Q3 20/21

Jan 20, 2021

Quarterly report

Ladies and gentlemen, good day and welcome to the Unseen Limited Q3 FY 21 Earnings Conference Call. As a reminder, the participants will listen only mode, Please note that this conference is being recorded. I now hand the conference over to Ms. Shweta Arora, Head of Investor Relations at Handesund Bank Group. Thank you, and over to you, ma'am. Good afternoon everyone and thank you all for joining us today for Hindustan Singh's Q4 fiscal 2021 results call. Today on the call we have with us our CEO, Mr. Arun Isha and our CFO, Mr. Swayamp Saurabh. Mr. Isha will begin with an update on business performance, while Swayamp will take you through the next performance, after which we will open I now request Mr. Mishal to begin today's call. Over to you, Mr. Mishal. Thank you, Shweta. Good afternoon and a very warm welcome to all of you. I trust that you and your families are safe and maintaining all precautions against the spread of COVID-nineteen. I would like to begin today's presentation by sharing an excellent achievement from sustainability side. Hindustan Zinc is included in the list of A rated companies for climate change carbon disclosure project. We are among the 2 companies in metal and mining sector across the globe, which scored A rating in the climate change. I am humbled to share that Hindustan Zinc is a part of business leaders group COP26, which is actively engaged in switching the agenda of the 26th meeting of countries that signed the United Nations Framework Convention on Climate Change to be held at Glasgow, U. K. In November 2021. I'm also happy to update you on Dow Jones Sustainability Index. We have maintained our first position in Asia Pacific region in the metal and mining sector for 3rd consecutive year and ranked 7th globally in the metal and mining sector. At Hindustan Inc, we hold welfare of our communities surrounding our operations very close to our heart and always endeavor to keep track and make a difference. Our CSR team actively engages with the communities through various flagship projects to ensure that all efforts are directed in a meaningful manner which adds value to their lives. I am proud to share that Hindustan Rink has been identified as responsible business of the year for its exemplary work in community development and awarded with Grant Thornton Ferra Award 2020. This is reflective of the trust based harmonious relationship that we have nurtured with our communities over the years. Turning to update on operational performance during the quarter, I'm happy to share that we have continued our winning streak from last quarter and touched a few milestones this quarter as well. We saw an ever highest ore production supported by proactive mine planning driven by increased use of technology and better targeting. We also successfully managed our cost at lower levels and our 9 months to date cost is at the lowest level since we transitioned to underground mining operations in March 2018. Coming to market update. Global mine supply continued to face COVID related disruptions and significant production was lost in China, Peru, Bolivia and Mexico, some of which is likely to be permanent in nature. Mines across the world are facing operational challenges to ramp up production while complying with social expense and norms. According to Wood Mackenzie, mine production in calendar year 2020 was down 3% since consistent market remained in deficit to the order of 2 20 kilotons as smelters were not severely impacted due to low manpower requirements. Marine logistics challenges also led to supply shortages in the market. In China, TCs for imported concentrates continued to fall and reached below $100 which might hamper refined output going forward. Global demand on the other hand is expected to have a V shaped recovery. The manufacturing sector in China was the quickest to return to normal with industrial utilization rates back to pre pandemic levels by May. The real estate sector also saw a rapid return to normal when by October November, China's retail sales were also back to normal. In the United States of America, the new administration is likely to invest in upgrading infrastructure and to decarbonize the economy, both of which will support zinc demand. Driven by this fundamental support, zinc prices faced a strong rally during the quarter. Prices dipped at $2,800 per tonne while leveraging at $2,628 per tonne in quarter 3, up 10% year on year and 13% quarter on quarter. Various government financial stimulus and rollout of vaccination programs across the globe is expected to drive economy towards a faster recovery path. Wood Mackenzie estimates zinc LME prices to average at $2,800 per tonne in 2021. Coming to domestic market, as michened workers return, downstream manufacturing units reported achieving 90% to 100% plant utilization. Zinc apparent consumption in quarter 3 FY 'twenty one was up 6% to 7% on a year on year basis and 12% to 13% quarter on quarter basis. Subsequently, premiums also rose significantly. Major steel manufacturers have signaled a tremendous improvement in demand and hinted at strong quarterly results, which also provided support to zinc metal. Finance Minister's assurance to continue fuelling economic growth also offers a promising outlook from next 2 to 3 quarters for zinc demand. Coming to silver, global investor interest remained weak during the quarter as short term macroeconomic outlook improved. And with news of vaccine rollout, this drove investors to other high yielding asset classes. Subsequently, silver prices were only up 1% at $54 per dry ounce. Turning to operational update. During the quarter, our mined metal production was up 4% from a year ago to 244 kilotons on account of higher ore production resulting from better mine planning, partially offset by low overall grades. Sequentially, mined metal production grew 22%, supported by higher ore production. Talking about 9 months to date performance, mined metal was up 2% year on year. Integrated metal production was at 2.36 kilotons, up 7% from a year ago and down 1% sequentially in line with availability of mined metal with zinc at 182 kilotons and lead at 52 kilotons. Selemium silver production was 183 metric tonne soaring 23% year on year on account of higher lead production, partially offset by lower grade at SK Mine compared to a year ago. Sequentially, the production was down 10% due to lower lead production and dip in metal grades in SK Mine. Coming to an update on our projects, I'm happy to share that environmental clearance that was recommended in the previous quarter by Expert Appraisal Committee for Jawor mine expansion from 4,000,000 to 4,800,000 tonnes per annum has been received. So the year zinc smelter has also received environmental clearance for expansion from 10,420,000 tonnes per annum to 0.50 1,000,000 tonnes per annum. As guided previously, both the factory plants at Jawarmal and Mochia mines were commissioned during the quarter. I'm also happy to share an update on our e commerce platform Evolv, which was launched in September last year. We have crossed 4,000 tonne sale of metal through the online platform and able to reach out to MSG customers with live exchange benchmark prices and as low as one time delivery for zinc and lead metals. We are delighted that total has been well received in the market and customers are conducting on daily basis. The online commerce portal has also received recognition for best e commerce portal and technology innovation in various industry forums like CII and SAC Guest Awards. Lastly, an update on Fumor commissioning. Due to ongoing COVID-nineteen disruptions, including visa restrictions for Chinese nationals, final commissioning of Fumor planted Chanderia is not completed yet and efforts are ongoing for an early resumption. As my closing remark, I would like to draw your attention to our previously guided FY 'twenty one volumes for both mined metal and refined metal in the range of 9 25 to 9 50 kilotons each and silver at 6 50 meg metric ton. I am happy to inform you that we are on track to achieve the previously guided numbers on metal volume and given our strong performance, we are likely to exceed our previously guided silver volumes. With this, I hand over to our CFO, Mr. Kiram Sohrab to update on the financial performance. Thank you, Arun, and good afternoon and a very happy New Year to everyone. As outlined by Arun, we continue to strengthen our foundation of our core operation and are delivering on volumes, while structurally bringing down the cost through various initiatives. As a management team, our focus is further sharpened and we are approaching growth via streamlining operating processes and imbibing the pressure of digital planning and more importantly efficient execution. We are constantly working towards the resilience of our assets so as to deliver consistent shareholder value throughout the economic life cycles. In these uncertain times, our strength lies in delivering strong free cash flow from operations, which enable us to invest in the growth of our business, consider new projects while also giving consistent returns to our shareholders. We will always try to strike the delicate balance of generating long term value and distributing returns to our shareholders. I would also like to point out that while we have our unwavering focus to deliver on operational and financial excellence, at the same time, we remain equally cognizant to our ESG commitments and sustainability goals. I'm happy and proud to see the emerging maturity of our sustainability initiatives. We are developing processes that are well laid out to incorporate both financial and sustainable aspects in day to day business decisions. The same has started to show some green shoots as we embark on this journey to achieve the sustainability goals that we have set out for ourselves. We do recognize that there is still a lot of work to be done here and we'll continue to take inspiration from global best practices to stay ahead of the curve. Coming to financial performance for the quarter. Revenue from operations during the quarter witnessed an increase of 29% year on year and was at INR 6,033 crores due to higher zinc volumes, which were up 6% year on year and an increase of 30% in lead volumes year on year. This was further supported by higher silver prices and volumes and higher zinc prices as well as room depreciation over the year. However, some of these gains were offset by a fall in lead LME on a year to year basis. Compared to the previous quarter, revenue rose 7% primarily driven by higher zinc lead LME prices. Sequentially, zinc LME rose 13% and lead LME increased 1%. This was further supported by higher metal premiums resulting from revival in domestic demand. Some of the gains were offset as price realization were impacted by rupee appreciation quarter over quarter. Reported zinc cost of production before royalty for this quarter was $9.46 per tonne, which was up 3% sequentially, but down a lower 12% from a year ago. This, however, includes a one time employee cost, which is equivalent to approximately $20 per tonne. And if you exclude that, it's fairly close to the last quarter's cost of production. All this is a result of our constant effort to bring down cost through structural optimization initiatives and maintain it at consistently low levels. As outlined to Arun earlier, we are proud to share that on a 9 monthly basis, we are at the lowest cost in dollar terms since we transitioned to a fully underground mining operations. I would like to reiterate that extraordinary efforts on all fronts including consumption, contracting, procurement and fixed cost optimization has resulted in the sustained reduction of costs which we are confident will continue. The resulting EBITDA for the quarter was INR3313 crores, higher 45% from a year ago and 12% sequentially on account of higher revenue and well managed operating costs. Net profit for the quarter was INR2200 crores, a stellar increase of 36% from a year ago and up 13% sequentially, which was driven by recovery in metal prices, strict cost discipline and slight volume gain. Tax rate as guided in previous quarters is at an average of about 24.5%. The higher normalized level is due to change in income mix in light of lower interest rate environment. Now coming to our previously guided costs and uses for the fiscal year. As you would have seen, we have successfully reset our cost to a lower level and are confident to consistently keep bring cost of production down. And given the strong performance, we are likely to exceed our previously guided cost numbers to keep where we communicated earlier that the zinc cost of production will be below $1,000 per ton for this fiscal year. This we are able to re guide despite higher mine development expenditure and this is emerging out of the efforts which has been made around bringing our cost structurally down. As for CapEx, we keep our guidance intact with a focused approach and exercise prudence in an uncertain business environment and strike a delicate balance into investing in growth while conservative cash. With this, I open the floor for questions. Thank you very much. We will now begin the question and answer session. If you could just share some more light on that, it will be very helpful. Yes. So let me take the backfill plant question. Backfill plant would not necessarily translate into a better rate. Backfill plant would help us fill our stopes faster and it would make our production process more consistent and disciplined, which would simply mean that my ability to forecast and meet that forecast consistently in term volume terms would be more accurate. It would also make mines stable to the life of the mine plan. On Fuma, the delay is primarily on final commissioning. And as it was also mentioned last quarter, we are facing some issues in terms of our Chinese contractor traveling out of China and that is something we are looking to resolve. We think we should be able to complete retaining Fumr work by end of this quarter, which is by April and Fumr should be operational by then. Understood. Certainly on the volume growth, as we mentioned this year at around 1,200,000 tonnes visit capacity, So what sort of utilization and the ramp up that you will get expressed in next year's FY 'twenty two? So this year, we were planning to have 1,200,000 tonnes since we lost considerable time in quarter 1 and especially in the month of April due to COVID and the ramp up got affected because of COVID. Similarly, to liberate the mine, the development had to happen. This quarter, we achieved a development figure of about 27 kilometers, which is highest ever in a quarter. So we are on that path. So we are now currently poised to do that. It's a full year, unaffected year if we have next year, that should show a likelihood of achieving this 1,200,000 tonne goal. Understood. So without any disruption, one, we expect a very strong volume growth next year, given the current year, we expect So currently we are absolutely in the process and quarter 4 should show an exit rate of 1,200,000 and MIC, which should then continue into the next year. And Dan, I would like to add that although we have been able to show an exceptional recovery in terms of our volume in last two quarters, COVID has not completely gone. So I think our current focus is to get to a 1,200,000 tonne equivalent run rate in Qutifo. And then from then all the development is happening and the investments which has been done should translate into a significantly higher run rate for next year. Okay. Just a follow-up domestic and export mix, has that normalized to normal levels of around 20% export? Yes. So this was already a question last quarter. And large part of normalization already happened last quarter where we saw from almost 65%, 70% export percent export sales in COVID impacted quarter 1 going down to 29%. This quarter our exports are 26%. And this has I think broadly reached the normal level. Got it. Thank you. Thank you. The next question is from the line of Amit Devijan from Telwis. Please go ahead. Yes. Thanks for the opportunity and congratulations for a good set of numbers. I have 2 questions. The first one is that you in your prepared press release, there is a mention of the issue with SK. Can you please elaborate more on that and whether these issues have been overcome? That is the first question. Okay. So in a mine, although we operate on an overall life of mine plan, okay, the grade issues are transient as you go from level to level, you would encounter geologically or in the overall resource wise, but you will encounter lower product some quarters and you will also be compensated by higher grade in the other quarter. So it's part of that life of mine plan and we have to transition that journey. Overall, grade would remain good over the 5 year period, but we'll have this fluctuation from time to time. I don't see anything abnormally wrong that needs to be corrected. Okay. So what are the grade can you share with us the grade that you'll see in this quarter and how does it compare with last quarter? So the grade in this quarter, quarter 3 is at 7.06%. It's close to a percent decline versus quarter 2 where it was 7.14%. Going forward, we think rates should normalize, go back to 7.15, 7.2 levels which we have been guided in the past. There are no such plans. There are no such plans. Okay. Thank you. Thank you. Next question is from the line of Vijayat Agrawal from CLSA. It was a one time payout which management decided to do across all grades to all employees as a sort of goodwill gesture sort of compensating for variable pay. This was a call taken by asset management for the fact that people have been working through this COVID sort of recognition but also kind of reinforcing our commitment back to them. But this entire thing will reverse the commitment process? No, it's so this is a one off cost. You should exclude this in predicting cost for future quarters. And how do you see the impact of where coal costs will be the cost of production in Q4 and going ahead? Right. So this is something we are also watching closely. If you look at our coal mix in this quarter, we have used about 23% of domestic coal. The imported coal which we had bought during last quarter indeed we're at, let's say, significantly economical prices, that is a price uptick we see right now in the market. So while quarter 4 is something we are watching closely, we do not see the impact. Plus also, we believe that even the global focus which exists right now in moving towards greener, greener energy, long term demand of coal is not going to change very significantly to drive price up in an extremely adverse way. So we are more balanced here. We do see a little bit of impact coming in quarter 4, but we do think that in next 6, 12, 18 months, coal prices should remain within the range. The next question is from the line of Pallav Agarwal from HandyStar Booking. Good evening. I just had a question on how our net cash has moved during the quarter. So I understand there would be the impact of the dividend sale. So if you could just walk us through how the Yes, sure. So I mean, I'll give you a very high rundown. If you need any specific detail, you can reach out to our investorization team. Our opening cash was INR276.31 crores. If you recall, we paid a dividend of almost INR9,000 crores. We had generated an EBITDA of INR 3,114 crores. There is slight working capital change about INR100 crores negative, primarily locked in debtors which we should recover this quarter. Our CapEx and tax put together was about INR1300 crores, which essentially translates into a free cash flow after CapEx and working capital change of INR2,100. And as I said, that 2,100, 9,000 return payout and there was some operational bias period INR 200 crores translating into closing cash of INR 21,000 crores. Okay. Thanks, Seth. Also on the capital process, while you mentioned the project capital is $100,000,000 What would be the total remaining maintenance capital for the year? So we guided the growth in the range of about 330,000,000 and out of that about 140,000,000 was growth CapEx. So about 190,000,000 was sustaining CapEx. Looking at where we stand in quarter 3, we should be able to hold this CapEx guidance. Thank you. So my first question was with respect to the interest cost that has moved up sharply in this quarter. Has there been an uptick in this customer? And what are our plans on the balance sheet relative to the future? So if you recall, dividend payout was done in this quarter. And something I've been mentioning also in the previous quarter that while we have quite significant, in fact, INR21,000 crore odd cash and investment equivalent, they may not necessarily be liquid. And basically to manage the temporary cash flow mismatch, the borrowings were taken. Borrowings as on December end is slightly above INR10,000 crores, which is which primarily was done to support the temporary cash flow mismatch. Now going to what extent we are open to lever our balance sheet. If you look at our ability to generate cash, we probably don't need any debt. So any debt which will be taken would only be for a purchase where I don't have liquidity to support. I would like to leave it here. So my second question is with respect to your expansion programs from 1,200,000 to 1,350,000 tonne. So where are we in terms of those plans? So right now, we are totally focused on first fortifying that 1,200,000 tonne attainment. So that is the 1st milestone. At the same time, we are on the drawing board to do the life of mine planning, which should be which should set us up for 1,300,000 tonne. To give you some supporting numbers, we are currently running in quarter 3 at about 10 kilometer per month development mine development rate. And if you have to achieve 1,350,000 tonne, we have to transit to about 13 to 14 kilometers per month of mine development rate. So as we stand today, we are discussing with various business partners how do we achieve this 14 kilometer development rate, which will in a way go to support 1,300,000 tonne, but that will come only after we attain our goal of 1,200,000 tonne MIC production first. Got it. If I may squeeze in one question, I know one time expense you mentioned was about $20 What would be the actual number for that in the interest? Yes, it would be about 16 crores. 16 crores that are investing on the CEC? Sorry, it would be about INR 35 crores. INR 35. That's in between the C3 numbers. That's okay. The next question is from the line of Ritesh Shah from Investec. Please go ahead. Hi. Thanks for the opportunity. I have two questions. One is for Swayamp sir. Sir, when you indicate when you look to balance growth, CapEx, services, consulting cash, can you explain how we are looking at balances in the 2 variables? And just a related question over here, at what stage are we for Gujarat's 300 80 smelter which has been announced and commissioning earlier was by 2022 and has the refinery project in Rajasthan? So that's the first question. Sure. So the simplest way to balance Ritesh is change your hurdle rate. It automatically helps you refinance. That's what we did when we're hit by COVID. But I also mentioned back in quarter 1 that we are very clear anything to do with growth of 1.2%, 1.35%, 1.5% remains untouched. But there were other CapEx, which we basically relooked at. Looking at the fact that we are getting back to normal, we as management team would also look at going into 2021, should we be holding such a high ARPU rate or should we look at it? And that's something we would look to do going into March or April. On Gujarat's letter, the current stage we are in is after signing up the MoU with government of Gujarat, we have hit the ground on community investment. We are also going through the process of environmental clearance. At the same time, the design engineering work is on. And within very short time, post board approval will be coming to you and inform you regarding the project, okay, and the deliverables. As far as the timeline is concerned, that is given and that's in today's format with R22. Yes. And as part of this validation, we will also know exact return of this project, which would allow us to take a final decision. Thank you. The next question is from the line of Rahul Jain from Systematic Shares. Please go ahead. Yes. Hi, good evening. Rahul here. So I have two questions. One is that you mentioned that you've got some EC approvals for increasing mine plan in SK and also digital data structures. So are we going to pick up these projects soon or just for future backup? Okay. So as far as my Jawahar wants, it's immediately because as we go towards 1,200,000 tonnes, some of the mines, the reserves will slowly getting exhausted and the other mines have to ramp up. That is 1. 2nd is rate balancing between different mines will call for increasing ore productions in different mines. Jawahar is the 1st target where next year we should see an uptick, uptick on the ore production. That's why the environmental clearance is there, and that will be useful. Similarly, in Janderia, once we go to the MIC level of 1,200,000 tonnes, automatically the smelting requirement goes up. And wherever the balance was not permitting, we have taken the clearances, which will impacting in Chandiryas smelter. And then R. D. Rajpurathariva also has got a 2,000,000 tonne clearance. We'll try to maximize up to 2,000,000 tonne in RD Mine as well. Right. So the government is proposing to change mining laws. So I can I got 2 proposals that come to mind the capital, non capture removal and second is the cancellation of the 500 stream licenses? So do we how do we look at it as an opportunity or do we think we get impacted by these proposals which are there? So as of now, all our capture mines, status of the mines which are there prior to promulgation of the changes, they are not impacted. There are on that you are perhaps referencing to 10A 2B cases, which are on the previously allotted. So that is we are already under the jurisdiction of legal jurisdiction, and we would wait for the court verdict on how that will apply on the newly made changes on tenant details. Could you tell us what exactly what detail for this? It is in the sense there were mines for which the PL were granted beforehand. And then there were confusion after the 2015 amendments came whether those PLs are valid or not valid. We have a certain view, whereas some of the relevant agencies have another view. So those are depending upon the judgment that we get, we will proceed. It's under the legal review now. So you're saying it will not get impacted by the amendment or it will remain circulated? Is that the right way to communicate? That's what is our firm belief. We take the last question, a follow-up from the line of Indrajit Agarwal from CLSA. Please go ahead. Hi, sir. Just a question light on zinc demand in India? How has it changed in the past quarter? And how do you see it going forward, domestic zinc demand? Correct. So post COVID, the domestic zinc demand is increasing, and it is also accompanied by the strong turnaround in the steel sector. The steel companies are looking at posting best ever results in the quarter 3. That is what we expected to post. That should actually show that the wind is in our favor in consumption of zinc domestically. And we are seeing that in the market that customers have come back to us in bigger quantities, and we are able to now get able to touch newer customers who are looking for our metal. And just to add, if you look at the entire spectrum across infrastructure and also what is expected in terms of upcoming budget, we think there is lot more positivity of the infra push which will translate into our purchasing demand. Thank you. We now hand the conference over to Ms. Shweta Dharura for closing comments. Thank you, everyone, for joining us on the call today. For any follow-up questions or clarifications, please feel free to reach out to investor relations team. Thank you. Thank you. Ladies and gentlemen, on behalf of Infosansi, this concludes this conference.