Hindustan Zinc shares have registered a fall of over 20% from the peak seen in October last year. Concerns over weak demand from China weighed on investor sentiment. On the other hand, rising cost of production due to sharp jump in coal prices has added to the trouble. An expected pent-up demand has also been hit by the fresh surge in Covid infections led by the Omicron variant.
Meanwhile, volatility in zinc and lead prices, however, remained favourable. Zinc prices on the London Metal Exchange (LME) averaged $3,364 a tonne during the quarter (Q3) ended December, up 28% year-on-year, while lead prices averaged $2,331 a tonne, year-on-year. But it was 28%.
Analysts at Antique Stock Broking Ltd said, “Zinc and lead outlook will be supported by smelter shutdown due to higher energy cost and lower global inventory levels. After 1.2MT per annum (MTPA) capacity expansion, prices of silver and metals firm up. Higher quantum of income will help.
On the volume front, the company crossed the 1.0 MTPA production run rate during the December quarter. It saw its best ever refined metal production of 261,000 tonnes during the third quarter. Analysts believe that though it is positive, the focus will be on touching the higher run rate of 1.2 MTPA, with 1.35 MTPA likely to take longer.
“We are factoring in 1.19mt of mining metal production in FY23 and 1.2mt in FY24,” said analysts at Motilal Oswal Financial Services Ltd.
Overall rising cost is the biggest concern. The company’s cost of production during the December quarter was $1148 a tonne, up 21% year-on-year, as the weight of higher coal costs. Analysts said part of the increase was due to lack of supplies from Coal India Ltd, adding that the share of linkage coal in the mix fell to 4% from a generally 30% low.
Analysts at Credit Suisse said in a note issued on January 24 that the backlog of around one million tonnes from Coal India will help reduce costs going forward. This may provide some respite, while international coal prices have remained fairly high in the fourth quarter so far.
Meanwhile, the upside could be limited at current valuations, analysts said. Those antique stock brokings maintain a ‘hold’ rating as the valuation is rich and they would prefer a more attractive entry level. Analysts at Motilal Oswal Financial Services Ltd maintained a ‘Neutral’ rating.
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