Buy Hindustan Zinc; target of Rs 144: A C Choksi

We expect the zinc volumes to remain flat ~764kt for the year on the back of lower ore grades from Agucha and rampdown of Vizag. Lead volumes to increase to ~142kt.We expect the silver volumes at 342t. We maintain our coverage on Hindustan Zinc Limited with a BUY Rating and target price of 144 giving it an upside potential of ~14% from current price of 125. It is currently trading at an EV/EBITDA of 5.8 (x), EV/Sales of 3.1(x) and P/E of 9.6 (x) its FY 12 earnings. We have valued Hindustan Zinc at an EV/EBITDA of 6.0 (x) to its FY 13 E EBITDA 64,651 mn.

Key takeaways from our interaction:

• Open cast mining in Rampura Agucha is planned upto 372m, currently at 220 m, beyond that it will go underground, capacity to remain at 6.15mt. OC strip ratio at its peak (1:13/1:14). Planning a vertical shaft at Agucha, currently using a spiral ramp. UGCOP to remain at present OCCOP levels.
• Geologists have found in Andhra Pradesh, patches of rock having similar characteristics to that of Udaipur and some mines in Australia.
• Exploration budget at $10mn each year, focus on addition to R&R.
• Lead volumes to ramp up to 110-115 kt integrated and 150kt total. Lead ramp up to 185 kt in couple of years.
• SK mine silver ppm is targetted at 130 ppm, overall mine life average at 180 ppm. Silver grade to improve as SK goes deep underground.
• Silver volumes to ramp up to 350 tonnes from integrated and 450 in total, balance through custom smelter.
• Capex at 15,000mn - 18,000 mn, including sustaining capex of 3,500 mn.
• No communication from the Government on 29.5% residual stake offer from the promoters.
• Kayar Underground mine is under progress; production is expected to start from FY14.
• Company expects final SC verdict on renewal of mining lease for Zawar in couple of quarter’s time. All other approvals are in place.