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Edited Transcript of HINDZINC.NSE earnings conference call or presentation 29-Oct-19 10:30am GMT

Q2 2020 Hindustan Zinc Ltd Earnings Call

Udaipur Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Hindustan Zinc Ltd earnings conference call or presentation Tuesday, October 29, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Preeti Dubey

Hindustan Zinc Limited - Head of IR

* Sunil Duggal

Hindustan Zinc Limited - CEO & Whole-time Director

* Swayam Saurabh

Hindustan Zinc Limited - Acting CFO

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Conference Call Participants

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* Abhijit Mitra

ICICI Securities Limited, Research Division - Analyst

* Amit A. Dixit

Edelweiss Securities Ltd., Research Division - Financial Analyst

* Rajesh V. Lachhani

HSBC, Research Division - Analyst

* Ritesh Shah

Investec Bank plc, Research Division - Analyst

* Vikash Singh

PhillipCapital (India) Pvt. Ltd., Research Division - VP of Metals & Mining

* Vishal Chandak

Emkay Global Financial Services Ltd., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Hindustan Zinc Limited Q2 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Ms. Preeti Dubey from the Investor Relations team. Thank you, and over to you, ma'am.

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Preeti Dubey, Hindustan Zinc Limited - Head of IR [2]

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Thank you, Reo. Good evening, everyone, and thank you for joining us today for Hindustan Zinc's Second Quarter Fiscal 2020 Results Call. Today, we have with us here Mr. Sunil Duggal, CEO; and Mr. Swayam Saurabh, CFO. Mr. Duggal will start with an update on business performance, and then Swayam will take you through the financial performance, after which we'll be happy to take your questions.

Over to you, Mr. Duggal.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [3]

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Thank you, Preeti, and warm festive greetings to all of you. I will start today's presentation with the announcement of a significant honor that showcases the sustainability efforts of the company over the last several years.

Hindustan Zinc continues to rank high in Dow Jones Sustainability Index in 2019, with first position in sustainability in Asia Pacific and fifth among global metal and mining companies. Our performance in all metrics of economics, environment and social improved over last year, and our total score also jumped up. I'm happy to inform that we have commissioned India's first dry tailing plant at Zawar, which will significantly reduce our water and land footprint as well as improved structural stability of the tailing dams. This plant will recycle more than 90% of the process water, leading to conservation of as much as 2,500 meter cube of water per day. We plan to have similar plants at all our mining locations in the future.

I'm pleased to inform you that our mining projects are approaching completion, and we expect to achieve 1.2 million tonne per annum mined metal capacity in H2. Operationally, production from our mines has progressively increased in H1. Agucha continues to ramp up as our plan with ore production growing close to 30%. Zawar has been delivering exceptionally well this year, with ore production up almost 25% and with better grades. It achieved its highest mined metal in the month of September. We faced temporary geotech challenges in Sindesar Khurd mine, which affected production volume and grade in H1. To address it, we have deployed rapid development crew for faster decline development and additional levels are being opened to drive production. We are also focusing to ramp up the shaft to its capacity. The second backfill plant at SK commission early this year will also assist in increasing production in H2. We have doubled our effort on efficiency and automation to achieve incremental as well as step changes in production cost.

During the quarter, at Agucha and SK mine, we have taken another step towards creating mine of the future by starting to track underground vehicles on a real-time basis for centralized control and monitoring. At SK, centralized path scheduling, and management has begun using onboard connected tablets for seamless communications with underground mining crew. Capturing this real-time data, we have started to develop an analytics layer on top of it, which would allow for better utilization of equipment and resources, predictive maintenance and higher productivity. In a significant automation of mine services, the water pumping system at Agucha has enabled complete visibility of total underground dewatering system and pumps can be operated from the control room that allows for safe, remote operations, optimization of resources and higher uptime.

In another milestone, we have started operating production drilling, equipment and loaders at Agucha on teleremote leading to higher safety, and we plan to deploy it to other locations. We are also progressing well in our minor metal initiatives, which is a new source of value generation beyond the mainstream activity of the company. The project for converting copper mat to copper sulfate has been commissioned this month in Dariba. We have partnered with global technology expert for cadmium recovery project, which is expected to commission in quarter 4. We have been granted our first European patent for the process related to production of value-added product using anti-money bearing residues, which is subsequently routed back to our cementing process. Similar tech work and initiatives are at technical evaluation stage.

For the long-term growth of our business, upgrading resources to results and adding new source are our key priorities. We are strategically targeting to delineate prospective ore bodies, such as Agucha Galena and SK Deeps. Agucha Galena resource upgradation program is ongoing, and we have also engaged a global partner to conduct feasibility study. SK Deep exploration has also been initiated, which can create a mine within mine, leading to incremental volume.

This year, surface exploratory drilling of 85 kilometer was carried out across all mines and 30 rigs have been deployed to achieve this year's target of adding 13 million tonnes of resources and upgrading 34 million tonnes to reserves. In Zawar, we are carrying out a special project, where we have drilled 23 kilometers this year for upgrading resources to reserves.

Now to give you a market update, zinc prices have declined sharply in the last few months despite limited metal supply and very low global exchange stocks, which are at less than 4 days of consumption now. This decline is largely driven by investor sentiments and the perception of demand slowdown due to trade wars and Brexit concerns. Also, we have seen in recent months, the Chinese authorities have moved to bolster spending on infrastructure in order to mitigate the impact of its dispute with the U.S. Zinc consumption growth is healthy in China at 1.5% this year. The mine production forecast for the year and next year have been pared down by almost 1 million tonne due to lower-than-expected production at several mines across the globe.

There are no major smelting capacity additions in pipeline for the next 2 years. Moreover, there are temporary disruptions and closures in China, Canada, Africa and U.S., equivalent to 200 ktpa refined metal production. The overall reduction in forecast for the year 2019 is about 700 kt now. The global metal market, therefore, continues to be in deficit, and we expect this shortfall to remain next year also, as it will take much longer for stocks to reach normal levels.

Given this background, we expect limited supply and low stocks to not only provide support to zinc prices, but also push it higher as some of the negative sentiments subside. Historically, zinc prices maintain itself at around $300 -- $3,000 at similar exchange stock levels.

Now turning to our operating performance. Total ore production for the quarter increased from a year ago with strong growth at Agucha and Zawar mines. Sequentially, Agucha, SK and Zawar mines ramped up. Mined metal production at 219 kt was up 3% sequentially and was lower 6% from a year ago, and was impacted by lower grades at SK mine. Integrated metal production at 210 kt was in line with mined metal production. During the quarter, refined zinc production improved from last year's level, but was lower than Q1 when we had excess starting WIP inventory. Lead production was low due to annual maintenance shutdown in July and also some unanticipated issues at DSC Lead smelter during the month of September. This also impacted silver production apart from lower silver grade at SK mine.

Now to update you on expansion projects. SK mine shaft ramped up during the quarter with conveyor and automation system also in production. Our shaft project at Rampura Agucha is now at an advanced stage and is expected to commission in the current quarter. Also, the 2 backfill plants at Zawar are expected to commission in quarter 3. In addition to improving mine stability and life of our tailing dams, this space filling will allow us to recover the left-out high-grade ore from old pillars at Zawar, improving volume and grades. The Fumer plant is under commissioning and first metal is expected to be produced in current quarter. Debottlenecking of our smelter to 1.13 million tonnes will be completed in the current quarter and further debottlenecking to 1.2 million tonnes is underway.

Now on our guidance. We expect mined metal and refined metal production in H2 to be higher than H1 on the back of continued ramp-up of underground mines. The revised guidance for both mine and refined metal production in FY '20 is expected to be around 950 kt, while silver production is expected to be around 650 kt -- 650 tonne.

Now I request Swayam to provide an update on financial performance.

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [4]

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Thank you, Mr. Duggal. Revenue for the quarter was INR 4,511 crores, down 6% Y-o-Y and 10% sequentially, and was impacted by lower zinc prices, which declined by 7% from a year ago and 15% sequentially. This was partly offset by a recovery in lead and silver prices during the quarter, which were up 8% and 14% sequentially. Silver prices were also higher from a year ago by 13%, though lead prices were lower by 4%. Zinc sales volume were higher from a year ago and flat sequentially, while lead and silver sales volumes were lower, leading to an overall negative impact in revenue.

For the 6 months period, revenue was lower by 6% on account of an average 10% decline in LME prices, partly offset by higher sales volume and rupee depreciation. On the cost side, imported coal prices declined further during the quarter, and the share of linkage coal increased to 31% of our requirements. Offsetting part of this saving in power cost was an increase in electricity duty on captive power plants from INR 0.40 to INR 0.60 per unit starting July 2019 by Rajasthan state government. This higher duty impacted zinc cost of production by $12 per tonne in Q2.

Zinc cost of production, excluding royalty in Q2 was $1,048 per tonne, improving 2% sequentially on account of lower power cost and fuel prices. This was partly offset by lower grades, maintaining shutdowns and lower acid credits. From a year ago, COP was 1% higher in Q2 and 2% in H1 on account of lower grades, higher mine development expenses, higher cement prices and lower asset credits, partly offset by lower fuel prices and power costs.

EBITDA for the quarter was INR 2,120 crores, down 8% Y-o-Y and down 15% sequentially, while YTD EBITDA was INR 4,600 crores, down 10%. This is primarily on account of lower revenue from operations and marginal increase in COP, partly offset by lower exploration expenses.

During the quarter, we have started capitalizing exploration expenses incurred on brownfield exploration. Earlier, we were charging all such expenses to P&L, irrespective of the commercial viability or the level of expenditure. We are now capitalizing qualifying expenditure expense -- exploration expenses, which has high commercial viability, in accordance with the Indian Accounting Standard 106 exploration for and evaluation of mineral resources. This has led to capitalization of INR 51 crores for the year-to-date results.

Net profit for the quarter was INR 2,081 crores, up 15% Y-o-Y and 18% sequentially, while YTD net profit was up 3% to INR 3,846 crores. The lower EBITDA and higher depreciation expenses were more than offset by higher investment income and lower tax rate. Investment income increased due to higher rate of return on account of mark-to-market gains in portfolio resulting from recent decline in interest rates. The lower tax rate is on account of revision of estimates for deferred tax liability pursuant to Taxation Laws (Amendment) Ordinance, 2019, leading to a reversal of INR 365 crores related to prior years. Excluding this onetime reversal, the effective tax rate for the quarter was 18.2%.

Looking forward, we expect zinc cost of production in H2 to be at about $1,030 per tonne, including the impact of higher electricity duty. The decline in H2 versus H1 will be primarily from volume growth and further improvement in power and other costs.

Tax rate for the year is expected to be about 23%, excluding impact of onetime deferred tax liability reversal. Project CapEx is expected to be at $300 million for the year.

Now I would request Mr. Duggal to wrap up today's presentation.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [5]

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So now to sum up from our side. We are entering H2 from a position of strength with major projects for 1.2 million tonne per annum capacity approaching completion. With the opening of new mining blocks, rapid development initiatives and shaft-driven haulage, we expect to deliver a significantly better performance in H2. We expect zinc prices to trend upwards with support from low stocks and limited supply as the current price is not conducive for marginal producers.

With this, I open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Amit Dixit from Edelweiss Securities.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [2]

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I have a couple of questions. The first one is with respect to the guidance -- the changed guidance. As I observed that you have reduced the guidance for mined metal production as well as silver. But if I look at your expansion projects, the progress is very similar to what was mentioned in the last quarter and update is also fine. Even on the smelter front, we have achieved 1.13 million tonnes, and on the way to 1.2 million. So just wanted to understand what has prompted this particular change in guidance?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [3]

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That's your question?

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [4]

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Yes.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [5]

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Okay. So the change in guidance is primarily driven by our performance in quarter 1 and quarter 2. And we actually look at mine to mine performance. While Rampura Agucha, Zawar, and RD mine have done well, the problem was where we said -- talked that we had some geotech issues in our SK mine. So in SK mine, we were into the ore blocks where the secondary stopes after filling were coming into sequence, where -- actually where we found and we encountered the ore body geotech issues. And to compensate that, we had produced from slightly lower grade area, wherein the overall grade from SK mine fell down and this also impacted the overall grade for the company as a whole.

And looking at what we have done in H1 and what we are up to in H2, we are a bit conservative in our guidance of 950, but we have -- as we have said in the top track that we are looking at the additional opportunities within the mine beyond the business plan, whatever the planning we had. We are looking at the areas where we can mine additionally and produce a better ore grade, better volumes from those areas, where the feed of metal as well as the silver will become better. So we are planning the H2 better.

Similarly, in our Kayad mine, we entered into the area where the ore body thinned out and because of the thinning of the ore body, there was increased dilution and the grade fell down. And it did not yield us the requisite or the planned MIC, I would say, and our performance was not to the -- as we had expected from ourselves. So this -- the net-net or to sum up, we are a bit conservative in H2. Although, internally, we have taken a large number of initiatives, where our H2 is going to be much better than H1. But on an overall guidance basis, as of now, we would like to keep our guidance as -- at 950 MIC and 650 tonne of silver.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [6]

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Okay. Great. The second question is on the capitalization of exploration expense that you have done to the extent of INR 51 crores in H1 FY '20. Is it possible to split it in Q1 and Q2? And what was the corresponding expense last year?

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [7]

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Yes. So Q1 and Q2 would be about INR 24 crores and INR 27 crores. Last year, full year exploration expenditure was INR 114 crores. And last year, H1 comparable would be about 10% lower than this year's H1.

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Operator [8]

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The next question is from the line of Abhijit Mitra from ICICI Securities.

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Abhijit Mitra, ICICI Securities Limited, Research Division - Analyst [9]

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Just 2, 3 questions, which I'll lay out and probably depending on how we want to tackle them, you can answer. First, if you can tell me the average grade that you have seen. Secondly -- and if you can break it out for zinc and lead. Secondly, on SK, I think this is probably the third -- I think the second quarter where you are facing these geotech issues. I think in Q1, also you mentioned these geotech issues. And I think this would probably be the fourth consecutive quarter where we are seeing the grade to slip. I think it was around 8%, 8.5% in Q3 '19. I don't know what would be the grade now in this quarter, but it would be, I think, almost fourth consecutive quarter of grade slippage. So what led to this event and what makes you sure that in H2, you can address it? Second -- actually, third question is on the score...

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [10]

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Can we answer one by one, and then you can go for the next question?

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Abhijit Mitra, ICICI Securities Limited, Research Division - Analyst [11]

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Yes. Sure, sure.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [12]

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So I think on the grade in this quarter and -- which was also a story in the last quarter that we said that our grade was lower than expected, and the grade in Q1 was 7.3%, average grade we always say. This is the total metal content we say in the grade. And this was 7.18% in quarter 2. In quarter 1, this was 7.31% and the respective quarter last year, this was 7.56%. So from our previous quarter, 7.31% it fell to 7.18%. Out of that, the zinc was 5.52% and 1.67% this quarter, and lead was 5.59% and 1.72% last quarter.

So the geotech issues, you are right, we faced in 2 quarters. And last quarter, we said that we are commissioning the paste fill plant, which we commissioned last quarter. This quarter, we filled up a lot of stopes, and we were mining from the secondary stopes. The one new ore body, the lower block where we were to enter, we, again, found some fault where we were supposed to produce in this quarter. And we changed our mine plan to approach the ore body from a longer route to which we had to do the additional development. So both these factors resulted into the area where we could not get the access to the high-grade area and the requisite volume. To compensate that, we produced the volume from the lower grade upper area with some different lens, which was relatively a lower grade and it resulted into the overall lower grade in SK mine. All our mines -- other mines, the volumes are okay.

I would say in Rampura Agucha, we were mining an ore body in the central portion, where, again, we encountered the lower grade as per the mine plan. But this resulted into the overall grade falling. A combination of all these factors resulted into the grade volume, although the grade at Zawar was better than expected and better than we planned. But a combination of that, what we are going to do this quarter, where the grade and the volume would be better, we modified our blasting technique with bigger blast in the current areas from where we were mining the secondary stopes. This has given a very good result to us and the volume already in this month from SK mine is much better, up by around 30% compared to the last month, which has given us a lot of confidence.

The silver grade is up by around 25% from SK mine alone, which also gives us the confidence that the flow of inventory from mines will become much better. So -- and then we are going into the newer areas in SK mine for complete H2, where the new mining blocks we are accessing by putting some fast development crews where the grades are also better, number one. And also, it insulates us from one area where we have the flexibility in the mine, where we have the opportunity to mine from 4 to 5 areas, so that the overall, if any surprise comes at any -- some point of time, it does not give any hit to us.

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Abhijit Mitra, ICICI Securities Limited, Research Division - Analyst [13]

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Yes. And the revision in mining techniques, the ones which you'd laid out would have led to higher exploration expenses. Is the understanding right?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [14]

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No. This is not a higher exploration expense. Higher exploration expenses are attributed to -- we are trying to find out the new lenses. One is -- 2 factors, I would say. One is that from resources to reserve, we want to focus wherein we have the visibility of the new lenses and gives us the opportunity to develop new areas, where the flexibility in the mine comes up. And secondly, as we talked in the top track that we are looking at the Galena zone in Rampura Agucha, where we have already put up the exploration drive and the drilling for the exploration is going up, where we wish to produce some ore next year itself. So this will also give us an additional opportunity of the lead-rich grade area and very high silver, very high silver. So the exploration activity has already started. The mine development is going to start.

And similarly, in SK mine, we have started going towards the SK Deep. SK Deep, where we -- earlier, we were finding that the ore body is going beyond our boundary. And suddenly, we found that the ore body is turning towards our lease boundary itself. So there, we have started the exploration activity, and which has given us the motivation that we have to increase the exploration drilling there to see how the ore body behaves. And who knows the waste the ore body has started turning towards our own mining lease area, there is a bigger ore body, we will start mining it from next year or next to next year itself, where it will give us the additional opportunity of mine within mine. And this also derisks and maybe if the R&R -- if we find out a bigger R&R, then we may look at whether we can go beyond 6 million tonne in this mine or not.

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Abhijit Mitra, ICICI Securities Limited, Research Division - Analyst [15]

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Okay. Okay. And if your plan succeeds in second half, you are reasonably constant that this $1,030 as a guidance would also hold. That is the key, right?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [16]

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Yes, absolutely.

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Operator [17]

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

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Vishal Chandak, Emkay Global Financial Services Ltd., Research Division - Research Analyst [18]

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A couple of questions. Firstly, on -- if you could just give us some update on the Fumer.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [19]

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So Fumer, the commissioning already started about 2 months back. The commissioning activities are going on. The -- already load trials have been completed for about 90% dry. 10% dry the load trials are going to be completed in the next few days' time. The hitch-up is going to start and by November end, we should have the first metal out from Fumer.

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Vishal Chandak, Emkay Global Financial Services Ltd., Research Division - Research Analyst [20]

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So the full impact of Fumer can be visible from the fourth quarter?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [21]

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That's right.

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Vishal Chandak, Emkay Global Financial Services Ltd., Research Division - Research Analyst [22]

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1.5% would probably increase in the grades recovery?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [23]

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Yes. That's right. And some silver about -- on a full year term -- full year basis, it is around 30, 35 tonne.

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Vishal Chandak, Emkay Global Financial Services Ltd., Research Division - Research Analyst [24]

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Okay. And secondly, sir, you've got the cash in the books have increased again as we progress. So any thoughts on dividend? We were expecting some dividends this quarter as well.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [25]

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So this is a Board issue, and we are trying to align us within the Board members. And as the -- as we will progress, we'll let you know.

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Vishal Chandak, Emkay Global Financial Services Ltd., Research Division - Research Analyst [26]

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Good. Sir, if I may ask one last question over here. On the industry front, if you look at the cost curve, so how much percentage of your -- of the industry would be under cash loss today at these prices?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [27]

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Cash loss, I think some of the mines, which are very low-grade mines which were in the highest decile.

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [28]

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Top 10%.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [29]

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Top 10% could be in loss. Because the LME, again, has picked up, no?

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Vishal Chandak, Emkay Global Financial Services Ltd., Research Division - Research Analyst [30]

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Correct.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [31]

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Today, LME is $2,550. So LME did not remain at a lower level for a long time.

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [32]

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And it also depends on company structure. If they are on loan and some interest has to be serviced, that also affects their ability to pay cash losses.

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Operator [33]

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The next question is from the line of Rajesh Lachhani from HSBC.

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Rajesh V. Lachhani, HSBC, Research Division - Analyst [34]

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Sir, just 2 questions from my side. Number one, sir, since we have been facing geotech issues in the last 2 quarters, is there some chance of facing these issues further? And there could be further downside risk to our outlook? Or you remain quite confident on 950 kt and 650 tonnes of silver? That is question number one. And secondly, sir, if I track the cost of production and grades for the last 6, 7 years, there is a clear inverse correlation that as the grades have fallen, the cost of production has increased. So since we are seeing the grades falling, even if we move down, if we get the shaft commission, if the grades keep on declining, we will see the costs remaining high. Is that understanding correct? Or there could be a material downfall to the prices -- cost even if the grade declined?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [35]

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So let me take the first question first. You are saying, last 2 quarters, we have been facing the geotech issue. Mine -- in any mine, the geotech issues are an inherent issue. And as you go deeper, you experience that how the geotech or the -- how the ground behaves. Some time, the predictability of the ground you are not certain. Two, three things, because of which the confidence is very high. One is that we commissioned our paste fill plant quarter 1 and started filling the mine in quarter 2. So if the mine remains filled, there are not very many geotech issues which are faced, number one. Number two, the blasting technique we changed. We globally benchmarked ourselves and in consultation with the global experts, we found that, how we have to take the blast, the blasting sequence, delay, more technical stuff, where we have got the success and because of that, the geotech issues have reduced considerably. These are the 2 things.

But what we have done, which will also insulate us in future is that let's suppose there is a mine, we were having A block, B block, C block. Until now, we were producing from B block and C block, principally from -- majorly from the secondary stopes in the B block and C block, because of which these issues were there. We have started going into D block, E block, F block. Till now we were in B block, C block, we have already entered D block, where the first stope is going to be mined in the next 2, 3 days, then we have started entering E block and F block. There is upper block, crown block. So we have entered in -- learning from this, we have entered into 5, 6 areas where the flexibility is very high. And this has happened only in one mine. The other mines, it has not happened. So it gives a huge confidence, and we are a bit conservative this time in giving the guidance. But I'm telling you, with these initiatives and the new opportunities of SK Deep, which I talked, Galena zone, which I talked, it gives us a huge opportunity of how we can stabilize our volume and maybe take beyond 1.2 million tonnes. So this is what it is.

On the grade, I would say -- I said that because the geotech issues were there, we mined from the area where the grades were low. The overall grades got impacted as well as at Rampura Agucha, the ore body which is more than 2 kilometer, it all depends on from which area and which sequence you are. If you are incidentally mining from the area where the ore grade is low, your overall grade falls down and the cost goes up. But if we have a right mix, then the overall grade should not fall. As the volume in Rampura Agucha is going up and the flexibility in SK mine comes and the opportunity of mining from the upper blocks in Zawar comes as we fill up the mine and mine the left-out upper level blocks, it gives us the additional opportunity of improving the grade going forward, lowering the cost.

And then shaft operation. Shaft operation, now SK mine this month is at about 40% of the -- total hauling is already being done through the shaft. We feel that in this quarter, we should end up around 60% of the haulings which are fixed. Definitely, it gives the opportunity of hauling additional volumes as well as lowering the hauling costs. So the combination of all this gives us an advantage of lowering the cost going forward. Of course, commodity price you have no control, it will come as it comes. But as it looks going forward, the fuel prices are coming down, and we have been able to book the parcel for quarter 3 and quarter 4, relatively at a lower cost.

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Operator [36]

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

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [37]

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First question is on -- has any decision been taken on the fertilizer plant? That was one. Sir, secondly, are you hearing anything specific to HZL divestment?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [38]

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On the HZL divestment, it is not for me to comment. On fertilizer plant, we are -- we have taken the EPC offers from 2 of the legit parties. One is (inaudible), tied up with the Shapoorji Pallonji. And another is [Jacobs] tied up with thyssenkrupp. So both these offers are under analysis. We had public hearing about 3, 4 months back. This month, we had the EC presentation in (inaudible). We have been principally given go ahead, but the -- officially, we will be given the environment clearance next month. We have been asked to submit some clarification, which we are submitting. And after that, the progress of fertilizer plant you will be able to see.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [39]

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So sir, is it possible for you to give some timelines and indicative CapEx over here, because last time you had indicated that we are enhancing certain capacities to increase the hurdle rates?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [40]

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So CapEx, I would not be able to exactly specify and not proper for me to comment. But we have enhanced the capacity from 0.5 million tonne to 0.74 million tonne. With the width of the increase of the CapEx, this will give us the -- to produce the additional volume. Earlier we were producing -- we had a plan to produce DAP. Now we will produce the DAP with the nutrients, NPKs to -- depending on which area the fertilizer will be used and the soil conditions.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [41]

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That's helpful. And sir, lastly, I just had a request. Specifically on the mines that you had indicated that there are delays in what you're looking to do in the forthcoming quarters. If we could have some schematic diagrams, along with schedules, if you could put it in the presentation, I think it will be a good help for us to understand and appreciate, sir, the things that you are doing.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [42]

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Sure. This is a very valid point. And we will -- next time, we will give some slides wherein the pictorials and the presentations and the graph can give you a better view.

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Operator [43]

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

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Vikash Singh, PhillipCapital (India) Pvt. Ltd., Research Division - VP of Metals & Mining [44]

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Sir, just wanted to understand one thing, sir. We are talking about our second half, by the guidance, roughly 20% increase in the volumes. But if I look at the cost of production, our guidance is just $12,030, which is just $18 less than what we have projected in 2Q. So while we are -- our production is jumping so much, and then you are talking about the fuel costs to be lower, why is this -- what are the other costs which are actually increasing and mitigating the impact?

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [45]

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So we roughly have 14% in our total cost as fixed cost. So any additional volume gives us coverage to that extent. There is an electricity duty impact, which is -- which would continue in H2, and you do not see that impact fully in H1 because it only came from July. Other than that, there is renewed focus on driving development, faster development to secure not only current year but also subsequent year. So there would be additional investment made towards faster development. These, together with pockets of commodities, where prices has gone up, is where our guidance is based on. But as Mr. Duggal said, these guidance numbers are conservative, and our goal will be to get there or do better.

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Vikash Singh, PhillipCapital (India) Pvt. Ltd., Research Division - VP of Metals & Mining [46]

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Okay. And sir, my next question is that we have spoken about taking the capacity to 1.35 million tonnes. So -- and this was supposed to happen concurrently. Just wanted to understand, while we are a little bit struggling to take up the capacity even to 1 million tonne or 1.2 million for that matter, so how -- so are we still going with the 1.35 million tonne plan concurrently? Or we are going a bit slow in that?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [47]

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There is -- we are a very progressive company, and this is how we evolved in the past. We are definitely looking at 1.35 million tonne. The opportunity of mine within mine and all these opportunities are giving us opportunity to mine at a faster rate. The hauling capacities, like in Rampura Agucha, which we have already hauled 4 million tonne through ramp and 4.5 million tonne shaft gives us the opportunity of 8.5 million tonnes. Similarly, at SK, we have a mine to ramp at a run rate of 5.5 million tonnes. So additional capacity of 4.5 million tonnes through shaft gives us the opportunity of mining -- hauling the more volume. And similarly, as I talked about the lenses, these are a couple of opportunities where we have talked that Galena zone, SK Deep, crown mining at both the places. And then digitization of mine wherein the productivity goes up, the recovery becomes better. And then the whole value chain also, the concentrator efficiency, digitization of concentrated plant, the Fumer plant. So we have given a feasibility study work to an outside party. And depending on the report, we are quite excited to go about it.

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Vikash Singh, PhillipCapital (India) Pvt. Ltd., Research Division - VP of Metals & Mining [48]

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Okay. So sir, our CapEx plans remain unchanged, right? This is -- hello?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [49]

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Yes. This is unchanged -- this is unchanged about -- it will take about 3 years from now.

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Operator [50]

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Thank you. We'll take that as the last question. I would now like to hand the conference back to Ms. Preeti Dubey for closing comments.

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Preeti Dubey, Hindustan Zinc Limited - Head of IR [51]

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Thank you, everyone, for joining today. If you have any further questions, please feel free to contact me. Thank you.

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Operator [52]

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