Hindustan Zinc Limited (500188) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Hindustan Zinc Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Shweta Arora, Head of Investor Relations at Hindustan Zinc Limited. Thank you, and over to you, ma'am.

Good afternoon, everyone, and thank you all for joining us today for Hindustan Zinc's Third Quarter Fiscal '21 Results Call. Today on the call, we have with us, our CEO, Mr. Arun Misra; and our CFO, Mr. Swayam Saurabh. Mr. Misra will begin with an update on business performance, while Swayam will take you through financial performance, after which, we will open the floor for questions. I now request Mr. Misra to begin today's call. Over to you, Mr. Misra.

Thank you, Shweta. Good afternoon, and a very warm welcome to all of you. I trust that you and your families are safe and maintaining all precautions against the spread of COVID-19. I would like to begin today's presentation by sharing an excellent achievement on sustainability side. Hindustan Zinc is included in the list of A-rated companies for Climate Change Carbon Disclosure Project. We are among the 2 companies in metal and mining sector across the globe, which scored A rating in the Climate Change. I'm humbled to share that Hindustan Zinc is a part of business leaders group, COP26, which is actively engaged in shaping the agenda for the 26th meeting of countries that signed the United Nations Framework Convention on Climate Change to be held at Glasgow, U.K. in November '21. I'm also happy to update you on Dow Jones Sustainability Index. We have maintained our first position in Asia Pacific region in the metal and mining sector for third consecutive year and ranked 7th globally in the metal and mining sector. At Hindustan Zinc, we hold welfare of our communities surrounding our operations very close to our heart and always endeavor to give back and make a difference. Our CSF team actively engages with the communities through various flagship projects to ensure that all efforts are directed in a meaningful manner and add value to their lives. I'm proud to share that Hindustan Zinc has been identified as a responsible business of the year for its exemplary work in community development and awarded with Grant Thornton SABERA Award 2020. This is reflecting of the trust-based harmonious relationship that we have nurtured with our communities over the years. Turning to update on operational performance during the quarter. I'm happy to share that we have continued our winning streak from last quarter and touched a few milestones this quarter as well. We saw an ever highest core production, supported by proactive mine planning, driven by increased use of technology and better targeting. We also successfully managed our costs at lower levels, and our 9 months to debt cost is at the lowest level since we transitioned to underground mining operations in March 2018. Coming to market update. Global mine supply continued to face COVID-related disruptions and significant production was lost in China, Peru, Bolivia and Mexico, some of which is likely to be permanent in nature. Mines across the world are facing operational challenges to ramp up production, while complying with social distancing norms. According to Wood Mackenzie, mine production in calendar year 2020 was down 3% and concentrate market remained in deficit to the order of 220 kilotonnes as smelters were not severely impacted due to lower manpower requirements. Marine logistics challenges also led to supply shortages in the market. In China, TCs for imported concentrates continued to fall and reached below $100, which might hamper refined output going forward. Global demand, on the other hand, is expected to have a reset recovery. The manufacturing sector in China was the quickest to return to normal with industrial utilization rates back to pre-pandemic levels by May. The real estate sector also saw a rapid return to normal. And by October and November, China's retail sales were also back to normal. In the United States of America, the new administration is likely to invest in upgrading infrastructure and to decarbonize the economy, both of which will support zinc demand. Driven by this fundamental support, zinc prices stays as strong rally during the quarter. Prices peaked at $2,800 per tonne, while averaging at $2,628 per tonne in quarter 3, up 10% year-on-year and 13% quarter-on-quarter. Various government financial stimulus and rollout of vaccination programs across the globe is expected to drive economy towards a faster recovery part. Wood Mackenzie estimate zinc LME prices to average at $2,800 per tonne in 2021. Coming to domestic market. As migrant workers return, downstream manufacturing units reported achieving 90% to 100% plant utilization. Zinc apparent consumption in quarter 3 FY '21 was up 6% to 7% on a year-on-year basis and 12% to 13% quarter-on-quarter basis. Consequently, premiums also rose significantly. Major steel manufacturers have signaled a tremendous improvement in demand and hinted at strong quarterly results, which also provided support to zinc metal. Finance Minister's assurance to continue fueling economic growth also offers a promising outlook for the next 2 to 3 quarters for zinc demand. Coming to silver, global investor interest remained weak during the quarter as short-term macroeconomic outlook improved and with news of vaccine rollout. This drove investors to other high-yielding asset classes. Subsequently, silver prices were only up 1% at $24 per troy ounce. Turning to operational update. During the quarter, our mined metal production was up 4% from a year ago to 244 kilotonnes on account of higher core production resulting from better mine planning, partially offset by low overall grades. Sequentially, mined metal production grew 22%, supported by higher ore production. Talking about 9 months to date performance, mined metal was up 2% year-on-year. Integrated metal production was at 235 kilotonnes, up 7% from a year ago and down 1% sequentially, in line with availability of mined metal with zinc at 182 kilotonnes and lead at 52 kilotonnes. Salable silver production was 183 metric tons, soaring 23% year-on-year on account of higher net production, partially offset by lower grade at SK mine compared to a year ago. Sequentially, the production was down 10% due to lower lead production and dip in metal grades in SK mine. Coming to an update on our projects. I'm happy to share that Environmental Clearance that was recommended in the previous quarter by Expert Appraisal Committee for Zawar mine expansion from 4 million to 4.8 million tonne per annum has been received. Chanderiya zinc smelter has also received Environmental Clearance for expansion from current 0.42 million tonne per annum to 0.50 million tonne per annum. As guided previously, both the backfill plants at Zawarmal and Mochia mines were commissioned during the quarter. I am also happy to share an update on our e-commerce platform, Evolve, which was launched in September last year. We have crossed 4,000 tonne sale of metal through the online platform and able to reach out to MSME customers with live exchange benchmark prices and as low as 1 tonne delivery for zinc and lead metals. We are delighted that the portal has been well received in the market and customers are transacting on a daily basis. The online commerce portal has also received recognition for best e-commerce portal and technology innovation in various industry forums like CII and SAP based awards. Lastly, an update on Fumer commissioning. Due to ongoing COVID-19 disruptions, including visa restrictions for Chinese nationals, final commissioning of Fumer plant at Chanderiya is not completed yet, and efforts are ongoing for an early resumption. As my closing remarks, I would like to draw your attention to our previously guided FY '21 volumes for both mined metal and refined metal in the range of 925 to 950 kilotonnes each and silver at 615 metric tons. I'm happy to inform you that we are on track to achieve the previously guided numbers on metal volume. And given our strong performance, we are likely to exceed our previously guided silver volumes. With this, I hand over to our CFO, Mr. Swayam Saurabh, to update on the financial performance.

Thank you, Arun. And good afternoon, and a very Happy New Year to everyone. As outlined by Arun, we continue to strengthen our foundation of our core operations and are delivering on volumes, while structurally bringing down the cost through various initiatives. As a management team, our focus is further sharpened, and we are approaching growth via streamlining operating processes and imbibing the culture of detailed planning and, more importantly, efficient execution. We are constantly working towards the resilience of our assets, so as to deliver consistent shareholder value throughout the economic life cycles. In these uncertain times, our strength lies in delivering strong free cash flow from operations, which enable us to invest in the growth of our business, consider new projects, while also giving consistent returns to our shareholders. We will always try to strike this delicate balance of generating long-term value and distributing returns to our shareholders. I would also like to point out that while we have our unwavering focus to deliver on operational and financial excellence, at the same time, we remain equally cognizant to our ESG commitments and sustainability goals. I'm happy and proud to see the emerging maturity of our sustainability initiatives. We are developing processes that are well laid out to incorporate both financial and sustainable aspects in day-to-day business decision-making. The same has started to show some green shoots as we embark on this journey to achieve the sustainability goals that we have set out for ourselves. We do recognize that there is still a lot of work to be done here, and we'll continue to take inspiration from the global best practices to stay ahead of the curve. Coming to financial performance for the quarter. Revenue from operations during the quarter witnessed an increase of 29% year-on-year and was at INR 6,033 crores due to higher zinc volumes, which were up 6% year-on-year and an increase of 30% in lead volumes year-on-year. This was further supported by higher silver prices and volumes and higher zinc prices as well as rupee depreciation over the year. However, some of these gains were offset by a fall in lead LME on a year-to-year basis. Compared to the previous quarter, revenue rose 7%, primarily driven by higher zinc-lead LME prices. Sequentially, zinc LME rose 13% and lead LME increased 1%. This was further supported by higher metal premiums resulting from revival in domestic demand. Some of the gains were offset as price realization were impacted by rupee appreciation quarter-over-quarter. Reported zinc cost of production before royalty for the quarter was $946 per tonne, which was up 3% sequentially, but down -- lower 12% from a year ago. This, however, includes a onetime employee cost, which is equivalent to approximately $20 per tonne. And if you exclude that, it takes it fairly closer to the last quarter's cost of production. All this is a result of our constant effort to bring down cost through structural optimization initiatives and maintain it at consistently low levels. As outlined by Arun earlier, we are proud to share that on a 9 monthly basis, we are at the lowest cost in dollar terms since we transitioned to a fully underground mining operations. I would like to reiterate that extraordinary efforts on all fronts, including consumption, contracting, procurement, and fixed cost optimization has resulted in the sustained reduction of costs, something we are confident will continue. The resulting EBITDA for the quarter was INR 3,313 crores, higher 45% from a year ago and 12% sequentially on account of higher revenue and well-managed operating costs. Net profit for the quarter was INR 2,200 crores, a stellar increase of 36% from a year ago and up 13% sequentially. This was driven by recovery in metal prices, strict cost discipline and slight volume gain. Tax rate, as guided in previous quarters, is at an average of about 24.5%. The higher normalized level is due to change in income mix in light of lower interest rate environment. Now coming to our previously guided cost and CapEx for the fiscal year. As you would have seen, we have successfully reset our cost to a lower level and are confident to consistently keep zinc cost of production down. And given the strong performance, we are likely to exceed our previously guided cost numbers to keep where we communicated earlier that the zinc cost of production will be below $1,000 per tonne for this fiscal year. This we are able to reguide despite higher mine development expenditure. And this is emerging out of the efforts which have been made around bringing our cost structurally down. As for CapEx, we keep our guidance intact with a focused approach and exercise prudence in an uncertain business environment and strike a delicate balance between investing in growth while conserving the cash. With this, I open floors for questions.

[Operator Instructions] The first question is from the line of Sumangal Nevatia from Kotak Securities.

Firstly, congratulations on good results and the achievements on the sustainability front. My first question is on the projects. For the backfill plant, which we have commissioned, what sort of volume and grade impacts can we expect from those plants in the coming quarters and the time line for the sale? And secondly, on the Fumer project, I mean, there's been continuously delay. We understand initially it was because of COVID. But I mean these plants are operated across the globe by all the peers. So just not able to understand what sort of technical challenges we are facing in commissioning. So if you could just share some more light on that, it will be very helpful.

Yes. So let me take the backfill plant question. Backfill plant would not necessarily translate into a better grade. Backfill plant would help us fill our stopes faster, and this would make our production process more consistent and disciplined, which would simply mean that my ability to forecast and meet that forecast consistently in volume terms will be more accurate. It would also make mines stable to the life of the mine plan. On Fumer, the delay is primarily on final commissioning. And as it was also mentioned last quarter, we are facing some issues in terms of our Chinese contractor traveling out of China. And that is something we are looking to resolve. We think we should be able to complete the remaining Fumer work by end of this quarter, latest by April, and Fumer should be operational by then.

Understood. Secondly, on the volume growth part, I assume we would be ending this year at around 1.2 million tonne rated capacity. So what sort of utilization and the ramp-up schedule can we expect in next year, FY '22?

So this year, we were planning to have 1.2 million tonne, but since we lost considerable time in quarter 1, especially in the month of April, due to COVID and the ramp-up got affected because of COVID. Parallelly to liberate the mine that development had to happen. This quarter, we achieved a development figure of about 27 kilometers, which is highest ever in a quarter. So we are on that path. So we are now correctly poised to achieve the full year -- unaffected year if we have next year, that should show a likelihood of achieving this 1.2 million tonne goal.

Understood, sir. Without any disruption, one can expect a very strong volume growth next year, given the current year we might end at around 950?

So we are -- currently, we are absolutely in the process. And quarter 4 suits -- show an exit rate of 1.2 million tonne MIC, which should then continue into the next year.

And I would like to add that although we have been able to show an exceptional recovery in terms of our volume in last 2 quarters, COVID has not completely gone. So I think our current focus is to get to a 1.2 million tonne equivalent run rate in quarter 4. And then -- from then all -- the development, which is happening and the investments which has been done, should translate into a significantly higher run rate for next year.

Okay. Just a follow-up. Sir, domestic and export mix, has that normalized to normal levels of around 20% in export?

Yes. So this was already a question last quarter. And the large part of normalization already happened last quarter, where we saw from almost 65%, 70% export sale in COVID-impacted quarter 1 going down to 29%. This quarter, our exports are at 26%. And this has, I think, broadly reached the normal level.

The next question is from the line of Amit Dixit from Edelweiss.

Congratulations for a good set of numbers. I have 2 questions. The first one is that you -- in your prepared press release, there is a mention of grade issues at SK. Can you please elaborate more on that? And whether these issues have been overcome? That is the first question.

Okay. So in a mine, although you do -- we operate on an overall life of mine plan, okay, the grade issues are transient. I think to go from level to level, you would encounter a great issue. There is nothing wrong geologically or in overall resource-wise. But you will encounter lower grade at some quarter and will also be compensated by higher grade in the other quarter. So it's part of that life of mine plan, and we have to transition that journey. Overall, grade would remain same over, say, 5-year period, but we'll have these fluctuations from time to them. I don't see anything abnormally wrong that needs to be corrected.

Absolutely.

Okay. So what was the grade? Can you share with us the grade that was there in this quarter? And how does it compare with the last quarter?

So the grade in this quarter, quarter 3, is at 7.06%. It's point -- it's close to 1% decline versus quarter 2, where it was 7.14%. Going forward, we think the grades should normalize, go back to 7.15%, 7.2% level, something we have been guided in the past.

Okay. Wonderful. The second question is on the concentrate inventory. Is there some kind of inventory that we are carrying that would be reflected in mined metal sales in next quarter?

There are no such plans.

There is no plan of sales.

There are no such plans.

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

I have question on the...

Sir, can you please speak closer to the handset, please? Your voice is breaking up.

[Technical Difficulty] cost of production that you...

Mr. Agarwal, so sorry, but we request you to move to a better reception area, please. We are unable to hear you.

What was the $20 per tonne higher employee cost because -- in the cost of production that you mentioned in your prepared remarks?

It was a onetime payout, which management decided to do across all grades to all employees as a sort of goodwill gesture, sort of, compensating for variable pay. This was a call taken by HZL management for the fact that people have been working through this COVID, sort of recognition, but also kind of reinforcing our commitment back to them.

So this entire thing will reverse in the subsequent quarters?

No, it's -- so this is a one-off cost. You should exclude this in projecting costs for future quarters.

Okay. And how do you see the impact of higher coal cost affecting the cost of production in fourth quarter and going ahead?

Right. So this is something we are also watching closely. If you look at our coal mix in this quarter, we had used about 23% of domestic coal. But the imported coal, which we had bought during last quarter, indeed, were at, let's say, significantly economical prices than the price uptick we see right now in the market. So while quarter 4 is something we are watching closely, we do not see a big impact. Plus also, we believe that given the global focus, which exists right now in moving towards cleaner greener energy, long-term demand of coal is not going to change very significantly to drive price up in an extremely adverse way. So we are more balanced here. We do see a little bit of impact coming in quarter 4. But we do think that in next 6, 12, 18 months, coal prices should remain within the range.

The next question is from the line of Pallav Agarwal from Antique Stockbroking.

Sir, just had a question on how our net cash has moved during the quarter. Because I understand there would be the impact of the dividend payout. But if you could just walk us through how the net debt has declined from about -- actually Q3 -- over the quarter?

Yes, sure. So -- I mean I'll give you a very high rundown. If you need any specific detail, you can reach out to our Investor Relations team. Our opening cash was INR 27,631 crores. If you recall, we paid a dividend of almost INR 9,000 crores. We had generated an EBITDA of INR 3,114 crores. The slight working capital change, about INR 100 crores, negative primarily locked in debtors, which we should recover this quarter. CapEx and tax put together was about INR 1,300 crores, which essentially translates into a free cash flow after CapEx and working capital change of INR 2,100 crores. And as I said, that INR 2,100 crores, INR 9,000 crores dividend payout. And there were some operational buyer credit, INR 200 crores, translating into a closing cash of INR 21,000 crores.

Okay. Just also on the CapEx part. So while you mentioned the project CapEx is expected to be between $100 million and $140 million. What would be the total normal maintenance CapEx for the year?

Sorry. Can you repeat your question?

I'm asking about the maintenance CapEx for the year. You mentioned the project CapEx will be between $100 million and $140 million. What would be the normal maintenance?

So we guided the total CapEx to be in the range of about $330 million. And out of that, about $140 million was growth CapEx. So about $190 million was sustaining CapEx. Looking at where we stand at quarter 3, we should be able to hold this CapEx guidance.

The next question is from the line of Vishal Chandak from Emkay Global Financial Services.

Congratulations on a good set of numbers. Sir, my first question...

Mr. Chandak, can you speak closer to the handset, please? Your voice is not audible.

Yes. Is it okay now?

Yes, sir. We can hear you.

Okay. So sir, my first question was with respect to the interest cost that has moved up sharply in this quarter. Has there been an uptick in the debt numbers? And what are our plans on the balance sheet leverage going forward?

So if you recall, dividend payout was done in this quarter. And something I've been mentioning also in the previous quarter that while we have quite significant, in fact, INR 21,000 crore odd cash and investment equivalent, they may not necessarily be liquid. And basically to manage the temporary cash flow mismatch, the borrowings were taken. Borrowings as on December end is slightly above INR 10,000 crores, which is -- which primarily was done to support this temporary cash flow mismatch. Now going to, to what extent we are open to lever our balance sheet, if you look at our ability to generate cash, we probably don't need any debt. So any debt which will be taken would only be for a purpose where I don't have liquidity to support. I would like to leave it here.

Got it, sir. Sir, my second question is with respect to your expansion programs from 1.2 million to 1.35 million tonne. So where are we in terms of those plans?

So right now, we are totally focused on first fructifying that 1.2 million tonne attainment. So that is the first milestone. At the same time, we are on the drawing board to do the life of mine planning, which should be -- which should set us up for 1.35 million tonne. To give you some supporting numbers, we are currently running in quarter 3 at about 10-kilometer per month development -- mine development rate. And if we have to achieve 1.35 million tonne, we have to transit to about 13 to 14 kilometers per month of mine development rate. So as we stand today, we are discussing with various business partners how do we achieve this 14-kilometer development rate, which will, in a way, go to support 1.35 million tonne. But that would come only after we attain our goal of 1.2 million tonne MIC production first.

Got it, sir. Sir, if I may squeeze in one question. The onetime expense you mentioned was about $20. What would be the actual number for that in the employee cost?

Yes. It would be about INR 16 crores.

INR 16 crores, that is impacting on the Q3?

Sorry. It would be about INR 35 crores.

INR 35 crores. That's inbuilt in the Q3 numbers of employee cost?

Yes. That's correct.

The next question is from the line of Ritesh Shah from Investec.

I have 2 questions. One is for Swayam sir. Sir, when you indicate, we look to balance growth CapEx versus conserving cash, can you explain how we are looking at balancing those 2 variables? And just a related question over here. At what stage are we for Gujarat 300 kt smelter, which has been announced and commissioning earlier was by 2022 and the refinery project in Rajasthan? So that's the first question.

Sure. So the simplest way to balance, Ritesh, is change your hurdle rate. It automatically helps you reprioritize. That's what we did when we were hit by COVID. But I also mentioned back in quarter 1 that we are very clear. Anything to do with growth of 1.2 million, 1.35 million, 1.5 million remains untouched. But there were other CapEx, which we basically relooked at. Looking at the fact that we are getting back to normal, we, as management team, would also look at going into 2021, should we be holding such a high hurdle rate or should we look at -- relook at it. And that's something we would look to do going into maybe March or April. On...

On Gujarat smelter, the current stage we are in is after signing up the MoU with government of Gujarat. We have hit the ground on community engagement. We are also going through the process of Environmental Clearance. At the same time, the design engineering work is on. And within a very short time, post Board approval, we'll be coming to you and inform you regarding the project CapEx outlay and the deliverables. As for the time lines are concerned, that is given, and that stays firm at FY '22.

Yes. And as part of this validation, we will also know exact return of this project, which would allow us to take a final decision.

The next question is from the line of Rahul Jain from Systematix Shares.

Rahul here. Sir, I had 2 questions. One is that you mentioned that you've got some EC approvals for increasing mine plan in SK and also the Chanderiya smelter. So are you going to take up these projects soon or it's best for future backup?

Okay. So as far as my Zawar one, it's immediately because as we go towards 1.2 million tonne, some of the mines, the reserves will slowly getting exhausted and the other mines have to ramp up. That is one. Second is grade balancing between different mines will call for increasing ore productions in different mines. Zawar is the first target where next year we should see a big uptick on the ore production. That's why the Environmental Clearance is there, and that will be useful. Similarly, in Chanderiya, once we go to the MIC level of 1.2 million tonne, automatically, the smelting requirement goes up. And wherever the balance was not permitting, we have taken the clearances, which will be impacting in Chanderiya smelter. And then RD, Rajpura Dariba, also has got a 2 million tonne clearance. So we'll try to maximize up to 2 million tonne in RD mine as well.

Right, right. And sir, the government is proposing to change mining laws. So I can -- I have 2 -- 3 proposals that come to mind, the captive, noncaptive removal. And second is the cancellation of the 500 saved licenses. So do we -- how do we look at it as an opportunity? Or do we think we could get impacted by the proposal such as that?

So as of now, all our captive mine status of the mines, which are there prior to promulgation of the changes, they are not impacted. There on that -- you are referring to 10A(2)(b) cases, which are on the previously allotted. So that is -- we are already under the jurisdiction of -- legal jurisdiction. And we would wait for the court verdict on how that will apply on the newly made changes on 10A(2)(b) cases.

Sir, could you tell us what exactly -- what details are there?

Details in the sense, they were mines for which the PL were granted beforehand, and then there was a conclusion after the 2015 amendments came, whether those PLs are valid or not valid. We have a certain view, whereas some of the relevant agencies have another view. So those are depending upon the judgment that we get, we will proceed, which is under legal purview now.

So that means it may not get impacted by the amendment or it would remain separate? Is that the right way of looking at it?

That's what is our firm belief.

We take the last question, a follow-up, from the line of Indrajit Agarwal from CLSA.

Can you throw some light on zinc demand in India? How has it been in the past quarter? And how do you see it going forward, domestic zinc demand?

Correct. So post COVID, the domestic zinc demand is increasing, and it is also accompanied by the strong turnaround in the steel sector. And the steel companies are looking at posting best ever results in the quarter 3. That is what we expected to post. That should actually show that the wind is in our favor in consumption of zinc domestically. And we are seeing that in the market that customers have come back to us with bigger quantities, and we are able to now get -- able to touch newer customers who are looking for our metal.

And just to add. If you look at the entire spectrum across infra sector and also what is expected in terms of upcoming budget, we think there is a lot more positivity of the infra push, which will translate into a better zinc demand.

I now hand the conference over to Ms. Shweta Arora for closing comments.

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

Thank you. Ladies and gentlemen, on behalf of Hindustan Zinc Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.