We met Navin Agarwal – chairman, Vedanta and HZL team led by Sunil Duggal – CEO & MD. The interaction addressed the core operational issues of a) volume growth and b) cost of production (CoP). The company laid out a plan to increase mined metal capacity from 1.2mtpa to 1.5mtpa post FY20. Silver production is expected to increase in tandem with the ramp up at Sindesar Khurd mine. The company expects strategic initiatives centred around power cost savings, shaft hauling, scale benefits and logistics to drive CoP reduction over the medium term. Current record high CoP is likely to fizzle out as transition phase of underground mining leads to a stable strip ratio eventually. Zinc outlook is expected to remain strong driven by a) deficit forecast in CY18 and b) continuous drawdown of warehouse inventory. Dividend payout is expected to remain strong to strengthen the cash flows of the holding company. Growth capex for future capacities is likely to start in FY20 – current zinc prices suggest high IRRs for these projects. We remain positive on HZL given its presence in the lower end of the global cost curve facilitated by high grade captive mines sufficient to meet requirements for decades, 100% captive power plants, sizeable scale of c.1mn tons+, diversified revenue stream with increasing contribution from silver sales and strong balance sheet with net cash of `45/share. Maintain BUY.
HZL is currently running a plan to increase mined metal production from 950ktpa to 1.2mtpa. The Company now intends to increase its mined metal capacity further from 1.2mtpa to 1.5mtpa by undertaking brown-field expansion across its mines. The future capacities of the mines could potentially be 1) Zawar mining – 6mtpa 2) Sindesar Khurd 8mtpa 3) Kayad mine – 1.2mtpa 4) Rajpura Dariba – 2mtpa and 5) Rampura Agucha at 6mtpa. At Rampura Agucha, the main shaft commissioning is on track and the production from the shaft is expected to begin from 3QFY19, while the winder was commissioned in 2QFY18.