Reiterate outperform on Hindustan Zinc (HZL) with a price target of R193 per share. We expect a gradual increase in HZL’s mined metal production starting FY16 and higher zinc prices (attributable to global supply issues) to drive earnings with 10% CAGR over FY15-17e. Also, higher production at RA u/g mining would bring in cost efficiency and improving silver content at SK mine will aid overall silver production in FY16. Any news on balance stake sale by the government will be a positive trigger.
We visited HZL mines at Rampura Agucha and Sindesar Khurd along with its Dariba smelter in Rajasthan. HZL has guided to mining of ~1.2 million tonnes of ore from Rampura Agucha’s (RA) underground (u/g) mines in FY16 and ramping up to optimal capacity of 3.75 million tonnes per annum by FY19/20. HZL is putting up a vertical shaft for u/g that is expected to be constructed by mid-CY17 and operational by FY19/20.
Deeper open cast (o/c) mining (from 370 to 420 metres) is likely to increase mine life by three years to CY19, resulting in a smoother transition from o/c to u/g and mitigating overall production disruption from the mine. With lower stripping cost offseting higher haulage costs, HZL expects to have similar mining costs for u/g as also o/c operations. Overall mining costs are expected to remain stable in the next two years before subsiding FY20 onwards.
