.
The Economic Times  Feb 20  Comment 
The Mines Ministry has sought the Law Ministry's opinion on selling the remaining government stake in Hindustan Zinc and Bharat Aluminium Company.
The Hindu Business Line  Feb 7  Comment 
Hindustan Zinc, a Vedanta group company, has come forward to sponsor international discus-throw champion Krishna Poonia. A two-time Asian Games medallist at Doha (in 2006) and Guangzhou(in 2010),...
The Times of India  Feb 3  Comment 
In 2001, the government had sold a 51% stake in Balco to Sterlite Industries, leaving it with 49% holding. It holds a tad less than 30% in Hindustan Zinc, while Sterlite has close to 65% stake.




 

Hindustan Zinc Limited (BSE: 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] 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 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 lower zinc spot prices, HCL's wide operating margin allows them to continue to invest in expanding production capacity and absorb low price pressure.

The company has expanded zinc and lead production capacity to 1 million tonnes per year, making HZL the world's largest integrated zinc-lead producer in 2010.[8]

Company Overview

Hindustan Zinc is an integrated producer of zinc and lead. The Company’s core business is mining and smelting of zinc and lead along with captive power generation. As of March 31, 2010, the company had four mines and four smelting operations.[9] HZL's mines are located at Rampura Agucha, Sindesar Khurd, Rajpura Dariba and Zawar in the State of Rajasthan, while the smelters are located at Chanderiya, Debari and Dariba in the State of Rajasthan and Vizag in the State of Andhra Pradesh.[9]

During the fiscal year ended March 31, 2010 (fiscal 2010), HZL sold 386,000 tons of zinc metal in the domestic market, while exports accounted for 192,000 tons.[9] Sale of lead metal in the domestic market was 51,000 tons, while the export sale accounted for 13,500 tons. It also sold 223,500 dry metric tons (DMT) of surplus zinc concentrate and 30,900 DMT of surplus lead concentrate in fiscal 2010.[9]

Generating captive power to cover HZL's energy needs is an important aspect of achieving cost effectiveness by vertical integration. The company now has a 234 MW coal based power generation capacity[10] and 123.2 MW[11] wind power generation capacity at Karnataka, Gujarat and Maharashtra.[12]

Business and Financial Metrics

First Quarter 2010 Results (ended June 30, 2010)[13]

During the first quarter of 2010, HZL reported that refined metal production was up 15% to 180,000 tonnes. Silver production was up 5% to 43,000 kilograms. Also during the quarter, revenues were up 29% to Rs. 1,951 crore. First quarter profit was up 24% to Rs 891 crore. The company maintained a strong balance sheet with cash and cash equivalents of Rs. 12,300 crore.

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.[14]

Hindustan Zinc Limited share holding pattern [15]
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

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.[10] 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.[16]

Mining Operations

HZL operates four mines at Rampura Agucha, Sindesar Khurd, Rajpura Dariba, and Zawar -- all located in Rajasthan.[10]

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.[17]

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.[16] On 24th April 2008, the company announced to increase silver production to 500 tonnes per year.[8]

Trends and Forces

Global economic slowdown and the corresponding lower spending by construction 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.[18] 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.

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.[19] 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.[20] 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[21], thereby benefiting HZL. But with the government taking steps to restore investor confidence in the economy, the Rupee is again appreciating.[22]

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.[23] It has production sites in Germany, the United Kingdom, Spain, and mines in Australia.[24]
  • 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.[25]
  • 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.[26]
  • 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.[27]

Miners

  • Zinifex - The company is headquartered in Melbourne, Australia. Its operations include exploration of zinc, copper, silver, gold, lead, nickel, and other metals.[28] The company operates through eight divisions, each dedicated to the operation at each of the main mines and the smelter.[29]

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.[31]
  • 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.[32]

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. 1.0 1.1 , Page 6 Annual Report 2007-08
  2. , Page 73 Annual Report 2007-08
  3. Lead and Zinc mine cost study
  4. 4.0 4.1 , Segmental performance: Capital Market Plus
  5. 5.0 5.1 5.2 5.3 , 24th November 2008, Business line
  6. The Wall Street Journal
  7. , Page 1 Company report
  8. 8.0 8.1 8.2 Announcement on 24th April 2008
  9. 9.0 9.1 9.2 9.3 Reuters: Hindustan Zinc Limited Company Profile
  10. 10.0 10.1 10.2 , Page 02 Annual Report 2007-08
  11. , Hindustan Zinc Limited Results for the First Quarter ended 30 June 2008
  12. , News wire today
  13. Hindustan Zinc Limited Investor Relations: "Hindustan Zinc Limited Results for the First Quarter Ended 30 June 2010"
  14. , 30th August 2007, Hindustan Times
  15. , Hindustan Zinc Limited share holding pattern, rediff Money wiz
  16. 16.0 16.1 , Hindustan Zinc Limited company profile, Vault
  17. , Thomson Financial Business Description, Alacra Store
  18. , Uses of Galvanized steel
  19. 19th Nov 2008, The Economic Times
  20. , Page 25, Marketing, 42nd Annual report, 2007-08
  21. , New strains on the balance of payments, People's Democracy
  22. , India Rupee Ends 3-Week Slide as Spending Plan May Boost Growth, Bloomberg.com
  23. , Linked In, Company profile:Xstrata
  24. , Yahoo Finance, Company profile:Xstrata
  25. , Wright Reports, Teck Cominco Limited - Company Profile Snapshot
  26. , Linked in, company profile Glencore
  27. , Linked in, Company profile Boliden
  28. , Linked In, Company Profile: Zinifex
  29. , Right reports, Company profile: ZInifex
  30. , Yahoo Finance, Company Profile: Anglo American
  31. , Yahoo Finance, Company profile: Nyrstar
  32. , Yahoo Finance, Company Profile: Korea Zinc
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