Hindustan Zinc Limited (500188) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Hindustan Zinc Limited Q2 and First Half FY '22 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. Thank you, and over to you, Mr. Arora.

Good afternoon, everyone. I welcome each one of you for Hindustan Zinc Second Quarter and First Half FY '22 Results Call. Today on the call, we have with us our CEO, Mr. Arun Misra, and a recently appointed Interim CFO, Mr. Sandeep Modi. Mr. Misra will begin with an update on business performance, while Mr. Modi will walk 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 staying safe and following all necessary precautions as well as taken dose of vaccination to fight the spread of COVID-19 pandemic in the country. It gives me satisfaction to report fatality-free operations during the quarter. Nothing is more important to us than safety of our people. And we, as a leadership team, reiterate our commitment and vision to ensure all employees go home safely. In some things, safety team continuously drives various initiatives to meet our vision and working committees identify critical areas for improvements to address any potential risk. It is heartening to see that the shared vision of holistic, inclusive and sustainable growth that we have set as leadership team for the company is yielding desired results. Progressing well on our water-positive journey, the very zinc smelters commissioned 0-liquid discharge plant as part of water recycling. Kayad mines have received FIMI Bala Gulshan Tandon Award for Excellence for the year 2020-2021, for the longest accident-free period and National Safety Award from DGMS. This reinforces our commitment to safety of our people. Our Chanderiya Lead-Zinc Smelter was given the Most Innovative Project Award for restoration of Jarofix Yard at the CII National Award for Environmental Best Practices 2021. Also at India ESG Leadership Awards, Hindustan Zinc won in overall environment category as well as greenhouse gas emission reduction category. I am also delighted to report the bold steps that Hindustan Zinc is taking on sustainability front. We have committed to net zero emission by 2050 and published our first task force on climate-related financial disclosure, also known as TCFD report. We have also joined the task force on nature-related financial disclosure, also known as TNFD to tackle nature-related risks proactively. I am also proud to represent Hindustan Zinc and participate in person at the British High Commission Conference of the Parties, also known as COP26 next week at Glasgow. I'm proud to announce that we won Industry Leadership Award at the prestigious S&P Global Platts Global Metal Awards 2021. As a group, our core value and priority is to give back to society and our CSR team have doubled up efforts during these trying times and carefully balanced both the ongoing long-term core initiatives as well as health and COVID-related support to the villages and communities surrounding our operations. I'm happy to share that Hindustan Zinc has won the CSR Leadership Award 2021 presented by World CSR for transforming lives of community nearby. Our Samadhan program received an appreciation from FICCI for commendable work under the Food Securities and agriculture category. Turning to market update. Zinc prices continued the momentum gained in quarter 1 FY '22 and crossed the $3,000 mark on multiple occasions, though prices retreated briefly in the face of macroeconomic worries about the softening global economy. Over the last 1 year, we have seen global zinc supply facing uncertainties in form of COVID-related stoppages to later logistical challenges due to bottlenecks at major ports, which caused long delays and shortage of containers to ship concentrate. More recently, industry is also dealing with coal shortage. Earlier, China announced curtailment or power supply to energy-intensive sectors, which also impacted output. Energy crisis, which started from China quickly spread to Europe, which is also facing rising natural gas prices. We have seen big players such as Nyrstar announcing curtailing production up to 50% at 3 of its European smelters because of rising electricity cost. All the supply side constraints are pushing zinc prices higher and partly also helping to offset rising input energy cost for low-cost players such as Hindustan Zinc. Talking about LME HZL stocks at their current levels, that is at the end of September, they are only sufficient to meet 7.5 days of global demand, which is one of the lowest level for the current calendar year. We feel relatively low stocks, supply side disruptions and the robust demand will continue to put upward pressure on spot metal premiums globally. Despite the supply chain and energy-related constraints, manufacturing activity in North America and Europe remain buoyant, always below the peak seen earlier in the year. End-use demand in most of the world's major economies remains robust. On domestic front, India's manufacturing PMI stood on the higher side of 52 during the quarter, suggesting a strong confidence of the market on economic progression. Quarter 2 of this year saw a continuation of the Indian manufacturing sector recovery. New orders continue to rise during the quarter, suggesting favorable market conditions. As government spending continues in infrastructure, highways, electrification and transmission projects, the major demand for zinc came from the structural segment followed by the alloy segment, which after the dull years exhibited strong recovery as automobile demand improves. Lead prices fell during the quarter, but fundamentally, we see OEM battery consumption, replacement demand and electric bike batteries to remain intact. Silver market in India has seen some headwinds in the quarter of this year, materially went to increase in premiums. The increase in premium is being caused due to the increasing demand and decreasing price. Onset of imports from the international market is another development, which is being observed since the end of July due to low global prices as compared to domestic prices. As we are increasingly seeing focus shifting to green energy in India in line with global practices, we foresee a strong pickup in industrial demand of silver for renewable power projects such as solar cell manufacturing. As we have seen some recent merger and acquisition activities from reputed corporate houses on green energy, we progressively expect more investment to come into this space. Coming to update on operational performance. During the quarter, mined metal production was 248,000 tonnes, up 4% year-on-year on account of higher ore treatment at Rampura Agucha, Zawar and Rajpura Dariba mines, supported by improvement in recovery, which has been partly offset by lower mining grades. Sequentially, mined metal production grew by 12%, mainly due to higher ore treatment at mine and improvements in mining grids and recovery. On a half yearly basis, H1 of this year, mine metal production was 470,000 tonnes, up 7% year-on-year, in line with the higher ore treatment at Rampura Agucha, Zawar mines and Rajpura Dariba mines and increased recovery, offset by a slight dip in overall mining grades. Integrated metal production was 209,000 tonnes for the quarter, down 12% sequentially on account of extended shutdown at one of the roasters at Chanderiya smelter for retail and overall structural components. We lost close to 25,000 tonnes due to the roaster maintenance work shutdown. The shutdown, which was originally planned for 60 days, however, was finished in 52 record days. Integrated zinc production was 162,000 tonnes, down 14% quarter-on-quarter; and integrated lead production for the quarter was 47,000 tonnes, down 4% sequentially. Integrated silver production was 152 tonnes, down 5% quarter-on-quarter, in line with lower lead production. I am proud of our teams at Hindustan Zinc, who with their metal, continue to successfully overcome formidable challenges, ranging from pandemic, operational and other macro challenges like energy crisis. They in turn have strengthened the backbone of our operations through effective systems and planning and have set the stage right for us to deliver 1 million production mark. Coming to project update, we are awaiting public hearing date for Doswada Zinc plant. Once that is cleared, we will proceed for environment clearance process and all other statutory approvals from state and central governments. Also, we will continue to engage with technology partners for closure of best-in-class technology. After all necessary approvals within the system and from government, teams will start the ground work. Due to ongoing COVID-19 related restrictions on visa for Chinese nationals, we expect fumer commissioning to be completed by end of this fiscal year. Before I hand over the call to Sandeep for an update on financial performance, I would like to reiterate our production guidance for the fiscal year 2022. We maintain our mine metal and refined metal production guidance for the fiscal year in the range of 1,025 to 1,050 kilotonnes each and saleable silver production at 720 tonnes. With this, I hand over to Sandeep to update on the financial performance.

Thank you, Mr. Misra, and good afternoon, everyone. Coming to an update on the financial performance for the second quarter and first half year ended September '21. Revenue from operations during the quarter was at INR 6,122 crores, which is an increase of 8% Y-o-Y, led by higher zinc LME and lead LME. We also had a higher premium as well. This was partly offset by lower metal and silver volume, zinc and LME price were up 28% and 25% Y-o-Y, respectively. Sequentially, revenue decreased 6%, primarily due to the lower metal and silver volumes and lower silver prices. It got partly offset by higher zinc and lead LME prices and higher premium. Zinc volume was sequentially down by 12% and lead was down 4%, in line with the lower production due to the maintenance shutdown. Zinc cost of production before royalty during the quarter was $1,124 per tonne in the INR terms, INR 83,208, higher by 22% Y-o-Y and up 5% sequentially. The COP has been affected by higher input commodity prices like coal, diesel, met coke, and higher revenue mine development. It got partly offset benefited from the operational efficiencies and better recoveries. Sequentially, maintenance shutdown and lower metal volume also weighed on the cost of production. EBITDA for the quarter was INR 3,332 crore. It was a 13% Y-o-Y and down 6% sequentially. It was a -- drop was driven by lower volume and higher costs primarily on account of input commodity inflation. I'm happy to share that on H1 basis, we delivered record high H1 EBITDA of INR 6,890 crore, an increase of 51% Y-o-Y. This was driven by higher zinc and lead LME prices, higher premium as well as higher silver prices. While an uncertain macro environment where we are facing headwinds in form of input commodity inflation led by global energy shortages, headwinds in form of higher LME is acting as a hedge to protect our margins. In addition, our continued efforts in operational efficiencies and recoveries are also supportive of lower costs. Net profit for the quarter was INR 2,017 crore, up 4% Y-o-Y and 2% sequentially. This increase was mainly driven by recovery in metal prices and lower ETR. Net profit for the H1 FY '22 was INR 4,000 crore, which is Y-o-Y up 21%. Moreover, effective tax rate for the quarter was approximately 30% -- in H1 32%. Based in the projection of our ETR guidance for the full year remains unchanged at 32%. Our cash tax rate would be 17% as we have met credit available. Once we move to new tax regime from FY '23-'24 onwards, our tax rate will be around 25%. Coming to our cost and CapEx guidance for the full year. In the previous quarter, we had cautioned against the risk to cost from rising input commodity prices. In light of the same, we would like to revise our cost guidance upwards -- for the fiscal year '22, zinc cost of production is expected to remain below $1,075 tonne, which was from $1,000 per metric tonne earlier. Project CapEx guidance for the year remains unchanged and is expected to be approximately $100 million. With this, I open the floor for your questions.

[Operator Instructions] The first question is from the line of Amit Dixit from Edelweiss.

I have 2 questions. The first one is on the coal sourcing currently. What is the split between linkage and import? And what is the likely increase in power and fuel cost in Q3 FY '22 as a result of imported coal prices where they are?

Sandeep?

Yes. So our mix of the linkage and nonlinkage coal, which is the import, is the 25% in the linkage and around 75% is the import. That is the overall mix for the coal. The likely increase in the coal cost, which is resulting into the -- our cost guidance, which I said about $1,075 per tonne is largely on account of the input commodity prices. In the Q3, Q4, almost $50 cost increase is coming on account of the coal cost increase.

Okay. That's helpful. The second question is a data-based question. What is the export quantum in -- I mean, you can say even excesses the proportion in Q2 and what it is likely to be in Q3?

So typically, exports are roughly around anywhere between 10 kt to 14 kt per month is the export depending upon the production volumes. However, in the Q2, since our overall metal production was lower, so overall, we tried to maximize the domestic component. And in fact, our domestic share went up in Q2 in spite of lower production, and that has resulted in additional earnings.

Okay. And what would be the proportion entry? Will it come back to 10 to 14 kt per month? Or I mean, is there some other thought behind that?

It depends on the volume. Typically, Indian market has an abortion capacity of 45 kt to 50 kt zinc production. And if we produce 65 kt zinc in order to produce a 90-kt-plus metal in that say 14 to 15 kt export will come back, which is the normal case in our case for a 90 kt production in a month.

The next question is from the line of Sumangal Nevatia from Kotak Securities.

My first question is with respect to the production. Now in the first 6 months, we've seen a lot of issues with respect to rosters at Chanderiya shutdowns and Dariba smelters. So one is if you could share if these issues are behind? I know you've already reiterated the full year guidance. But then in fourth quarter, do we expect to run at full rated capacity at around 1.2 million tonnes? And what will be your confidence level for next year? Whether we can deliver as per our retail capacity at 1.2 million tonnes, which would mean a very significant growth from FY '22 levels?

No, absolutely. I also share your views. So we were actually slated for 1.2 million tonne delivery this year. However, we have never anticipated a second wave of COVID, which affected us badly in the beginning of the year, that was in quarter 1. And then it was subsequently followed by disruption in supply chains across Europe. So most of the equipment, which we tried to introduce this year as a replacement, which was scheduled to arrive in quarter 2 have not yet arrived and expected in quarter 3. So that and -- also what -- that's why we took the decision when the roasters, there was a breakdown in Chanderiya when the shutdown was extended for the dome failure, we preponed the shutdown, which was there in H2 into the same quarter 2, assuming that the most of the new equipment will arrive in this quarter, and then we'll be in full throttle as far as operations are concerned. And the current level of operations that I see, I can say from December onwards, we should be able to demonstrate our capacity of delivering 1.2 million tonnes annual capacity, and we will reach that mark in quarter 4 surely, but we should demonstrate a monthly capacity even before that.

Understood. So Mr. Misra, this is more of the delays and we don't see any structural issue of grade slippage or something to deter us from achieving 1.2 million tonnes. Is that the right understanding?

So overall, if you look at the grade compared to last year, these are almost similar if we look at quarter-on-quarter. Annual-wise, we are still slightly worse than what it was last year, but the development targets that we have taken for ourselves will liberate better grade ores in the coming H2. Our H2 number plan was also for better -- typically in the mine planning. Compared to H1, H2 grades are better, and we are looking to that. And H2 should provide better grades, should provide better numbers and should also demonstrate our capability of 1.2 million, and I'm sticking to that.

Understood. Just a follow-up. I mean this Fumer project, we were delaying the commissioning by month and earlier it was September, then October, then November. And now it has been pushed to end of FY '22. So -- I mean things have opened up and is there the issues of visa, et cetera, for Chinese official still there, and that is why we are, I mean, delaying by another 6 months?

Correct. So the visa issue remains the same. So that's what is also affecting us. However, interested we are for commissioning, but we are unable to get the same thing done in absence of experts visiting us. So we have to wait till quarter 4. At the same time, I can assure on the production front, since you have got enough of MICs in stock because of higher mine metal production in this quarter compared to metal production, so we will be full on as far as H2 is concerned. And any commissioning of fumer will only give benefits for the first quarter of next year.

Understood. Sir, my second question is with respect to the capital allocation. Sir, generally, we have, in the last 2 years, we've been giving a big interim dividend around 1H results. And this time also, there was a Board meeting scheduled, but suddenly overnight, it was canceled. So any thoughts on that? And secondly, the media reports suggesting that we might look to take on zinc international business from the parent. So any thoughts on that media speculation, if you could share?

So we have just into the festive season and going on to the Christmas, I think good news is there for all. We need to just wait for that. And good news will, of course, arrive at the right time, and I am very optimistic about the festive season delivering good news for us, as far as dividend is concerned. The other part is Zinc International, I have also committed earlier in our Annual General Meeting with respect to questions from our respected shareholders that should Hindustan Zinc look at South Africa and in particular ZI, of course, all we have to grow inorganically as well. And the targets do include ZI as well as other facilities around the globe. I will rest my comment there. Whenever we are matured on that thought process and we have new approval from all relevant agencies, we will come back and good news -- sharing the good news with you.

[Operator Instructions] The next question is from the line of Raashi Chopra from Citigroup.

Sir, just to clarify, you mentioned that the coal cost will be higher, the power cost will be higher by $50 in the second half. So just kind of timing it with the guidance that you have, which is $1,075 for the full year versus $1,095 in the first half. So apart from higher volumes, where are you expecting cost savings and to offset the more than offset the power increase?

So I will -- Sandeep, I will take this question. So if you see my cost structure, so almost whatever the volume driven will be there, the volume will be helping the -- offsetting this coal cost increase. And apart from this, I have -- whatever asset prices are also there. So we have better realization in case of asset prices. So these are the 2 factors, apart from the operational efficiency recovery improvement. And what Mr. Misraji has also said about the metal ore, metal grade -- so the ore grade, that will also help me to reduce my cost. So with that, we should be able to meet the below $1,075. And we also had some exceptional item in a shutdown cost in the other expenses category, so which was in the H1 in -- especially in Q2. So we're now leaving behind everything, and we don't have any planned shutdown in the H2, we should not be having such a shutdown costs also.

Sir, can you quantify the exceptional amount, please?

We clarify the one-off items in the part of the other expenses that is the shutdown cost was there, which is not there -- would not be there in H2.

Okay. And what was -- what were the grade in this quarter?

Sorry? Have...

Grade.

Grade. Grade in this quarter was 7.12. It was better than last quarter of 6.91, I guess. Yes.

The next question is from the line of Pinakin from JPMorgan Chase.

Sure, sir. Sir, my first question is that if tomorrow, the visa issue is not resolved, would it be fair to say that the fumer will not come into line by the FY '22 deadline that has been mentioned?

So we are also looking to -- we are desperately looking for alternative expertise available in the globe. We have done similar commissioning. I'm hoping that if this visa issue doesn't get resolved, and in next 3 to 4 months' time, we are also going to locate experts we have commissioned, similar fumers of similar of similar mix, and we have confidence on that expertise, then surely we'll go for that.

Sure, sir. So by the time you make alternate arrangements and it gets pushed out into FY '23, what would be the volume impact on the guidance that we have given this year so far?

So this guidance that we have given, we are not factoring anything for the fumer as such because we had anticipated that fumer commissioning perhaps would get delayed because of the COVID and all that. So however, we are intact on our volume guidance with or without fumer. So we will deliver that guidance.

[Operator Instructions] The next question is from the line of Vishal Chandak from DAM Capital Advisors.

Sir, my question is with regard to Zinc International. Now I just wanted to understand, do we really have any synergies with Zinc International? Or it would just be a means of acquiring because ultimately, we give dividend, dividend goes to the parent and instead of paying dividend, we acquire an asset from the parent and from there onwards to the dividend moves through the parent entity. So how does that Zinc International fit into our entire scheme of things? I understand expansion at Rajasthan as the primary opportunity and then probably the Gujarat plant can also come up. But Zinc International is a little difficult to understand, if you could just help us on that?

So I don't think I have said anything to indicate that I'm right now getting into the Zinc International as an acquisition family. I have only said that if an another geography has to be seen South Africa does provide an alternative geography. Now the question of Zinc International, whenever they come, I'm sure a proper due diligence, valuation, related approval and something on the solid foundation on which I can present to you. Saying that, since Zinc International is part of our group company structure and I'm as a also zinc person being part of many discussions, all I can tell you is Zinc International has a resource base of about 30 million to 32 million tonnes, which is equivalent to Hindustan Zinc, right? So that should give us a comfort if that were to happen. But nevertheless, if Hindustan Zinc has to grow, it should look at a property, which allows it to remain in the first decile on the cost curve, which uses its expertise of converting resource into reserve, which is huge experience of exploration in base metal. And third, it rests on its expertise of high metal recovery from the reserve in the smelting process. If these 3 attributes are there and satisfied, then perhaps it would have a right synergy with Hindustan Zinc. This particular entity of ZI is concerned, till the time we are firm about what we have to talk about or we are committing or we are considering. Until that time, I would not be able to address that question. I would treat it purely [indiscernible].

Sure. That helps, sir. Just let me rephrase it once more. If I looked at any overseas acquisition done by any commodities player in India, whether it's on the steel or nonferrous, generally, we have seen that it has been EPS dilutive to the shareholders. So in that light, would you still want to pursue and you think that would be more accretive or better than Hindustan Zinc's current assets at Rajasthan itself? If you were to just compare between ZI and the existing assets that we have?

Again, we have been dragging me to comparing on a particular entity, I cannot comment on that. But nevertheless, those are all, whatever you are saying are the right things to be talked about and they should also always form part of a due diligence and part of the valuation exercise. Ultimately, in the business, how much do I pay for how much value to be created in future. Rest all are internal matters of calculation. As a shareholder from outside, I will look at each money that I invest, how much money that investment can bring that. As long as these 2 equations satisfy, I'm okay. Rest all are internal calculations, we can keep on arguing which is better where, right?

That really helps, sir. Sir, my second question was with respect to the Gujarat project. If you could just update us on what the likely time line is over there?

So we are waiting for a new date for public hearing. Once the new date is announced, then our team on the ground will work for that public hearing to be successful. And in frankly speaking, any greenfield project in India do have some hiccups to start with. We also had a hiccup of public hearing not being held successfully. So let the public hearing is the first success. Once that happens, we buy the confidence of the society around and then we will think about design and declaring to you when, how much and where and who will do that. All that will fall in place.

[Operator Instructions] The next question is from the line of Rahul Jain from Systematix Group.

Sir, on the volume side, I mean, you're sticking to our guidance, but it does look very aggressive at this stage, given how the first half has gone through. And you're saying by your interest in the management assets, are you trying to imply that the growth opportunities in Rajasthan are not so exciting anymore?

The growth opportunity in Rajasthan is attractive. It's not that not attractive, provided that option has to be physically in place. Right now, if you look at Rajasthan, all the other blocks surrounding our mines or the blocks between Gujarat and Rajasthan on the border areas, where the GSI data shows, they are potentially high reserves of zinc-lead and some of the places also lead and silver. The question is, when does the government bring them out for allocation either through the auction or any other method. And through the PL cum MLs perhaps is the only route for base metal that one would get a combined license of PL and ML and get it. Now the question is whenever that comes, Hindustan Zinc would be the -- in the best place to go for it and get new blocks. Till the time new blocks come, which also would take anywhere between 5 to 6 years to development of underground projects and then delivering numbers. We are also flushed with cash as far as cash reserves are concerned. If the cash reserve is to grow and get earning more than whatever is earning on the treasury side, then a new investment has to be thought of. And then logically, if I have to think as a CEO, zinc material available elsewhere, wherever their -- the mine is currently at a concentrate stage, that means I don't have to prove the reserve or explore and mine the reserve, which is already there, and it is available in the concentrate stage, my future investment will be only smelter, then it will be a quick start-up -- or quick investment and cash return for the investment that I make. And my shortlisting of tentative targets would be based on that.

All right. So sir, you are basically -- I think what we understand now from hear on that we are kind of clearly at a peak production level in next 2, 3 years, probably, this is the number we should look at?

No. Surely, my vision for future is from 1.2 million tonnes, we should look at for sustaining because we have not delivered 1.2 million tonnes, we need to deliver 1.2 million tonnes sustainably for at least 2 to 3 years before we can make the next jump to 1.35 million tonnes if possible from the current resources. At the same time, if I have to go for -- say, overall ambition would be Hindustan Zinc should be of a capacity of 2 million-tonne kind of producer across the globe. So anywhere, if I can add another 0.5 million tonnes through inorganic process anywhere in the world, that would help me take the company to a globally 2 million tonne kind of capacity.

Do you see your current volume run rate sounds more like where the numbers every time the guidance is very high, is really not met for quite a long time now. And so essentially, it's kind of -- is it like a very mature phase? Or even what you said about the new blocks which you get, you will essentially have to pay a premium, right? So I don't think much will be left on the plate, like we have seen for a lot of the iron ore auctions and other auctions. So it's not really very value accretive, right? So in that sense, you would want to increase our dividend? Is that not an option with you?

Dividend is always as per the policy. That option can never be ruled out. So that's always there. But as I am speaking plainly from the business sense of investment and earning more returns from the money that we have, then perhaps expansion into a where concentrate is available and only smelting and quick conversion is possible, then I would surely look at that. And at the same time, on the auction and premium that we spoke of, it depends upon the competition. Now who would be there to develop a mine with a 600, 700-meter depth is a question that all of us need to ask. We are in the best place possible. And we should have that advantage as far as bidding is concerned.

That was helpful, sir, also you said that in Zawar, you've got some extension. How much is that going to add?

No. I said that in Zawar, we have got some intersection. As you explore, every time you drill, intersection means, you find more ore. So that is how in our R&R we add resource when we convert it to reserves. So Zawar, we have the lease area, which is huge and only in that more explorations are going on. If I look at future, Zawar production can go up from 4 million tonne to 8 million tonne kind of ore production. And in Rampura Dariba mine, the production has to go up from 1.5 million to 4 million tonnes. So these are the potential places for more exploration, addition of resources and opening up new frontiers as far as mining is concerned. That's more to give us a guarantee that 1.2 million tonnes will not be a flash in a pan, it should be the steady for the next 4 or 5 years, if not more.

[Operator Instructions] The next question is from the line of [indiscernible] Group.

Hello? Yes, sir. So regarding the higher cost of production that we have seen, increase of about $54 per tonne quarter-on-quarter. So regarding that, I just wanted to know, you had mentioned that the increase is mostly due to the higher coal costs, right?

So you are talking about the quarter 2. In the quarter 2, if you recall, I said that there were 2 reasons. One is about the coal cost, obviously, and the [indiscernible] which is the commodity input cost has been putting the pressure. However, since there were in the quarter 2, there was a metal production also lower. That has also impacted the cost of production and there because to have a maintenance shutdown. So these are 3 primary reasons for the overall cost increase.

Okay. Okay. Okay. Understood. But generally, if we're looking at sensitivity of cost of production to higher coal prices. So -- I mean, let's just say if the coal prices, say, coal prices have sustained again another upwards by around $20 to $30, so would -- I mean, how would that move the cost -- overall cost of production, assuming that there is no -- I mean, no production-related difficulties?

So if you see our cost guidance, I would say that to the extent we foresee this fast-evolving situation, we have revised already our cost guidance. However, it remains to be seen how quickly and proactively various operatees and industry bodies around the world would evolve -- resolve this at local and global level. In turn, how this delicate trilogy of coal, natural gas and oil bear itself out of, in the short to medium term, because if this is left unattended, it has the potential to snowball into something big, which may even dent the overall economic growth. So I would leave at this answer from the overall cost guidance and this point of view.

The next question is from the line of Vikash Singh from PhillipCapital.

Sir, previously, a couple of quarters back, we were guiding that concurrently apart from 1.2 million tonnes, we would be concurrently doing CapEx for 1.35 million tonnes as well, at least the mine development things also. So looking at our current project CapEx of just 100 million, just wanted to understand what happens to that project? Have we kept it on a backburner for the time being? Or is this still going on and initial CapEx is very low?

So if you look at our exploration, we have actually been adding. We are focusing first on converting resource to reserve and adding more resource because if you want to do 1.35 million tonnes, so the mining volume that will go up, you need to file for a revision of mining plan. And for every mining plan revision, they require 5 years of reserve to be proven first. So first priority for 1.35 million when we back calculate, we have focused on R&R increase across the mines. Part of the increase of Zawar mine from 4 million to 8 million tonnes and the Rajpura Dariba expansion, SK Mine from 6 million to 7 million tonnes, starting off some old blocks after new clearance, 1 year [indiscernible] like that or getting hold of prospecting license and mining license from SK North, SK South, so those are the actions have to be frozen first before we can start declaring about 1.35 million tonnes. So that was -- it's not on the backburner, as I said, clearly, if Hindustan Zinc has to become a 2 million player in India, it has to be 1.5 million, 0.5 million has to be inorganically elsewhere in the world. And for 1.5 million currently at 1.2 million, the growth has to come in 2 stages, 1.2 million to 1.35 million and then 1.35 million to 1.5 million. I'm hoping in between, there will be addition of leases, which will give me more resource and reserve to support this theory of my ambition of higher production to 1.5 million tonnes.

Understood, sir. And sir, my second question pertains to: recently, we had some shutdowns in Europe in terms of zinc capacities because of shoring energy prices. Sir, any expectation from our side in terms of some more supply cuts, which could still benefit us? Or with the recent some correction in the power prices, there's a risk of these supplies coming up? Any thoughts on that?

So we are watching over the situation very, very closely, whether that expected cutdown in production finally fructify, materializes, how much would be the exact drop. That's number one. Number 2 is world shipping logistics as well as container availability, port congestions are a matter of concern. As the world has coming out of COVID, suddenly we find direction of material movement all across the globe has completely changed from what it used to be earlier, primarily because, one, sudden realization or withdrawal of many American companies out of China and shifting of production basis. Second, we find that the delay in the port, which is holding that container, releasing of ships from ports are not allowing free flow of material across the globe. So even if we want to start at this moment in European market, whereas the high logistics cost or delivery timeline commitment would be a key challenge for us to serve that market. However, we're saying that we look at the upward push on prices perhaps would be one way to counter the upward push of commodity prices, which is on the import side. But the situation, what you said is, yes, something we are looking at very closely. But using that market for our supplies may not be as remunerative, as it would be if you are only supplying to domestic.

Understood. Sir, any idea to hedge any of your...

Sorry to interrupt. I'll request you to come back in the question queue for a follow-up question. [Operator Instructions] The next question is from the line of Amit Dixit from Edelweiss Financial Service.

I had a couple of questions. One is, what -- can tell us about the capital mine development in the quarter?

Capital?

Mine developement?

So capital mine development in the quarter was about 12 kilometers. Yes, it was about 12 kilometers this quarter, almost same as that of the quarter 1 of this year, but about 2 kilometers more than quarter 1 -- quarter 2 of last year.

Okay. And the second question is just wanted to pick up from Vikash' question actually. So there, as you mentioned in your opening remarks also that there is like has temporarily idled some of refining capability. So do -- since we are also dependent on imported coal, so do we see any threat on the imported or domestic coal availability that might impede our smelting operations? Do we see a threat as of now?

As of now, on the supply side, we have tied up with supply and fully protected till about February or early March of next year. So this business plan here, we don't see much risk. And the way the dynamics are playing, we will see some intervention, some big coal producing going forward, and I am hopeful that the situation will come back to control. Availability is not a concern just as of now. We'll have to make [indiscernible] savings on other fronts as Sandeep has narrated, although there will be a price from the coal side, we will try to make gains by working with better grade of ore, better recovery as well as cost of water. We have preponed the shutdown of H2 to H1. The cost has already got absorbed, so the planned cost of H2 will be avoided. At the same time, we would gain back more recovery from the other income that sources that we have, which is asset sales or other residues that we sell will make more recovery from that front. So those are the levers that we have in our hand to counter in case the coal cost becomes too high.

Sir, just a follow-up on this. Have you seen coal availability from Coal India improvement in October so far?

I guess, the -- more than the availability, the current issue is the domestic power plants or energy sector plants have a priority and rate allotment of transportation would be again a bottleneck because every power plant are at different locations, their logistics and turnaround times are different. Government has a clear focus on energy -- priority first on the energy sector. We come in the metal-producing sector. So that priority does impact the amount of domestic coal available to us.

[Operator Instructions] The next question is from the line of Ashish Kejriwal from Centrum Broking Limited.

Sir, this question is on coal cost only. When you are talking about $50 increase in wing production costs on account of coal, so -- this is -- you're talking -- you are taking into account both international coal supply which we have till February as well as disruption in the domestic coal market because now Coal India is not giving it in October. So incorporating these 2 reasons, we are seeing that $50 increase will be in third quarter as well as in fourth quarter?

So I'm saying that compared to the overall H1, whatever my cost of $1,096, I'm assuming there's an approximately $50 cost increase from there. And this captures the both the import coal prices increase and some pressure on the natural metallization of the coal from the domestic, which is obviously the situation, as Mr. Misraji has said with everyone who is now in the non-power center.

So this $50 will be $60 in third quarter, is it?

So I'm putting the -- it will be in the sequential manner, but I'm putting the overall from the H2 point of view. When I give -- revise my guidance for the overall $1,075, this is built up into that.

Sure. Sure. And secondly, sir, in terms of volume guidance, though you are maintaining the volume guidance, but in any of the earlier quarters, historically, we have not seen that kind of volume in a quarter. So is it possible to share that in a quarter, how much maximum we can produce?

No. So I would say that in the March of last year, we exited at 1.2 million capacity because of high mining volume as well as smelting. So our aim is to recreate that in quarter 3. The enablers that we look for that is all the equipment that we placed orders this year's business plan was supposed to be delivered in quarter 2 have got postponed. So quarter 3 would have more equipment -- new equipment in place. Second, ambient temperatures are less, typically mine operates at the highest productivity when the weathers are good and comfortable. We have also finished all our infrastructure work related to ventilation in mines. We have commissioned new chilling -- air chilling plants in SK Mine, so that those investments that we had planned have already in place. All that gives us confidence that both quarter 3 and quarter 4 will be exceptional years, and we would have better volumes, so that, that gives us confidence of maintaining the guidance.

Sir, volume was definitely going to be there, but do you think that we can do 300 kt in the quarter, which means third quarter because we already have some data on October? So that confidence still you are seeing that 300 kt can be done in the quarter?

At the end, the effort will always be there for that. In case of 1.2 million, ultimately boils down to 300 kt per quarter has to be delivered, right? So the attempt is there. And we will see how it pans out.

Sure. And sir, lastly, because now zinc prices are already on a higher side, so by looking at...

Sir, sorry to interrupt, I'll request you to come back in the question queue. [Operator Instructions] Ladies and gentlemen, we'll take the last question from the line of Pallav Agarwal from Antique Stockbroking.

Sir, you had mentioned that this quarter, you sold more on the domestic market rather than the export market because our volumes were lower. So is that reflecting in the premiums that we realized? Because sententially, I think, there has been an increase of both zinc and lead premium. So is that something that has happened, paid out in the 2Q?

Yes, it is a reflection in my premium because in the domestic, whatever the -- I get duty factor and including -- also we have the excess exports premium. So I can't disclose the number, but it's a reflection in my overall revenue increase.

Sure, sir. So just on that, look, with auto volumes going -- coming down, so are we seeing any impact of that on our lead demand? Because lead primarily goes into batteries, so is that impacting our demand or not really?

So if you look at -- sorry, Arun Misra here. If you look at my change in operating strategy in H2, we operate the pyro in zinc and lead mode. Whereas in H1, we were operating the pyro in all lead mode. So comparatively, my zinc production will be up. And from my lead delivery will remain at the current level, somewhere around 17, 18 kt per month. And so that absorption is not a very difficult target to achieve. We have not seen yet any impact on the auto battery side. But also, you would appreciate more and more EV vehicles are being launched, which also run on a combination of lithium battery as well as lead acid battery, primarily lithium battery being used for the motor drive, whereas the lead acid battery being used for the window drives and auxiliary power consumption. So we would see a shift towards EV would also result in more lead acid batteries, so that demand will be intact. As of now, I can assure you there is no indication for us to see that there is a drop in demand as far as auto customers are concerned.

Sure, sir. So sir, if we produce less of lead, will that impact our silver volumes? Because most of the silver production is linked to the lead -- will the silver guidance be lowered than that?

It's a balanced operation. So the guidance that has been given, we'll stick to that, and we'll ensure that the grades are such that we produce that.

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

Thank you, Nirav. With this, I close today's call. On behalf of Hindustan Zinc, I wish you and your family a very happy and safe festive season ahead. For any follow-up questions on results, please feel free to reach out to the Investor Relations team. Thank you.

Thank you very much. On behalf of Hindustan Zinc Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.

Thank you.