4th August, 2017 I By Varsha Meghani
Hindustan Zinc - India's Super 50 Companies 2017 by Forbes India.
What makes it Super
- Access to high quality grades of ore lends it a ‘natural’ advantage
- Tight control on costs helps it retain it healthy margins
- Quick adoption of the best-in-class technologies
- The integrated nature of their operations adds to their cost advantage.
A 100-tonne truck emerges
from pitch darkness and rumbles past us. Outfitted with helmets, rubber boots
and fluorescent overalls, we’re seated in an SUV, waiting to plunge into the
same abyss. Around us hills dot the dry landscape.
We’re at the mouth off the
Sindesar Khurd, an underground zinc-lead mine operated by Hindustan Zinc in
Dariba on the outskirts of Udaipur in Rajasthan. About an hour ago, a blasting
had been carried out in the 500-metre deep mine. The truck that crossed us had
scooped up the broken rock and was on its way to a nearby mill where the
zinc-lead ore would be separated from the waste.
This extraction of zinc and
lead - and silver as a by-product–is a thriving business; one that has
catapulted Hindustan Zinc from deep losses, when it was a government
run–entity, to huge profits after Anil Agarwal’s Vedanta Ltd (formerly Sesa
Sterlite) bought its first tranche of the company’s shares in 2002. Last
fiscal, the company – 29.5 percent of it is still owned by the
government–reported earnings before interest, tax, depreciation and
amortisation (Ebitda) of Rs. 9,734 crore on revenues of Rs. 18,642 crore.
Meanwhile, cash reserves stood at Rs. 16,065 crore. This, despite declaring an
interim and special dividend totalling Rs. 27,157 crore–the highest ever paid
by an Indian company in a single financial year claims the company, which
trades at Rs. 274 on both the BSE and the NSE (as of July 14). “When our
balance sheet became very fat, we decided to share the money with the
government, our shareholders and us”, jokes Sunil Duggal, CEO, Hindustan Zinc.
Despite the huge outflow, the
company’s expansion plans remain undented. With a current output of 1 million
metric tonnes per annum (MMTPA) of refined metal, Hindustan Zinc is the second
largest Zinc producer in the world – after Anglo-Swiss mining giant Glencore –
and seems well on its way to achieving a targeted output of 1.2 MMTPA by
FY2019. It is among the world’s least expensive zinc producers, and also
Vedanta’s most profitable unit. In India, it enjoys a near-monopoly (the only
other Zinc producer, Binani Zinc, produces 0.03 MMTPA), meeting 80 percent of
the domestic demand for the metal that is largely used as a coating to protect
steel from rusting. Clearly, Duggal, 55, has much to smile to about.
Our SUV makes its way into
the mine. Floodlights blinking, we drive through the mine passages, first 300
metres underground and then 200 metres further. The air becomes heavy and the
darkness is interrupted by light bulbs hanging from the rock ceiling at
intervals of a few metres. Jumbos–large vehicles that blast through the ore
body–navigate the rocky terrain, making way for our car.
Huge mineral wealth is buried
deep within those rocks. In fact, some of the richest ore bodies are found in
the five zinc–lead mines owned by Hindustan zinc spread across Rajasthan. At
Sindesar Khurd, the ore grade–the concentration of mineral within an ore–is 6
percent. While at Rampura Agucha–the company’s flagship mine, and also the
world’s largest zinc-producing mine – the ore grade is even higher: “The open
cast pit mine at Rampura Agucha has a grade quality of 13 percent, while the
underground mine has a grade of 14.1 percent. Globally the average is about 3
percent”, says Ashutosh Somani, metals and mining analyst, institutional equities
research, JM Financial.
This natural bounty has
ensured that Hindustan Zinc maintains its advantage on the cost of production
of zinc. At around $800 per tonne, the company’s cost of production is around
30 percent lower than that of its global peers, says Andrew Thomas, principal
analyst, zinc markets, at Wood Mackenzie, an Edinburgh-headquartered research
consultancy.
Remarkably, Hindustan Zinc
has been able to maintain this cost over the years; around 15 years ago, at the
time Vedanta stepped in, the cost was the same. What was different, however,
was the price of zinc on the London Metal Exchange (LME). Back then it hovered
around $800 to $850 per tonne, says Duggal, which meant that the company was
largely loss making. So much so that in 2002 when Vedanta bid for a controlling
stake in Hindustan Zinc, it encountered little competition; it bought a 26
percent stake from the government for Rs. 445 crore, while another 20 percent
was acquired from the public. (In 2003, Vedanta acquired an additional 18.9
percent stake from the government for Rs. 324 crore, taking its total ownership
in Hindustan Zinc to 64.9 per cent.)
Around the mid–2000s a China
driven commodities boom began, with the prices of oil to iron ore and zinc
shooting up. Hindustan Zinc’s profit followed suit; in fact its margins only
became fatter as its cost of production remained steady.
Today, zinc prices move
between $2500 to $2700 per tonne on the LME. “We never look at commodity cycles
when looking at production,” says Duggal, pointing out that even at about $1400
per tonne – the lowest zinc prices have sunk to over the last five to six
years–Hindustan Zinc still pocketed a good margin, given its $800 per tonne
cost of production. Even at the height of the global financial meltdown in
2009, when zinc prices plummeted to around $1100 per tonne and prompted
producers worldwide to shut mines or halt production, Hindustan Zinc made
money. “So that [global zinc prices] is not a topic for me. The only topic is
first to control costs and second to increase volumes”, adds Duggal.
Apart from the low cost of
labour in India, Hindustan Zinc’s access to abundant, and high grade, ore is
just one of the factors that enables it to maintain its low cost of production.
After all, these resources were available to it even when it was an unprofitable,
state–run company.
In fact, at the time of
Vedanta take over in 2002, Hindustan Zinc produced only 0.2 MMTPA of refined
metal. “Globally, we were nowhere,” says Naveen Singhal, president and
director, projects, at Hindustan Zinc. “But our chairman’s [Anil Agarwal],
vision was to make the company a global first or second.”
Upping production was key to
that vision. And so from 2003 to 2005, Hindustan Zinc undertook what Singhal
describes as “Phase 1 of the expansion journey, targeting 0.5 MMTPA of ramped
up capacity. The challenge however, was to keep capex costs low so as to make
the project financially viable, given the low zinc prices at that time, says
Singhal. Also, project delays had to be avoided so as not to get caught in a
spiral of interest payments. “We engaged the best of contractors with the right
technology and right infrastructure practices so that they could do our project
right”, he says.
In addition to mine
expansion, zinc and lead smelters, and the company’s first thermal capacity
power plant were built. “Our smelters are power intensive. If we didn’t have a
power plant, firstly our costs would be higher and secondly getting reliable
power would be an issue. Without reliable power, we can lose millions of
dollars in a day”, says Singhal. This integrated project was completed in
record time and at a cost 40 percent lower than the global benchmark, because
of the right technology partners, as well as the low cost of labour that India
enjoys, he adds.
By the time the project ended,
metal prices started soaring and Hindustan Zinc began raking in the profits.
Hungry for more, it eyed large volumes, targeting 0.8 MMTPA of capacity
expansion by 2008 as part of Phase 2. This time too, the company ramped up not
just its mines, but also the capacity of its smelters and power plants. “Each
time we spent money, we spent it in all three areas”, says Singhal. The fact
that Hindustan Zinc’s mines and smelters and power plants are located close to
each other reduces transportation costs, while the power plants meet 94 percent
of company’s energy needs, says Somani. “The integrated nature of their
operations adds to their cost advantage,” he says.
Currently, Hindustan Zinc
produces 0.9 MMTPA of metal and is on track to meet its next target of 1.2
MMTPA by FY 2019. As part of this phase, in 2012, it found that the open pit
production at Rampura Agucha, responsible for 70 to 85 percent of the total
output was tapering. Exploration studies revealed that a kilometre beneath the
earth’s surface the reserves were still rich. Swiftly, the management
implemented a transition from open cast mining to underground mining. Here too,
investments in world–class technology, including the building of 1 km–long
shafts at Rampura Agucha and Sindesar Khurd mines, are underway to increase
efficiencies. Digital technologies, such as wifi infrastructure within their
mines, are also being built to connect their operations and resources in real
time. “It is the next generation of underground mining,” says Duggal.
The challenge, however, will
be to compensate for declining output from open cast mining, while still
meeting the 1.2 MMTPA target. This is important for retaining volume and,
therefore, cost advantage. At present, the company produces 0.4 MMTPA of metal from
underground mining operations. “We are not going from 0.9 to 1.2 MMTPA, but
from 0.4 to 1.2 MMTPA. It is a three-fold expansion,” says Singhal, adding that
over the last 10 to 12 years the company has spent more than $3 billion on
expansion work.
As we drive through the mine
passages, making our way back to the top, the air becomes lighter. Metres away
from the mouth of the mine sunlight floods into the SUV. The full extent of the
riches that lie beneath the surface become astonishingly clear.
