Hindustan Zinc – Large reserves + low costs to Help

The recent sharp 33% qoq drop in zinc metal prices has led to a sharp cut-back in zinc mining output and led to a spate of mine closures. Cumulative reported mine closures have been to the order of 1.6 mn tons so far, which represent about 15% of global output. Zinc prices are expected to remain subdued in the near term owing to current surpluses and high inventories, we believe swift supply side response would help restore market equilibrium.

Rampura Agucha zinc mine which is the largest zinc mine globally with an annual output of 5 mntpa which is being expanded to 6 mntpa and at US$100/ton its cost of production is among the lowest. It has a large proven resource and reserves base of more than 100 mn tons which, at expanded output, would last more than 15 years.

Chanderiya Smelter – Largest single location zinc smelting complex has a production capacity of 525,000 tons of zinc, 85,000 tons of lead and a captive power plant of 234 MW. About 105,000 tons of zinc is produced through the Pyro smelting process.

HZL is setting up a new silver refinery having an annual of 350 tons (11.3 mn ounces) taking up total capacity to 500 tons (16.1 mn ounces) by 2012, making it Asia’s largest primary silver producer and would have 2.5% of global silver output.

Earnings and Valuations:
Zinc, lead and silver prices are based on imported parity prices and hence a weaker rupee helps boost realizations.

HZL has significantly outperformed the broad market over the past month and was up by 4% as compared to the BSE Sensex which was down by 15%. FY2010 and FY2011 EPS is estimated to be Rs64 and Rs81, respectively. The stock continues to trade at inexpensive valuations at less than 2X EV/ EBITDA and 5.5X PE