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Edited Transcript of HINDZINC.NSE earnings conference call or presentation 21-Jan-20 7:30am GMT

Q3 2020 Hindustan Zinc Ltd Earnings Call

Udaipur Jan 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Hindustan Zinc Ltd earnings conference call or presentation Tuesday, January 21, 2020 at 7:30:00am 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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* Amit A. Dixit

Edelweiss Securities Ltd., Research Division - Financial Analyst

* Pinakin M. Parekh

JP Morgan Chase & Co, Research Division - Associate

* Rajesh V. Lachhani

HSBC, Research Division - Analyst

* Ritesh Shah

Investec Bank plc, Research Division - Analyst

* Sumangal Nevatia

Kotak Securities (Institutional Equities) - Analyst

* 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 Q3 FY '20 Earnings Conference Call of Hindustan Zinc Limited. (Operator Instructions) Please note that this conference is being recorded.

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

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

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Thank you, Stanford. Good afternoon, everyone, and thank you for joining us for Hindustan Zinc's Third Quarter Fiscal 2020 Results Call.

For our call today we have with us Mr. Sunil Duggal, CEO; and Mr. Swayam Saurabh, CFO. Mr. Duggal will present an update on business performance; while Swayam will present 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 a warm welcome to all of you. I'm happy to share with you that Hindustan Zinc has been declared as a disclosure champion in FTI Asia Disclosure Index 2019, with a perfect score of 10 and is among the top 23 companies in Asia and top 5 companies in India. This index is based on nonfinancial voluntary disclosures and covers areas of performance, Board quality, sustainability, risk management, et cetera.

As our commitment towards maintaining highest corporate governance, we have progressively improved our disclosures in our annual report and have been voluntarily publishing sustainability report for the last 4 years now and tax transparency report for the last 2 years. I encourage all of you to visit our website to read these reports to understand the extent and quality of our nonfinancial and financial disclosures. This recognition complements our ranking in Dow Jones Sustainability Index, where we are placed first in Asia Pacific and fifth globally in metal and mining as well as our membership at FTSE4Good Index Series for the third year in a row.

Now coming to operations. Production from our mines has progressively increased during the year. Agucha delivered [22%] growth year-to-date and has achieved a run rate of 4.1 million tonne per annum in quarter 3 and is on track to achieve its target run rate of 4.5 million tonne per annum in quarter 4. Zawar continues to deliver good performance, with ore production up 16% year-to-date. SK mine has started recovering from geotech challenges, which affected production volume and grade during first half of the year. Both volume and ore grade improved in quarter 3. And with shaft fully operational, the mine is set to deliver good performance in quarter 4.

Coming to our projects now. We are at final phase of our mining expansion project to deliver 1.2 million tonne per annum of mined metal, design capacity. At Rampura Agucha, shaft and auxiliary equipment have been commissioned and waste hauling has begun. Our hauling is expected to start in February, which will complete the [haul product].

With a final nod given by MOEF, environment clearance for expansion of Rajpura Dariba mine to increase ore production from 1.08 million to 2 million tonne per annum and ore beneficiation from 1.2 million to 2.5 million tonne per annum is expected in February.

We have set up a digital collaboration center at Udaipur, which brings complete operational data of all our locations on a single analytics platform. This will enable improvement in productivity, equipment effectiveness and ore-to-metal ratio. I'm proud to say that this center qualifies to be amongst the world's top integrated technology centers.

In our mine -- on the future initiative at SK mine, we have launched advanced analytics to particularly help our equipment, which will help in improving OE up to 10%. Furthermore, underground traffic management system has been implemented, allowing for improved turnaround time and safety.

In our journey towards realizing the potential of over INR 1,000 crore from minor metals, we are advanced stages of setting up facilities to extract copper, cadmium, cobalt, antimony, nickel, bismuth as well as residual zinc. The current ancillary unit generates INR 150 crore additional value annually. We are following up partnership with leading global technology suppliers and execution experts to augment the capacity of minor metal production in next 2 years to realize the full potential.

Now to give you an update on the market. The fundamental look for -- outlook for the zinc market remains strong, with exchange metal stocks at historically low of about 4 days. The negative sentiment which prevailed this year initially by the U.S.-China trade war has reversed with key trade deals being signed up between the 2 countries. This puts zinc prices higher during the quarter.

The refined zinc market continues to remain in deficit, with zinc demand higher than zinc production by about 500 kt in 2019. The mine production in 2019 was lower by about 600 kt as compared to expectations at the beginning of the year due to several reasons, including environment issues in China, slow ramp-up of new projects, R&R divisions and operational issues. These issues have also impacted mine production estimates in 2020 and 2021, which are now lower by more than 1 million tonnes. A similar trend was seen in smelter production, for which forecast production has also been pared down by over 1 million tonnes for the next 2 years versus expectation at the start of 2019.

Moreover, zinc product -- projects, adding supplies have deleterious elements like silica, manganese, mercury, arsenic, et cetera. Penalties for impurities along with elevated treatment charges at current prices level are stretching margins and will discourage ongoing expansion.

With China's massive Belt and Road initiative, India's strong push around infrastructure to boost GDP, coupled with other global infrastructure projects, the demand for zinc has potential to grow. Any boost in demand will be difficult to accommodate at current level of inventories.

Looking ahead, we are confident that improving demand with positive momentum from resolution of trade disputes and continuing deficit in zinc market will support higher zinc prices. Our strategy for India is to provide quality value-added zinc products for alloy and cheap steel producers to grow our market share and secure better premiums. We are on track to increase our value-added product portfolio to 25%, driven by strong demand for these products in the market.

In line with Prime Mister's outlined plan to spend about $1.5 trillion to upgraded build infrastructure, the Indian railways is setting targets to galvanize rail tracks and is speeding up replacement of asbestos sheets with galvanized roofs. This has opened a new opportunity to significantly increasing demand. Moreover, we expect this year's budget to fuel consumption growth in key sectors, which should eventually drive zinc demand to high single-digit growth.

Now turning to our quarterly performance. Mined metal production at 235 kt was up 5% (sic) [7%] sequentially on account of higher ore production across all mines and better overall grades. Mined metal production in quarter 3 and YTD declined from a year ago due to lower ore grades offsetting higher ore production.

From a year ago, Agucha, Zawar and SK mine increased ore production in quarter 3, while Kayad and RD mines are operating at near capacities and EC limits. Ore grade at Agucha and Kayad were down in quarter 3 due to expected transition to low metal bearing areas.

Integrated metal production was 219 kt in quarter 3, up 4% sequentially and down 9% from a year ago, while YTD production was down 3%. Integrated zinc production at 178 kt was in line with mined metal production during the quarter. Lead production at 41 kt was lower due to some temporary operational issues at DSC lead smelter; that led to slow rate of production and consequent increase in lead mine metal stock. Silver production at 149 tonne benefited from higher silver grades at SK mine, though lower lead production impacted silver production.

Now to update you on expansion projects. As mentioned earlier, we expect to begin ore hauling from Agucha shaft in February. The shaft will also provide an opportunity to explore Galena zone under the shaft.

At Zawar, the 2 backfill plants are under commissioning and backfilling of voids is expected to commence in February 2020. In addition to improving mine stability, this space filling will allow us to recover the left-out high-grade ore from old pillars at Zawar, improving volume and grade.

The Fumer plant at Chanderiya is undergoing hot commissioning and expected to produce first metal by February. The debottlenecking of our smelters to 1.13 million tonne was completed during the quarter and further debottlenecking to 1.2 million tonnes is underway.

So now I request Swayam to provide you 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, and good afternoon, everyone.

Revenue for the quarter was INR 4,672 crores, up 4% sequentially on higher zinc and silver volume, improvement in metal prices as well as rupee depreciation. From a year ago, revenue was lower by 16% due to lower metal production and lower zinc prices, which declined by 9%, while lead and silver prices have recovered, with silver up by about 20%. Revenue for the quarter was also lower due to buildup in refined zinc inventory, which will add to revenue in Q4.

For the 9-month period, revenue was lower by 9% on account of an average 9% decline in LME prices, lower volume, partly offset by higher silver prices and rupee depreciation.

On the cost side, our imported coal prices improved further during the quarter with linkage coal reaching about 22% in the overall mix. This led to a reduction in power cost sequentially as well as from a year ago despite a 50% increase in electricity duty on captive power plant from July 2019 by Rajasthan government.

Zinc cost of production, excluding royalty, increased sequentially to $1,077 per tonne. While higher production improved the fixed cost leverage, COP increased on account of higher mine development expenses to secure our production profile and a onetime R&M expense at Dariba zinc smelter which suffered roaster breakdown. The roaster is back in operation and hence is not expected to have any impact on Q4 production.

As compared to last year, COP in Q3 and year-to-date was further impacted by lower grades, increase in cement prices and a softening acid prices globally.

The EBITDA for the quarter was at INR 2,288 crores, up 8% sequentially and down 20% Y-o-Y. And for the 9 months, it was down 13% to INR 6,888 crores.

Net profit for the quarter was at INR 1,620 crores as compared to INR 2,081 crores in Q2 and INR 2,211 crores in Q3 last year. The sequential decline is due to: one, lower investment income in Q3 as we had significant mark-to-market gains in Q2 due to rate cuts; and two, effective tax rate of 23% in Q3 versus exceptionally low 0.3% in Q2, which was due to reversal of INR 365 crore on revision of estimate for deferred tax liability pursuant to Taxation Law (Amendment) Ordinance 2019. Excluding the impact of tax reversal and exceptional MTM gain, the net profit for the quarter would have been 8% higher, reflecting higher volumes and LME improvements.

As compared to a year ago, net profit in Q3 was impacted by higher depreciation and amortization expenses on account of higher ore production and higher capitalization and also lower investment income due to mark-to-market gains last year. From the year-to-date, net income was at INR 5,466 crores, down 8% on account of lower EBITDA and higher D&A expenses, partly offset by higher investment income due to higher corpus and higher rate of return and lower tax rate due to INR 365 crores reversal, as mentioned earlier.

Now I will 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. Our major mining expansion projects will be operational in the current quarter to achieve 1.2 million tonne per annum mined metal capacity. With ongoing ramp-up of mines, we expect to deliver much better performance in quarter 4. The deficit in defined zinc market, low stock levels and the expected growth in zinc demand, zinc prices are expected to improve in the near future.

With this, I open the floor for questions. Thank you.

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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 Pinakin Parekh from JPMorgan.

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Pinakin M. Parekh, JP Morgan Chase & Co, Research Division - Associate [2]

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Just taking a step back, the last couple of years, we have seen delays in the mining projects, grade slippages. When I look at the zinc cost of production without royalty, the FY '17 average was around INR 55,000; in FY '18, it was INR 60,000; then INR 70,000 in '19; and now it stands at INR 76,000.

Now sir, going forward over the next 2 years, even if we assume that, that 1.2 million tonne is fully ramped up, can we go back to the cost of production that we saw for zinc in FY '17 and '18, between the INR 55,000 to INR 60,000 range? Or is this plus INR 70,000 per tonne is the new normal given the geology that is there and the other issues?

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

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No. Actually, whatever we faced is more like a temporary issue. So the grade is a combination of what we mine from which area. So within the same mine, we have the differential grade depending on which section of the ore body we have. So there is a defined sequence because of which some committed grade is there. But when some -- the certain events happen, like we said the geotech issues, which are there in the SK mine, so we had to revise our sequence of mining so that we can actually get the ore production. So it temporarily impacted the grade, but going forward -- the grades from our Rampura Agucha, which was also a sequential event.

So going forward, we are trying to -- when we -- both the base fill plants are commissioned and our development happens in a manner that -- we designed our stope sequence in a manner that it gives you the average grade for the year-end, which is as per the plan. So what we have done in the last 3 quarters is that the development in the mine, we are putting up a huge focus on the development of the mine. So if I give you the trend, there is about 13%, 14% rise in the mine development from quarter-to-quarter. And we also are giving a better focus on defining the ore body by accelerated drilling.

This also gives us an opportunity to do the structural mapping of the mine in which we can predict what is the advance support we have to give and definition of the ore body better, by which we can make a better design. And we expect the better grade where we can reduce the dilution. So this is what the definition of the -- how shall we get hold of our ore grades.

But apart from that, there's volume rise, the SK Mine, the shaft has got stabilized. The shaft which gets stabilized in Rampura Agucha will give us the opportunity to do the additional hauling and the additional development. And from a deeper level, we will be able to take out the ore.

But along with that, as we have told you that we are digitizing the mine, which should improve our OE.

So all these projects are getting mature. Digitization of the mines, both in SK and Rampura, which have completed to the extent of 60%, 70%. And when the digitization gets completed, so it gives us a more utilization of machines, remote operation of the machines and the improvement of OE. So all these opportunities are there.

But along with that, as we have set ourselves on the journey of minor metals, like we are saying that we have already seen some opportunity and some of the projects are also coming on stream, some of the projects are being put in the pipeline. When we get actually all these projects commissioned and we get a credit of around INR 800 crores to INR 1,000 crores, this will also give us a credit in our cost and ultimately the positive from that.

But as you are also talking about the cost in rupee, you see it also have the factor of depreciation of rupee because a large part of the cost is connected with the dollar cost because we import 80% of our coal, and there are other commodities which consume which have a global bearing on us.

So a combination of that, what I'm trying to say is that, we have the internal plan that how shall we claw back the cost or other compared to $900 or $875 in a couple of years from now.

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

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If I can add to that. This is Swayam. So the reference cost of $800 or below $800 has one more impact. It's a shift from open cast to underground. When you do, you typically have a cost increase simply because they are -- you're going deeper and mine development cost goes up.

But going back to what Mr. Duggal said, from the current levels, once we go higher, we'll have a little bit of volume leverage. About 35% of our total cost is fixed. So that would drive cost down. Second is indeed minor metal. Third, I think, is equally important and we have been talking about it for the last 1 or 2 quarters. Mine digitization will eliminate some of the inefficiencies. What that will do is some of the inherent cost of going deeper will get compensated -- more than compensated by doing that. So if I can do a simple math for you, incremental mine development was the reason why cost went up in Q3 versus Q2. So at a $1,040 level, it is possible to go down to around $900 by a combination of holding grade right, delivering on minor metal credits and essentially a volume uptick, which will give me a better leverage. So it is possible to go around $900.

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Pinakin M. Parekh, JP Morgan Chase & Co, Research Division - Associate [5]

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Sure. So just to clarify, the cost reduction from plus $1,000 or INR 76,000 to below INR 65,000 a tonne, that is a 2-year schedule that we should look at. It's not going to happen in the next 2 to 3 quarters, right?

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [6]

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Steadily quarter-on-quarter it will happen.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [7]

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Correct.

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Operator [8]

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

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [9]

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The first question is on the projects that we have. If I look at Fumer, RD mine, backfill plants at Zawar, they seem to be delayed by a couple of months. So February '20 is a very critical month for us. As I get during this con call, a lot of milestones planned then. Is there a possibility of these projects getting delayed any further or is it -- I mean the delays are all done?

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

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No, no. There is no further delay. If I would explain about the Rampura Agucha shaft, this is -- the shaft is up and running, hauling the ore. The ore pass, which is a pipe created in the ground, which has to drop the ore from a higher level to the shaft level, this is being drilled, and the progress is such that it is going to get completed in the next 4 to 5 days' time. So everything is done. All the crusher is commissioned. Everything is -- hauling is going on. So this project is almost in the last kicking state. So there is no further delay, which is expected.

As far as the base filling is concerned. The base filling plants are also -- the commissioning is going on -- cold commissioning is going on. And these plants are almost completed. So these plants will start filling the mine at any point of time. So there is no further issue in this.

As far as Fumer is concerned, the hot commissioning is already going on. We should get the metal any day.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [11]

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Okay. Wonderful, sir. The second question is on -- essentially, you mentioned that you're going to hit Galena-rich zone in Rampura Agucha. So does that imply that you will get more of lead output from Rampura Agucha and, henceforth, the lead output would get -- and silver would get us a lift from this particular mine as well?

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

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So that is what the plan is. And presently what we are doing is we have made exploration right there. And the high-speed drilling machines and high-technology machines are already deputed there. So we are drilling, and we are defining the ore body there.

So along with that, a mine plan, how to reach from the shaft bottom to the ore body, that plan is going on. So I think when the ore body will be fully defined or broadly defined, we'll be able to define that how we have to approach the ore body. And that development work to reach the Galena zone will start in about 3 months' time from now. And in about a year's time, we will start ticking that. After that, the stoping will start.

But you are absolutely right. This is a high lead zone where the silver content varies from somewhere at 150 to 400 PPM, and average silver is more than 200 PPM. We will -- in the time to come, we will definitely have a mine within mine, the mine which is the main ore body and mine below the main ore body to the Galena zone. So we will parallel-ly start operating both the mines within Rampura Agucha mine.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [13]

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Great. One more question, if I can squeeze in. This cost of production also has some onetime repair and maintenance due to the roaster breakdown. So is it possible to quantify the same? How much was the cost due to roaster breakdown?

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [14]

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The cost -- onetime cost would be about INR 16 crores.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [15]

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$10 per tonne.

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Operator [16]

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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 [17]

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Sir, my first question is how should one look at our full year volume guidance? I think past consecutive quarters, I think volumes haven't come at least to the expectations of The Street. Sir, how should one look at it?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [18]

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In the quarter 4 or next year, you are talking?

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [19]

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Sir, implied, for full year this year, that is for Q4 because we had indicated 950 kt plus for this fiscal. Sir, how does that stack up now? Because the implied Q4 ask is quite high. So how should one look at Q4?

And secondly -- my second question was how should one look at it next year? And if you could give some color on mine-wise split and grade, sir, that we are looking at?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [20]

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So as far as next year is concerned, our endeavor is to at least make the mine plan which is close to the capacity. And we are on a blackboard to design the mine-wise grade, stope sequence and the ore production we will do. We'll come back next quarter when our business plan exercise will be completed. But that exercise is going for what is a mine-on-mine.

As far as the volume of this quarter is concerned -- as far as MIC is concerned, we are confident that we will be as close to 950 as possible. Our silver will also be as per the guidance, almost as per the guidance. But looking at some of the smelter slowdown or the lead smelter issue which we faced in quarter 3 and the roof of one of these smelters, the roaster, which we faced in quarter 3, there could be some volume variation as you're right. And we could be around 910, 950 in quarter 4 or year as a whole.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [21]

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Okay. And sir, when you indicate that for silver we'll be on track with the guidance, is this on the basis of, like, we already have some lead inventory which is there -- ore inventory, which is there, and hence, you are confident on the numbers?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [22]

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Yes. So one is the lead inventory. Another is that the sequence of mine, where the good grades from SK mine delivering the high silver content, the silver content from quarter-to-quarter has grown. Last quarter also, we had the high silver content. It was about 120 PPM. And this quarter, we are expecting even higher silver. So the flow of higher silver and the lead inventory.

And what we are also thinking that one of the pyro smelter, which normally we have the option to run either on lead or lead and zinc together. So this quarter, we will be fully running on lead. So this will give us the additional volume of lead and definitely the silver. So that is why we are confident that we should be reaching almost close to our guidance of silver, which was I think 650 tonnes.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [23]

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650 tonnes, okay. Sir, my third question is, any update on Bamnia Kalan? That is what we had indicated in a couple of prior quarters that we were about to start drilling over there and we see some good scope over there.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [24]

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So the exploration drilling is going on in a big way. So after the exploration drilling will be completed, we should have a sufficient drilling to have the R&R, which gives us the visibility of designing the portal and the decline and the -- make a mine plan. So I think it will take another quarter or so before we will be able to make a mine plan for that.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [25]

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And sir, any clarity on SK North and South? I think there was a certain clarity from a legal side that we were awaiting.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [26]

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No. Actually, the ordinance has come, which says there is some priority for the deep-seated metal. We are trying to get the clarification. And it also says that some rules could also be framed around that. So we will try to take some clarity. But we definitely have some -- the preferential right on that. So we will come back to you as we get the clarification on that.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [27]

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Okay. And sir, just last one question. You had indicated on the fertilizer plant, basically it will have a EC in the next quarter. So sir, any capital allocation plans formed up over here?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [28]

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So we have -- the MOEF presentation was made, and the principal nod has been given. So EC -- we'll get EC in this month any day. So in the meantime, we are preparing ourself looking at the technologies. Our teams are visiting where the plants are established, and we are doing the internal working, and we will order the plant as we progress and finalize the technology and the partner.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [29]

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Sir, have you firmed up on the size? And you had indicated that the hurdle rates are significantly better than the yields. So sir, any number that you can share over here?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [30]

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So around 0.7 million tonnes or so will be the size of the plant we will be putting in the first day.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [31]

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Okay. And sir, indicative CapEx? Last one, sir.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [32]

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Indicative CapEx, I cannot give you the figure right now because this will go public, and I don't want to do any spoiling our own negotiations.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [33]

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No. No problem, sir.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [34]

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Thank you.

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Operator [35]

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

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [36]

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Sir, first question is with respect to the cash flow, I just wanted to understand 3Q flows better. So operational cash flow appears to be around INR 2,200 crores, but still cash balance is flat sequentially. So if you could just share, I mean, how has the cash flow been?

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [37]

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Sure. So EBITDA was INR 2,288 crores. The change in working capital was a negative INR 1,100 crores, and that is a combination of a customer advance, which needed to be funded. We are sitting on high stocks of finished goods as well as on concentrate side, which would correct itself in Q4. Sustaining CapEx, about INR 750 crores; net tax outflow -- cash outflow is about INR 500 crores; net interest income, which is slight -- which is lower than Q2 is at INR 379 crores; and growth CapEx is INR 430 crores. If you add them up, you basically come to that flat number.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [38]

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Understood. So sir, sustaining CapEx, what should be the annual run rate? Because this is over and above the $300 million growth CapEx, which you've guided, right?

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [39]

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That's correct.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [40]

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So what should be the annual number this year and the run rate to expect next year?

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [41]

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It should be about $250 million to $300 million annually. And a large part of sustaining CapEx is mine development.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [42]

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Okay, okay. That's a bit higher than what we were building in. Has this increased in the last couple of quarters? Or I mean this is just a 1- or 2-year thing or sustainable going forward from a 3-, 5-year point of view as well?

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [43]

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So if you look at the quarter numbers, we are focusing significantly on driving additional mine development, a message which we also communicated last quarter. So we are investing additional in mine development to do mine development faster, which would make our volumes projections more reliable. So it should stay in this range for some time in future.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [44]

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Understood. Understood. Sir, second question is with respect to coal supply. If you could just share, I mean, what was the linkage supply import mix, et cetera? And how the cost trends in the coming quarters impact the COP from the coal front?

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

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So coal indeed has given us benefit from an average of INR 8,400 landed last year, full year. We are almost 15% lower. And we have -- sequentially quarter-over-quarter, the coal prices have come down. As on Q3, the linkage mix was 22%, while on a YTD basis, linkage is about 25% of my total coal.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [46]

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But just to update you further on this. The differential between the linkage coal and the imported coal is going down. So the advantage we used to get last year on the usage of the linkage coal is not that much because the linkage coal price has gone up and the imported coal price, CIF prices have come down.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [47]

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Understood. So going forward, there's further cost deflation expected from coal?

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [48]

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So part of the reason imported coal went down was a global demand/supply situation, something we expect to continue. And also, there has been significant focus globally on driving green energy, noncoal energy. So we expect coal prices to remain soft in coming quarters as well.

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Operator [49]

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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 [50]

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Sir, if I look at the premium that you get over the LME on the zinc, on a sequential basis, it has come off to almost like $35. If you could just help us understand how this premium moves and what impacts us?

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [51]

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So the effective premium which we earn is a combination of actual premium and the import parity, which are charged by customer. Import parity is a factor of FX and going LME because basis that, that gets determined. Actual PBM, which is our reference, is a combination of a few metal exchanges. In Southeast Asia, premiums are under a little bit pressure. We have seen premiums coming down by about $20, $25 over the last 2 quarters. But we strongly believe, looking at current zinc stock and also the fact that mine supply is lower than what has been forecasted, putting pressure -- similar pressure on refined metal supply, we think premium will catch up soon.

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Vishal Chandak, Emkay Global Financial Services Ltd., Research Division - Research Analyst [52]

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Got it. Secondly, sir, I think you mentioned that your smelter capacity would be about 1.13 million next year, while the mined capacity would be 1.2 million. So the balance we should assume would be part of concentrate sales?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [53]

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No. It is -- if we take the recovery into account, it comes almost at the same level. And we are also further planning to take this capacity up to 1.2 million tonnes, considering that we would also have the additional flow of the metal when we will -- from the fumer and from our [zinc oxide capture].

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Vishal Chandak, Emkay Global Financial Services Ltd., Research Division - Research Analyst [54]

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So we should not be building in any ore concentrate sales next year?

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [55]

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No, no. No way. Yes.

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Operator [56]

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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 [57]

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Sir, just a small clarification on the question that my colleague asked earlier. Sir, the sustaining CapEx of $300 million, you said was largely driven by mine development expenses. So -- however, our COP has increased because of the mine development. So basically, this is part of the normal expenses, and it's not a separate CapEx. How should we understand that?

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [58]

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So if you see the mine development cost process, there is a part which needs to be developed before we can take the ore out. So we work parallel-ly on multiple phases, multiple level. That part, where there is a timing difference on my ability to take ore out is capitalized. That sits in sustaining CapEx. The development, which I need to do, the crosscuts I need to create to enter the ore and actually drill and take production out, is the development which is in revenue, which has gone up 35% versus last quarter. So it's basically the whole process. The closer I go to my actual production is revenue. The decline development and related developments are all capital.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [59]

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And plus, we also need to replace our mining equipment in a cycle. So depending on which mining equipment comes in which cycle and how many equipment we have to replace, so that is the -- that also defines the sustaining CapEx. But going forward what we're also doing is that these equipments are being maintained by the OEMs, and these OEMs used to take the responsibility of the equipment for 4 years of maintenance. We are discussing with them and almost finalizing that how these equipments can live the life up to 6 to 7 years. This will also optimize our CapEx going forward.

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Rajesh V. Lachhani, HSBC, Research Division - Analyst [60]

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Understood, sir. So sir, if you can just throw some light on the trend of the mine development expenses. How much was capitalized earlier, 2, 3 years back and compared to now? Can you just throw some light so that we can understand the trend and what it could be going forward?

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [61]

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Sure. You would -- we'll take this question off-line, and Preeti could provide it separately.

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Operator [62]

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Ladies and gentlemen, that was the last question. I now hand the conference over to Ms. Preeti Dubey for closing comments.

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Preeti Dubey, Hindustan Zinc Limited - Head of IR [63]

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Thank you, everyone. If you have any further questions, please contact me. Thank you.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [64]

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Thanks, everyone.

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Swayam Saurabh, Hindustan Zinc Limited - Acting CFO [65]

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Thank you.

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Sunil Duggal, Hindustan Zinc Limited - CEO & Whole-time Director [66]

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Thank you.

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Operator [67]

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