Hindustan Zinc conducted a conference call on 21 July 2020 to discuss the financial performance for the first quarter ended June 2020 and way forward. Mr Arun Mishra, CEO- Designate of Hindustan Zinc, and Mr. Swayam Saurabh, CFO of Hindustan Zinc, addressed the conference call.

Highlights of the Concall

Zinc market update-

• Zinc metal prices recovered in May and trended above $2,050 in June, After touching multi-year lows in March, mirroring the rebound in industrial activity, post easing of sanctions and restrictions globally. Majority of the mines where production was suspended on account of COVID-19 related lockdown, resumed operations in May, June and are ramping up, while complying with new protocols. Globally, there are also some mine closures and new project delays on account of an already weak price environment that has been worsened by COVID-19 pandemic. The overall impact of all this is likely to translate into a decline in mine supply by 5% in 2020 as compared to pre-March expectation of a 4% growth.

• On the "Demand" side, Chinese consumption which accounts for 40% of global demand, has trended upwards with increasing government spending on zinc intensive infrastructure and real estate, white goods as well as auto sector showing momentum. As a result, Chinese zinc stock have come down despite higher imports and higher output from Chinese smelters. However, demand in rest of the world remains disrupted with secondary outbreaks. So, while we witness demand picking up from the lows recently, it still remains weak and expected to be lower than the last year. As mine supply is expected to be lower and dependent on ramp-up, we expect smelters will cut production due to subdued demand and lower TC which have declined from $300 in March to $170 per DMT (dry metric tons) in spot market. This will likely to provide an upward push to zinc price in the foreseeable future.

• In domestic market, the Company's key customers including steel plants, are gradually increasing production and demand is expected to improve towards the end of the current quarter as ‘unlock 4.0' accelerates. Government's economic package to reboot the economy will aid downstream demand of zinc as infrastructure activities are anticipated to pick up pace. In lead, Company's expects replacement demand to gain traction in Q2 though it may take a while for automobile OEM demand to return to normal levels as the segment globally is struggling. Silver demand is steady in domestic market and prices are has steadily rising. Gold to silver price ratio has increased further and the need for safety in these uncertain times will keep silver prices on a secular uptrend.

Operational performance update-

• The Company total mined metal production for the quarter (Q1FY21) was down 5% y-o-y to 202kt due to fewer days of production in April and lower workforce availability on account of restrictions related to COVID-19. Ore grades were flat at 7.3% from a year ago as per mine plant and a fewer days of production in April. Similar to mine, smelters also saw a gradual ramp up in April and registered 90% utilization in May and June, with production run rate being 11% higher in those two months as compared to similar months in Q1 of last year.

• Integrated metal production was 202kt for the quarter, down 8% y-o-y due to lower production in April. Integrated zinc production was 157kt, down 8% y-o-y while integrated lead production was 44kt, down 7% y-o-y. Integrated saleable silver production was 117 MT, down 26% y-o-y due to delayed stabilization of Dariba Smelting complex (DSC) lead smelter and increase in WIP, partly offset by higher silver grades.

• Zinc cost of production before royalty (COP) and adjusted for one-time costs (COVID-19 related donations & start-up costs) was $954 (Rs 72,004) per MT for the quarter, lower by 11% (3% in Rs) y-o-y. Reported COP was $1,019 (Rs 76,920) per MT and included Rs. 101 Crore ($53 per MT) for contribution towards PM-CARES fund and another $12/ton as one-time startup cost. The reduction in CoP is a combination of structural cost optimization measures in the area of consumption, power management, contracting and overhead optimization as well as softening prices of input commodities like coal, met coke, cement and diesel. These were partly negated by COVID impacted lower volumes and weak acid credit due to temporary mismatch of supply/demand in acid market.

• Acid credit has declined in Q1FY21, It has now come to about Rs.1,400/ton of acid which is roughly 40%-45% lower than what the Company's was realizing till two quarters back. The other factor on which prices will depend is sulphur prices which has also crashed coincidentally by 40% over the last six months or so. The acid prices are at bottom level right now, thus, its expected that acid price to improve going forward.

• During Q1FY21, LME Zinc prices declined 29% to $1,961 per MT and Lead prices fell 11% to $1,673 per MT, but Silver prices added 10% to $16.38/oz. Metal premiums were lower due to an overall decline of benchmark premiums in international markets as well as mix shift to exports as domestic demand virtually halted down due to lockdown in Q1.

Expansion Projects-

• The Company's project work resumed at all sites in June 2020 while complying with COVID-19 guidelines and providing essential training and awareness to ensure safety and well-being of all workers and business partners. Consequently, the commissioning of back-fill plants at Zawar is expected to be completed in Q2. Fumer plant is ready for commissioning and is waiting for OEM support delayed due to visa and travel restrictions.

• The Company's has commissioned a 10 MLD STP in Udaipur and another 5 MLD plant is in its final stages of commissioning, which will take the total STP capacity to 60 MLD. This will treat major portion of the sewage of Udaipur city. While part of the recycled water will continue to be used by our plants, the remaining water will be discharged back into the river to augment ground water levels and help downstream agriculture.

Financial performance-

• The Company has posted 23% drop in the net profit to Rs 1,359 crore on 20% slide in income from operation at Rs 3,989 crore for the first quarter ended June 2020. The drop in topline was primarily due to a 29% decline in zinc LME prices, 11% decline in lead LME prices, lower metal premium, and COVID-19 impacted lower volume, partly offset by rupee depreciation, while drop in bottom-line was partly offset by higher investment income primarily on account of higher mark-to-market gains due to favorable interest rate movement and lower tax rate due to incoming shift. OPM declined to 40% from 50% in corresponding previous quarter, thus, operating profit (OP) dropped by 36% to Rs 1,576 crore.

Outlook-

• The Company's is conceptualizing next phase of growth to 1.35 mtpa and finally to 1.5 mtpa. For this a detail life of mine planning and feasibility studies are currently underway in partnership with renowned global experts

• The Company's expects both mined metal and finished metal production in FY2021 will be higher than last year and is expected to be between 925-950 KT each. FY2021 saleable silver production is projected at c.650 MT.

• The Company's expects Zinc cost of production in FY2021 to remain below $1,000 per MT. The project capex for the year is expected to be in the range of US$100-140 million.

• The Company's expects project Capex for this year to be in the range of $100-$140 million and our focus remains on conserving cash and channeling investment in growth projects with superior paybacks.

• The Company's expects grades to improve going into Q2FY21 and expect them to be in the range of 7.5%-plus for the full year.