We revise earnings factoring the recent price buoyancy and increase Fair Value to Rs 290 (from Rs 225) with a revised SOTP based valuation. Maintain ‘buy’.
A fast growing silver behemoth. HZ’s silver volumes have grown nine times faster than zinc-lead in the past decade. This should continue in the medium term given higher grades and new recovery enhancement projects. HZ, a monopoly silver producer in India, is the sixth-largest producer in the world. Silver, with a dual characteristic of industrial-precious metal, should remain the best performing metal in the current reflation backdrop. We revise earnings factoring the recent price buoyancy and increase Fair Value to Rs 290 (from Rs 225) with a revised SOTP based valuation. Maintain ‘buy’.
Silver prices correlate strongly with that of gold given its precious metal trait and current macro set-up is a favorable- safe heaven amidst uncertainty, low interest rates and a weak USD. It outperforms gold during accelerating global growth given its industrial usage. Opening of global economies post lockdowns implies strong sequential demand recovery. The combined impact of global monetary and fiscal policy response to the pandemic makes silver an attractive reflation proxy. Silver is up 51% YTD FY2021 and price strength could sustain in the current macro backdrop.
HZ’s silver volumes have grown at 15% CAGR in the past decade versus zinc-lead volumes at 2% CAGR. Growing contribution of Sindesar Khurd mine in ore production (from 6% to 34% in the past decade) has been a game changer. Silver would contribute ~30% to HZ’s FY2021 Ebitda. Currently, HZ recovers silver only from lead concentrate whereas zinc concentrates and tailings, currently not processed, could add 150 tonne of silver annually. It would commission its first fumer project in 2QFY21 to recover ~32-35 tonne silver annually and plans to add two more such plants.