Hindustan Zinc Limited (500188) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Hindustan Zinc Limited Q1 FY 2021 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Ms. Preeti Dubey from Investor Relations team. Thank you, and over to you, ma'am.

Thank you, Vikram. Good evening, everyone, and thank you for joining us for Hindustan Zinc's First Quarter Fiscal 2021 Results Call. I'll begin this call today by introducing our new Head of Investor Relations, Ms. Shweta Arora. Shweta has over 12 years of experience in capital markets and joined our group in November 2019. Over to you, Shweta.

Thank you, Preeti, and good evening, everyone. I'm very excited to be heading Investor Relations team at Hindustan Zinc and look forward to interact with you all in the coming few months. Today, we have with us our CEO designate, Mr. Arun Misra; and our CFO, Mr. Swayam Saurabh. Mr. Misra will present an update on business performance while Swayam will brief you on the financial performance, after which we will be happy to take your questions. Before we proceed, we have an announcement to make for which I will hand over the call to Swayam. Over to you, Swayam.

Good evening, everyone. I'm pleased to announce that Mr. Arun Misra will be taking over as CEO of Hindustan Zinc from 1st of August 2020. He has been with us since November last year as Deputy CEO and has been an integral part of our Executive Committee. He has a diverse experience of 31 years, and we are excited to have him. I would also like to thank Mr. Duggal, our outgoing CEO, for his immense contribution in the growth of our company, and he will continue to guide us as the CEO of Vedanta. Now I will ask Mr. Misra to take over this call.

Thank you, Saurabh, for your kind words. Good evening, and a very warm welcome to all of you. I thank our Board of Directors for giving me the opportunity to lead such an illustrious company, and it will be my endeavor to continue to our growth story and achieve our vision of becoming the largest and most admired zinc, lead and silver company. I trust that you and your families are safe and maintaining all precautions against spread of COVID-19. While the uncertainty due to the pandemic is still lingering, we have done well in keeping our assets and people safe and have ramped up our mines and smelters to near-normal levels. The needs of our communities remain close to our hearts, and we have stepped up our CSR activities during these times, not only to ensure sufficient supply of food, health services, masks and other PPEs but also continue to provide access to our programs in livelihood, education and child care. I'm delighted to share that our sustainability efforts over the last several years have paid off, and we have been certified as 2.41x water positive company. What it means is that we are adding 2.41x more water than we are actually consuming. This is significant as we operate in a water scarce region where water availability to communities for drinking and agriculture is a key issue. Initiatives like rain water harvesting, desilting of Udaipur lakes, water conservation initiatives like dry tilling and enhanced use of treated sewage water has enabled us to achieve this distinction. Another good news is that we are now the sixth largest producer of primary silver in the world and contribute to over 10% of our domestic demand. We have increased our silver production 4.1x over the last decade to over 600 tonnes, which now constitutes approximately 13% of our total revenue. We have plans to further increase it to over 1,000 tonnes in the coming years through higher production from existing and new silver-rich deposits as well as by enhancing process recovery. This will pave the way for us to become one of the top 3 silver producers in the world. Coming to quarter's performance, we have continued to deliver good performance despite losing approximately 18 days equivalent of production in April due to lockdown and other workforce-related restrictions. Through well-planned safe restart and continuous ramp-up of operations, while also complying with COVID-19 guidelines, we have achieved 16% higher mined metal production run rate in May and June than the average run rate of last year's Q1 during the same month. We are well aware that risks associated with COVID-19 is yet to fade away. But based on our resilient Q1 performance, we remain confident of delivering strong performance during the year. Coming to market update. After touching multiyear lows in March, zinc prices recovered in May and trended around $2,050 in June, 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 lockdowns, 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 stocks 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 witnessed 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 TCs, which have declined from $300 in March to $170 per dmt in spot market. This, we believe, will provide an upward push to zinc price in the foreseeable future. In the domestic market, our 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, we expect 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 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. Now an update on operations. During the quarter, our mined metal production declined by 5% from a year ago to 202 kt due to fewer operation days in the quarter. Our grades remained unchanged at 7.3% from a year ago. Sequentially, mine metal production was lower by 19% as per mine plant and fewer days of production in April. Similar to mines, smelters also saw a gradual ramp-up in April and reached above 90% utilization in May and June with production run rate being 11% higher in those 2 months as compared to similar months in Q1 of last year. Integrated metal production was 202 kt, down 8% from a year ago and 9% sequentially, in line with the availability of mined metal with zinc at 157 kt and lead at 44 kt. Saleable silver production was 117 tonnes, down 26% year-on-year and 30% sequentially due to delayed stabilization at our Dariba smelting complex lead smelter and increase in WIP, partly offset by improved grades. Coming to our growth projects, the commissioning of backfill plants at Zawar are expected to be completed in Q2. Fumer plant is ready for commissioning and is waiting for OEM support held up due to Visa and travel restrictions. We are conceptualizing our next phase of growth to 1.35 million tonnes per annum and finally to 1.5 million tonnes per annum. For this, a detailed life of mine planning and feasibility study is currently underway in partnership with renowned global experts. I'm quite excited about this new phase in our company which will add substantial value to our stakeholders. Before I hand over to Swayam for an update on financial performance, I would like to present our annual production guidance as promised in the Q4 earnings call. We expect mined metal and refined metal production for the year to be in the range of 925 to 950 kt each while saleable silver production is expected to be approximately 650 tonnes. Now our CFO, Swayam Saurabh, will provide an update on financial performance. Over to you, Swayam.

Thank you, Arun, and welcome, everyone, again. As outlined by Arun, we continue to strengthen the foundation of our operation to deliver the guided volume growth across all mines and smelters. I'm happy to share that our digitization and automation backed cost optimization program launched last year, together with the war rooms which we created towards the end of March, have started to yield encouraging results. We have been successful in structurally reducing our cost through specific initiatives which were deployed across all our operational units. In addition to this, the tailwind of softer input commodity prices helped us to protect margin in an otherwise uncertain environment. All of this has also laid a strong foundation for us to deliver the promised performance for rest of the year. Coming to the financial performance for the first quarter, revenue from operations was INR 3,989 crores, a decrease of 20% from a year ago and 9% sequentially. Our financial performance was impacted by a sharp decline in zinc LME prices, which fell 29% Y-o-Y and 8% sequentially, as well as lower lead LME prices which were down 11% Y-o-Y and 9% sequentially as COVID-19 pandemic slowed down economic activity. 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 quarter 1. On the positive side, rupee depreciation aided our price realization. Zinc, lead sales volume at 163 kt and 45 kt were in line with production and higher opening inventory. Silver sales of 146 tonnes were significantly higher than production and marginally better sequentially as we liquidated inventory from previous quarter. Zinc cost of production before royalty for the quarter was $1,019 per tonne and included a $53 per tonne impact from COVID-19 related donations and another $12 per tonne as onetime start-up cost. Excluding the one-offs, COP improved 4% sequentially and 11% from a year ago to $954 per tonne. 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 softing prices of input commodities like coal, met coke, cement and diesel. These were partly negated by COVID-impacted lower volumes and weak acid credits due to temporary mismatch of supply/demand in acid market. Resulting EBITDA for the quarter was INR 1,599 crore, lower by 36% from a year ago and 18% sequentially on account of lower LME and onetime costs, partly offset by lower operating costs. Net profit for the quarter was at INR 1,359 crores, a drop of 23% from a year ago, but a marginal increase of 1% sequentially. The decline in EBITDA 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 income mix shift. Coming to cost and CapEx guidance for the year. Our cost base is resetting to a lower level, and we therefore expect COP to remain below $1,000 per tonne for the fiscal year, which includes higher spend on mine development to support future volume growth. Project CapEx for this year is expected to be in the range of $100 million to $140 million, and our focus remains on conserving cash and channeling investment in growth projects with superior paybacks. With this, I open the floor for questions.

[Operator Instructions] We have our first question from the line of Sumangal Nevatia from Kotak Securities.

First question is on the delays in the expansion plans. So both the backfill plant at Zawar and Fumer. I think in early May call, we guided that both these should start in May and now we are telling 2Q. So just wanted to know what has got -- I mean what is the reason behind the delay because I'm sure a lot of these COVID-related issues are already well-known in May.

Yes. So you would appreciate that although the COVID-related domestic issues are well known, it was not anticipated that the foreign travel would be restricted to the extent that it has been and especially now the situation with China that has developed the way it is and also, of course, because of COVID, only from couple of countries international flights were allowed to pick up their own citizens. Otherwise, for technical people to travel, it is still not so easy to happen. So we are estimating that towards August end, for us, the travel would be easier and the foreigners to get Visa and then the experts can come in. So somewhere towards the end of this Q2 we should be able to get the experts to help us in commissioning those facilities.

Understand. So -- I mean in second half, it looks like we will be completing all the planned expansion projects and reaching 1.2 million tonne capacity. So can we expect a steep jump in FY '22 in terms of our volume capability? I mean just some early color and thoughts on FY '22, how it can look because then -- I mean at least on the capacity or any project commissioning side, we will not have any constraints.

Yes. So Swayam here. Indeed, we expect most activities related to the current expansion growth project to be completed by Q2. And we also think this would allow us to exit Q4 at a significantly higher run rate. Of course, COVID is something we will have to watch out for. This is not gone yet. But it is giving us confidence that we would exit Q4 higher, which should give us, let's say, even better run rate going into FY '22.

Understood. And just 1 last question. There's a lot of media reports that we are evaluating a bond issue of $1 billion or something. So -- I mean given that we already have around $2 billion of cash, just wanted to understand the rationale behind this.

Yes, we would not comment on media reports in this forum.

We have the next question from the line of Amit Dixit from Edelweiss.

I have a couple of questions. The first one is on the silver. So if you look at silver EBIT, we find that for the first time it is greater than zinc, lead EBIT and it has been growing, I mean, since several quarters. So what is your overall thought process behind this division? Is there a thought process internally to spin it off into a separate hub because clearly this business is not getting the value it should get essentially. And given the increasing contribution, and you said in your opening remarks that silver production is likely to go up, so -- and the kind of EBIT margin it generates, I think the contribution of this particular division is going up. So I just wanted to understand the thought that goes into the future of this particular division.

So it's a very interesting question, and the whole management also appreciates the fact that silver constitutes a very significant portion of our revenue, and also it's time now, with the scale and the proportion it is having, a separate attention is needed. So we have recently appointed a CEO for silver business, who would focus exactly on the idea that you are talking about, how to take this segment of the business forward while still not delinking with the main business of zinc and lead. So that is the strategy as of now.

And just to add to that, on your question of not getting the right value, we are aware of that. And we think that silver as a business should command, let's say, a significantly higher value than what you see right now. And as Arun explained, with more committed and dedicated focus on silver vertical, we are looking at ways to enhance and extract this value.

Okay. The second question is on cost per tonne. While you have guided that cost per tonne would be lower than $1,000 and in these 2 quarters, Q1 and Q2, we have found that cost per tonne has declined and, in fact, if you adjust it with the one-off cost for COVID-related thing, it is already down to $954, and coal cost is expected to stay low. So why the guidance of just below $1,000? Why not, I mean, COP to be nearer to USD 950? Do you expect some, I mean, cost to escalate or something going ahead?

So there are known reason for cost escalation. It's just that the current environment is very dynamic. The second reason cost is guided the way it is guided is the fact that, we have mentioned this, I think, couple of quarters back that we are focusing on accelerated development, which would allow us to generate sufficient, let's say, higher minable reserves versus what we have today, which would translate in a more predictive -- volume-predictive grades and also, let's say, a more sustained continuous production levels. So this is something we are going to be actively investing in. And if the commodity prices and our cost-saving initiatives stay the way they are, the cost should be around $950. However, additional development is where we need to focus on to make sure our business remains sustainable for next 3 to 5 years, and that's where the investments are.

We have next question from the line of Pinakin Parekh from JPMorgan.

Sir, can you talk more about the acid credits? Because historically, it has been a material number in terms of revenues and EBITDA, and this quarter was particularly weak. So what's the outlook going forward in terms of prices that you see?

Yes. So acid credit has declined in this quarter. I mean it has now come to about INR 1,400 per tonne of acid, which is roughly 40%, 45% lower than what we have been realizing till 2 quarters back. See, acid is a more regional business. Transportation of acid beyond 200, 250 kilometers makes it unviable. So a lot of price gets determined by regional demand and supply. And as you know, part of the reason why our price realization came down in Q1 was because of COVID. A lot of our consumers, their facility, their factories did not start while we started to operate, which created a small delta between, let's say, demand and supply -- traditional demand and supply. We do expect acid price to improve going forward. The other factor which -- on which prices will depend is sulfur prices, which has also crashed coincidently by 40% over the last 6 months or so. But we think the acid prices are at bottom level right now, and only way forward will be prices going up.

Sure, sir. Sir, 2 more questions. The first -- the second question is that I would assume that in the current quarter, you would have exported a much larger share of your volumes than you normally do. Sir, what was the export percentage? And how do you expect this to trend because increment domestic sales volume will be more profitable. And the other question is that with the commercial coal blocks coming up for auctioning, does Hindustan Zinc fancy itself entering that segment or would it remain limited to zinc and lead and not participate in the commercial coal block auction?

So coal block auction, I will let Arun respond, but let me take your first question. Our -- indeed, the market -- domestic market was completely under lockdown mode. So we had to do far more export. And export, as a percentage, which traditionally is about 25%-odd had moved to actually 70% during May and June. But we're already -- looking at May to June, we are seeing this trend reversing. With domestic market opening up, we expect towards end of Q2, the situation should start to get normalized.

Yes. On top of that, in spite of higher exports in the domestic market, our supply was more than what we thought of.

Market share was maintained.

And the last part is the coal block. Yes, Hindustan Zinc is looking at coal block primarily from the affordability and logistical viability compared to the coal that we use in our power plants. It is under consideration, but I would not be speculating on which mine and how much.

We have next question from the line of Anupam Gupta from IIFL.

Just 2 questions. Firstly, given that exports were much higher in May, June, what's the sort of differential between the prices of exports and domestic? And the second question -- sorry.

Yes, go on, go on.

Yes, and the second question is on the CapEx part of it. So the CapEx number which you indicated $100 million to $140 million, is that only the growth CapEx or does it include the sustenance CapEx as well?

So to answer your first question, typically, between export and domestic, when we sell in domestic, we have something called duty factor, which is -- it gets added back. So approximately, that works out to be $100, $120 per tonne. That's at incremental margin we generate if we sell domestic.

Right. And second on the CapEx, sir?

So CapEx number which has been guided is on the growth CapEx. Sustaining CapEx is on top of that.

So what will be the total CapEx which would build in for FY '21 and '22, or '21 if it was just guided for this year?

We are still evaluating sustaining CapEx. And just like all other corporates, our focus is on conserving cash. We expect the total CapEx at this moment to be between $300 million -- in the range of $300 million plus/minus $20 million, $30 million total CapEx.

We have next question from the line of Ritesh Shah from Investec Capital.

Sir, my first question is, how is it that we have deployed INR 15,500 crores. I'm looking at it from, like, is it more towards our short end of the curve or is it towards the long end of the curve? So if at all we have to monetize it, sir, how do you look at it? So just wanted to understand what sort of deployment is from a maturity perspective?

So all our investments by design are for the long term because our goal is to focus on tax-efficient fixed income or debt investments. Any specific queries around what are the maturity profiles can be obtained off-line from our Investor Relation team.

Okay. And sir, when we say, long term, is it like 1 year plus, and that would be, sir, 90% or so. Would that be a fair roundabout number?

You should reach out to our Investor Relations and they should be able to guide you. It's typically 3 years plus because you get 4 indexation benefits, but there are different products with different level of tax efficiency and maturity follow.

That's helpful. Sir, my second question was a bit [indiscernible] pardon me for my ignorance. But if a company had to raise debt, a certain large quantum, is it something that the Board has to sanction the quantum? Is there any regulatory requirements around this?

So you're asking me what are the requirements of company debt?

Yes. So basically, next question was assume if it is quantum that is something which Board has a certain requirement of the sort?

Yes. So in past, whenever we have raised debt, we have asked for Board approval, and that's I think all companies are required to follow. And that's where I would leave this question.

Okay. We can't basically disclose the sanction quantum over here?

We don't because -- we don't disclose this information as a standard information disclosure.

Okay. I just move to -- I have a few more questions. Sir, is there any update on sale leases? I think the government was talking about abolishing Section 10 (2)(b) of MMDR Act. This is something which is critical for Hindustan Zinc. Sir, has there been any update over here, positive, negative or work in progress?

Section 10 (2)(b) of MMDR.

So as of now, on the MMDR Act changes, all our leases on the life of mine, it is still protected. There is no risks towards our ownership of the leases that we have.

So this also includes the sale leases, which stood allocated prior to MMDR, that is, I'm referring to the [indiscernible].

Okay. So all those -- there are -- under various clauses, we still have right over them and for which we are in talks with the government. Some cases are under PL and some cases we have applied for -- I mean some where our government has extended like BK 2 projects, government has extended the mining lease and some cases, we are working with the regional authorities to get our hold on the leases.

Okay. Sorry, sir, just going up, but my second question -- my fourth question is for Swayam. Sir, that was an ongoing case of COVID and contractor. This was pertaining to the payments in this quarter because of the COVID issue. What is the impact of that on an endpoint cost for this quarter? Or is it something which has been deferred and it can come in Q2?

You mean payment dispute with a contractor related to COVID payment?

Yes. This is regarding the 4 mines which were there and the [ deployment ] contractor case. The 4 main regions actually where we have a common contractor, which had actually filed a litigation.

No, we are not aware of any litigation, and we are also not aware of any such large dispute which is material enough, let's say, to be disclosed or discussed here. There are a few cases, we are having discussions. And I think they will get resolved. None of them are material.

Okay. And sir, lastly, if possible, I think the Supreme Court has been talking about the divestment of government's stake in Hindustan Zinc. If at all the Supreme Court gives a green light, how should a minority investor look at Hindustan Zinc as a listed entity?

I will not be able to answer this question because we have very little role to play. We are getting divested if at all we get divested. So I would not have answer to this question. You should -- yes, this is not the correct forum for this question.

Your next question is from the line of Indrajit Agarwal from CLSA.

Two questions from my side. First, on the start-up cost that you mentioned, about $12 per tonne, so approximately how long can you expect this to sustain? Or do you think as we launch or commission all the projects, do the start-up costs go up small P&L?

See, the start-up cost was a onetime cost since we stopped our operation from 22nd March and then we restarted towards the middle of April. These are onetime costs which you need to incur when your smelters come to a complete standstill. They are not expected to be repeated in the coming quarters.

So during the lockdown, was the smelter entirely closed or is it like something like hot idling of the smelter?

No only -- almost 70% to 80% of the smelters were closed and only a roaster which is a hot furnace and needed to kind of slow idling it, we could maintain only 1 or 2 of them.

Second point is on the grades. How are the grades this quarter for zinc and lead?

So grades are at 7.3%. They declined, were sequentially, which were at 7.9%. But we expect grades to improve going into quarter 2 and expect them to be in the range of 7.5% plus.

Blended for the full year?

Yes.

Ladies and gentlemen, we'll take the last question due to time constraints. We have next question -- the last question from the line of Vivek Ramakrishnan from DSP Mutual Fund.

I'm really sorry, I have to go back to the debt question only because there's also CRISIL rating rationale, which has assigned the INR 8,500 crore fresh MTD line. So could you at least guide us in terms of what are your debt raising plans because I know you raised CPs in the last quarter? And how much do you propose to raise as long-term debt? And what would be the end use?

See, as I've replied earlier, this is not an appropriate time for us to provide specifics. So I would request you to drop here. And once we are closer to any concrete plan, we would -- via our Investor Relation, you would be informed.

Ladies and gentlemen, that was the last question. I'd now like to hand the conference over to Ms. Shweta Arora for closing comments. Over to you, ma'am.

Thank you, everyone, for joining the call today. For any follow-up questions or clarifications, please feel free to reach out the Investor Relations team. Thank you.

Thank you very much. Ladies and gentlemen, on behalf of Hindustan Zinc Limited, that concludes today's conference call. Thank you for joining with us, and you may now disconnect your lines.