Govt may ask HZL to swap shares, explore rights issues

The government may ask HZL to consider a share swap, warrant or rights issue instead of using cash reserves to buy these assets, the official said on condition of anonymity.

“We understand that the company needs to acquire mines to grow its business, but this should not be done through cash acquisition. These are the options that the company can exercise. Government is a stakeholder in the company and its have the right to cash reserves, and we will not allow them to use it for related party transactions.” the officer said.

An India Ratings & Research report on 17 January stated that HZL had a net cash position, and its treasury book amount 17,800 crore in the first half of FY23. total debt was 2,900 crore in the first half of FY23, mainly on account of strong cash flows on the back of supportive gross margin despite cost inflation.

On January 19, the HZL Board approved the acquisition of Zinc International assets of THL Zinc Ventures Limited (Mauritius), a wholly owned subsidiary of Vedanta Limited, through THL Zinc Limited (Mauritius). THL Zinc will become a wholly owned subsidiary of HZL.

According to the Union Mines Ministry, the acquisition is a related party transaction and violates minority shareholder rights. Vedanta holds 64.9% stake in HZL, while the government holds 29.5%.

The mines ministry has written to the market regulator reiterating its disagreement with the deal and said all three government representatives on the HZL board had opposed the proposal during the meeting.

HZL CEO Arun Mishra said he has nothing more to add beyond the views he shared in a recent interview Peppermint, In the interview, Mishra said that a company like HZL cannot afford to limit its size and potential to where it is today; It should go much further and tap other mineral sources as mineral reserves in India and Southeast Asia—the major markets for HZL today—may be exhausted. He also said that HZL would discuss the mechanism with the government.

“The objective (of this deal) is undoubted and undeniable. Mechanisms could be the problem,” Mishra said in the interview.

Mishra had said that he has not yet discussed the issue with government officials, but will do so soon.

The government plans to sell its stake in HZL as part of its disinvestment plan.

Mishra had said that India’s annual zinc consumption is 650,000-680,000 tonnes and is expected to grow by 3-4%. HZL produces approximately 800,000 tons annually. Therefore, it needs new stores to expand.

Analysts have also termed this acquisition as ‘very important’ but expensive.

“The company will seek shareholder approval in February, while other approvals are expected in 18 months,” said JM Financial Institutional Securities’ January 19 report, ‘Much-needed growth optionality, albeit at expensive valuations’.

“The acquisition is being done for cash consideration not to exceed $3 billion, implying a valuation of ~11x EV/EBITDA (adj for 70% stake in Gemsburg – valuation could be 12-13x EV/EBITDA) Zinc International’s capacity is expected to double to 600kt (kilo tonnes) by FY25 with another 300kt mine at Gamsberg and then by FY20, said a note by JM Financial analysts Ashutosh Somany and Ashutosh Somany. Expected to grow to 1mt by 27/28, this acquisition will provide significant growth opportunity, Heet Vora said.