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Published on: May 15, 2022, 3:38 p.m.
Disinvestment blues
  • Misra: We are committed to decarbonise our mining operations

By Lancelot Joseph. Executive Editor, Business India

In the last three years, the government of India has set up ambitious divestment targets. However, it has failed to achieve and the target for FY23 has been slashed by over 55 per cent to Rs78,000 crore. So far, it has achieved the listing of Life Insurance Corporation of India (LIC) to meet the target and is mulling the divestment of Rs39,000 crore of  Hindustan Zinc Ltd (HZL).

“We welcome the government's decision to offload its residual stake in HZL. In the last two decades, HZL under Vedanta has emerged as a major player in zinc, lead and silver. We are confident that the government will be able to derive significant value from this stake sale. We are comfortable with our current holding in HZL and will wait for the government to come up with its offer for sale and then decide to participate, as per our capital allocation policy", explains Anil Agarwal, chairman, Vedanta group, which holds 64.9 per cent, and the government 29.5 per cent in HZL. However, whether the stakes will be released in one go or in tranches will be the government’s call. 

The government has filed applications separately for ending the arbitration. A senior official from the government said it would sell the balance stake in the company “at an opportune time”. The Supreme Court (SC) had on 18 November, 2021 allowed the Centre to disinvest its residual stake in HZL in the open market, citing that HZL had long ceased to be a government company.

In 2002, Vedanta (earlier known as Sesa Sterlite) had bought a 26 per cent stake in HZL; it exercised the first call option in 2003 and acquired an 18.9 per cent additional stake in the company. Vedanta later acquired another 20 per cent stake in HZL through an open offer, increasing its shareholding to 64.92 per cent. To acquire the government’s remaining 29.5 per cent share in HZL, it had exercised the second call option in 2009, but this was rejected by the government. Following this, Vedanta initiated arbitration proceedings against the government. 

North bound prices

Right now, HZL is in a sweet spot. Globally, the price of zinc has been on an upward trend. Soaring crude oil, natural gas and coal rates have forced major European producers to cut output. Currently, the price of zinc is ruling at $3,540 per tonne, up 19 per cent year-on-year (Y-o-Y) from $2,965 in May 2021. In the previous year it had grown by 50 per cent from $1,975 in May 2020. The increase followed a two-year decline of 45 per cent from the ten-year high of $3,500 in 2018.

Zinc prices are likely to rule at multi-year highs in 2022 in view of high energy costs due to the Russia-Ukraine conflict that continues to affect crude oil, natural gas and coal supplies. According to Dr Heinz-Jürgen Büchner, Director of Industrials and Automotive, IKB Deutsche Industriebank AG, zinc prices will rule at around $3,500 a tonne by the middle of this year, with a fluctuation band of $500 either way. Research agency Fitch Solutions Country Risk and Industry Research (FSCRIR), a Fitch Unit, stated it had raised the 2022 price forecast to $3,500 from $2,900 a tonne. 

In its report, Fitch Solutions states that the metal has averaged $3,688 year-to-date. “At these levels, zinc is close to reaching its all-time high of $4,442/tonne reached in 2006. Our 2022 price forecasts imply that we expect prices to stabilise and weaken from here on in the coming months, despite remaining elevated compared to historical standards.”

In October last year, the World Bank, in its commodity forecast, said the average price of zinc will fall to $2,400 in 2022 against $2,700 at the end of 2021. But the Russia-Ukraine conflict has changed market fundamentals. 

According to Fitch Solutions, the global refined zinc output continues to be pressured, as major producers Nyrstar and Glencore have announced a cut in production on the back of the energy crisis in Europe. Energy costs have soared since February this year, when Russian troops entered eastern Ukraine. Prices of energy commodities such as crude oil, natural gas and coal have been swinging wildly over the past month. Though crude oil and natural gas have gained, coking coal has dropped, after having topped $500 a tonne at one point in time.

Zinc is used in numerous common products, including mobile phones. The cost of renewable energy projects and some electronic products may increase as key metal prices go up. The metal – used in die-casting alloys, castings, chemicals, medicine, fertiliser, paints, batteries and other products such as brass – has gained since the beginning of the year. 

“The upward price drivers for zinc are as follows: disruption of zinc concentrate supplies due to the suspension of large zinc mines as a result of the Covid-19 pandemic. Persistent environmental restrictions in China and mine closures and disruptions in other countries,” explains Arun Misra, CEO, Hindustan Zinc Limited (HZL), headquartered at Udaipur in Rajasthan. It is a Vedanta group company, which is one of the world’s largest and India’s only integrated producers of zinc-lead and silver and enjoys a 78 per cent market share in India.

The company is self-sufficient in power with captive thermal power plants and has ventured into green energy by setting upwind power plants. HZL is an industry leader with over five decades of mining and smelting expertise. The company is a fully integrated player that emphasises providing holistic value to its stakeholders.

In January 2022, Misra was elected as the new acting chairman of the International Zinc Association (IZA). He is the first Indian and Asian to hold the position of acting chairman of the IZA, a non-profit organisation that represents the global zinc industry. IZA members produce 60 per cent of global zinc and 80 per cent in the Western Hemisphere.

“Being the industry leader, Misra has a deep understanding of the industry and will accelerate IZA’s efforts towards increasing consumption of zinc globally and making India a self-reliant market for commodities, specifically zinc. He, along with other members will strive towards addressing the concerns of the industry and underline the significance of zinc in crop nutrition, infrastructure, and human health,” emphasises Rahul Sharma, director-India, IZA.

Stellar performance

In April, HZL announced its full year ended March 2022 results. For the full year, HZL had the best ever mined metal production of 1,017 kt, up 4.6 per cent Y-o-Y. The one million mark was crossed for the first time owing to higher ore production across all the company’s locations. For the full year, overall refined metal production was 967 kt, up 4 per cent Y-o-Y on account of better plant and concentrate availability. Silver production was 8.3 per cent lower Y-o-Y and dropped to 647 mt in line with the lower lead metal production and reduction of silver WIP.

For the full year, revenue from operations was Rs29,440 crore, an increase of 30 per cent, led by higher zinc volumes and LME prices while being partially offset by lower lead and silver volumes. The cost of production of zinc before royalty (COP) was $1,122 (Rs83,511) per tonne, up 17.6 per cent. The COP was affected largely by higher coal prices and input commodity inflation and partially offset by higher volumes, better sulphuric acid realisations and improved recoveries.

The operating profit (EBITDA) for the full year was Rs16,289 crore, up 38.8 per cent. The rise was primarily due to higher zinc and lead LME prices, higher premiums as well as higher silver prices. Finally, the bottom-line net profit for the full year was Rs9,629 crore, up 20.7 per cent. The company paid a total of Rs7,606 crore in dividends and repaid debt amounting to Rs4,355 crore. 

“We have a strong balance sheet and remain a cash rich company with net investments of Rs17,966 crore. HZL delivered its best-ever annual mined metal production; it touched the record one million tonne mark this year. Our production of refined metal was also the highest ever. With the exit run-rate for refined metal at 1.2 mtpa, we are fully geared for another stellar performance this year. Our focus is to produce more and more of world-class value-added zinc alloy products with the use of the latest technology and equipment. We are committed to decarbonise our mining operations and deliver on our ESG road map to achieve Net Zero by 2050,” says Misra.

“With stringent cost and cash conversion discipline, we continue to deliver industry leading returns, while investing towards a sustainable business. With ongoing asset optimisation, integration initiatives as well as proactive measures towards combating input commodity inflation, we will continue to produce essential resources for the world, thereby create long lasting value for all stakeholders,” adds Sandeep Modi, Interim CFO at HZL.

“In the total cost bucket, coal used to be 25 per cent to 28 per cent historically but this has risen to 35 per cent today. During the quarter, the domestic coal situation related to domestic linkage coal materialisation did not improve, and HZL received around a mere 3 per cent of coal from Coal India. Despite the pressure, the cost of production was delivered by keeping costs under control on account of the higher volumes, operational efficiencies and other key operating parameters such as recovery,” adds Modi.

“We have embarked on strategic hedging via zinc forwards for approximately 15 per cent of our volumes. As the situation with coal and LME is fast evolving, we continue to monitor the same. So, we are flexible on this account and play a balancing act and use this as a protection mechanism. We will continue to evaluate the situation for the benefit of stakeholders. In terms of coal security which is essentially availability of coal in total to run our operations smoothly, we have taken a proactive approach and secured supply from a mix of imported coal and linkage coal, which is domestic supply, and are overall at close to two months inventory. Coal is largely sourced from South Africa, Indonesia, and Australia. We have more than 1 million tonne backlog of linkage rakes from Coal India. Once it gets materialised it will not only help coal security but also cost,” explains Misra.

“We remain positive on HZL given its presence at the lower end of the global cost curve facilitated by high grade captive mines sufficient to meet requirements for decades, 100 per cent captive power plants, sizeable scale, diversified revenue stream with increasing contribution from silver sales and a strong balance sheet and high dividend pay-out,” says Ashutosh Somani, analyst at JM Financial, adding that, “consent to establish a 30 kt plant has been obtained by Hindustan Zinc Alloys, while revamping of Rajpura Dariba Mill for 1.1 mn tonne is underway – commissioning is expected by 3QFY23. The company ranked in the top 100 global companies by Global Sustainability Magazine and has received board approval to undertake a long-term captive renewable power development plan up to a capacity of 200 MW. Net cash as of 4Q stood at Rs17,000 crore – Rs40 per share and the company declared a dividend of R18 per share during FY22.”

“HZL managed costs well, as COP of zinc ex-royalty declined 1 per cent q-o-q to $1,136/tonne despite increase in coal cost. Approximate 1 mt linkage (coal) volume is in backlog which will be received in the future, helping to reduce power cost,” points out Ashish Kejriwal of Centrum Broking. 

“The company operated pyro smelter in both Zn-Pb mode to take advantage of higher LME zinc prices. It expects to sustain above 1 mt of refined metal production and ramp up the 30 kt zinc alloy plant,” suggests Amit Dixit of Edelweiss.

According to Vikash Singh of Phillip Capital: “HZL has impressed us with cost management as COP was 1 per cent lower despite low linkage coal availability (3-4 per cent), aided by volumes and by-products realisations. HZL has hedged 15 per cent of FY23 zinc delivery at S$4,000 plus. They reduced gross debt by Rs4,350 crore during FY22. Net cash stands at Rs17,870 crore.”

“HZL expects costs to remain on an uptrend q-o-q given the higher cost of imported coal. However, HZL expects to partially offset this increase from internal efficiencies and higher volumes in FY23. Management expects power costs to moderate on higher linkage coal supplies in the coming quarters and has foreseen the zinc cost of production to be in the range of $1,125-1,175/tonne for FY23E,” estimates Sumangal Nevatia of Kotak.

A disinvestment story

Clearly, HZL is a success story of a mining company from disinvestment till now. It has grown from about 0.20 million tonne per annum (mtpa) in 2002, at the time of disinvestment, to 1 million tonnes and is now moving ahead to produce 1.5 million tonnes of metal in the coming years. It produced just about 45 tonnes of silver at the time of disinvestment and now produces 570 tonnes of silver and is moving ahead to produce 1,500 tonnes of silver in the coming years.  

“We expect to achieve that goal in about two to three years. To accomplish this goal, HZL has taken up a two-pronged strategy: the first step is to optimise production from existing operations. To that end, we are already working with global consultants to help expand Zawar and Rajpura-Dariba mines’ capacities to 8 and 4 mtpa respectively. Along with production capacity optimisation, the company is also focused on the greenfield strategy, ie acquire new mining leases,” says Misra.

Technology and innovation are the key propellers of unprecedented growth at HZL. The increased use of cutting-edge technology and digitalisation, coupled with continuous adoption of best practices from across the globe has helped in delivering target run rates, while also staying at the lower end of the global cost curve. 

“We take pride in being a tech-friendly organisation and achieve this by way of proactively exploring and implementing the relevant technology. This involves sending executives to visit benchmark operations, conferences to widen their exposure and bringing in experts in the domain to guide them from time to time,” adds Misra, pointing out that the company has partnerships with reputable international institutes and global technology companies complementing their efforts as they augment their future-readiness to harness the opportunities of tomorrow.

 Drone technology

Currently, HZL uses drone technology, mostly for reconciliation and physical verification purposes. Another area where the company has plans to use drones is for capturing digital imagery required to meet statutory obligations. Based on requirements, drone technology is used in underground (UG) mines for the scanning of stopes, drives and ore passes. This gives HZL an insight in a short time, something not possible to get with manual intervention which would take much longer. 

The digitisation of mines is another element and remains a key goal for HZL, especially since the process offers the scope to achieve a 10 per cent reduction in the cost of production, as well as enhanced productivity by 10 per cent and increased metal in concentrate (MIC) by enabling the company to take timely and data driven decisions. 

“This has enabled us to track underground assets, monitor the performance of heavy earth moving machinery (HEMM) for the UG mining fleet, enable tele-remote operations of drills and automated drilling during shift changeovers. It also enables online health monitoring of critical assets, the integration of various control system data to get online overall equipment effectiveness (OEE), process score cards, AI/ML based process predictions, advanced process control at mills to get 1 per cent additional metal recovery, centralised monitoring of ESG parameters, etc,” says Modi. So far, HZL has invested $12-15 million for high-end digitalisation of its mines, setting a Wi-Fi network at two of its mines – Sindesar Khurd and Rampura Agucha – and roughly 70-80 per cent of the work has already been completed.

“The collaboration centre has given us greater visibility and intelligence about operations and processes for making informed decisions. A team of data scientists keeps developing various analytical dashboards, reports and condition-based maintenance (CBM) modules to help the operations team improve performance by taking the right decision at the right time. I personally think there is a huge scope to identify hidden potentials by advanced analytics, and this year we are working on it,” observes Misra talking about ‘Drishti’ that digitalises HZL’s mines to provide greater visibility and intelligence in order to make informed decisions. 

“With its objective to increase the operational equipment effectiveness by 20 per cent and ore-to-metal index by 2 per cent, Drishti will lead us to achieve global mine productivity benchmarks. So far, we have implemented this programme at Rampura Agucha and Sindesar Khurd mines. This year, we have added many modules to it which include integrations of different systems, advanced process controls, AI/ML based data analytics, use of Internet of Things (IoT) technologies, remote monitoring and control,” says Misra talking about investing in technology infrastructure, including high-bandwidth underground wireless network, IoT and advanced analytics to monitor, control and operate their mines in real time from a central control room.

With their North Star project, a data mining, visualisation and analytics tool, HZL is looking at unlocking the potential of big data analytics using 10,000-plus hours of mining as well as smelting operational performance parameters. “This platform, developed in-house, offers an intuitive user interface as well as smart mobility features to put business information at the fingertips of those who need it. HZL’s business managers now have access to real-time insights to a variety of factors, such as production, procurement contracts, consumption, inventory, and spending and an array of historical analyses, benchmarking, and visualisation options,” discloses Misra.

HZL is one of the first mining companies to use battery electric vehicles (BEV) in UG mining. The company has signed an MoU with Epiroc Rock Drills for battery electric vehicles, which shows HZL’s dedication to ensuring smart, safe and sustainable operations and its belief that the onus to push for sustainability-driven business solutions is on the company. 

Battery electric vehicles

“As part of this belief, the company sought to introduce battery electric vehicles in underground mining via the MoU with Epiroc. This strengthens its commitment to environment-friendly and responsible mining as well as efforts to reduce carbon emissions and achieve carbon neutrality as set out in the Sustainable Development Goal for Emission Reductions for 2025. The partnership will enable HZL to introduce a fleet of highly efficient battery-powered equipment in the place of diesel-powered equipment,” says Misra talking about HZL which has also signed an MoU with the Normet Group for SmartDrive vehicles that will help to significantly reduce carbon emissions and save a huge amount in HSD (High-Speed Diesel) and its maintenance. 

“We believe that safety, sustainability, innovation, and technology are an integral part of business operations in the new age. This conviction doubles up as a robust foundation for the pursuit of sustainable industrial partnerships to help us improve individual efficiencies and expertise. This transition will help in terms of HSD (roughly three lakh litres of HSD savings per vehicle) and vehicle maintenance-related costs,” says Modi.

HZL is revamping the RD mill to match beneficiation to production capacity and to improve metal recoveries which will be completed in the current financial year. The company is also working to commission a new beneficiation plant in an 18-month timeline at Zawar in line with the expansion plan to bring the location’s total beneficiation capacity to 8 mtpa. “The capex for expansion is estimated at $125-150 million and will be deployed at the alloy facility, for mill revamping and at the solar renewable energy power project,” sums up Misra.

“For us, 1.35 million tonnes are the next stepping-stone for the onward journey to 1.5. And 1.5 would require a few more new mining blocks. We are fully prepared to acquire new mining blocks and developing them whenever the same are offered to us. Also, globally, we would like to have some acquisition or some merger somewhere to get 0.5 to 1 million-tonne additional capacity so that together in the world, we should be at least a 2.2 to 2.5-million-tonne kind of producing company globally. Based on various studies, the company is considering capacity expansion in two stages: in the first stage, capacity will be increased by 1.35 million tonnes of metal per year. In the second stage, we plan to further increase it by 1.5 million tonnes of metal per year,” adds Misra.

Lastly on the outlook for FY23, both mined metal and refined metal production at HZL in FY23 is expected to be higher than last year. Mined metal is expected to be between 1050-1075 kt; refined metal production in the range of 1000-1025 kt. Saleable silver production is projected to be between 700-725 tonnes and the cost of production of zinc in FY23 is expected to be in between $1,125-1,175 per tonne. 

Industry experts say it’s likely that the price of zinc will continue to rise amid a supply crisis in Europe. The research agency expects a strong growth in zinc mine supply resulting from expansions and restarts in key producers, including Peru, Australia and Canada. This will eventually boost downstream refined zinc production later in the year. ‘Indeed, this has already started to play out with an increase in zinc treatment and refining charges in China, as a result of better ore availability,’ says an FSCRIR report.

Meanwhile, in the long term, zinc prices are likely to head south as production is projected to outstrip consumption growth, which could be subdued. And HZL, because of its keen strategic approach of constant evolution in an ever-changing business environment, has a powerful advantage that drives its growth and expansion.

ESG as a goal

HZL is built on principles that are inherently sustainable. “We believe in driving long-term sustainable economic development and value creation for our stakeholders by protecting the health and safety of our people and community, minimising the environmental impact of our operations, respecting human rights, and sharing benefits with the community,” says Misra whose endeavour for environment-friendly production begin with HZL’s vision for Zero Harm, Zero Waste and Zero Discharge. 

To integrate the ESG vision into business decisions and long-term planning HZL has taken a holistic view in setting the eight Sustainability Goals 2025 which are aligned to the UN Sustainability Global Goals.

HZL has a well-defined water management system in place which leads it to continuously identify opportunities for water access, reuse, efficient use and responsible wastewater management. The company has undertaken several water conservation and harvesting initiatives for reduction in freshwater intake. Establishment of 60 million litre per day (MLD) Udaipur STP, integrated effluent treatment plant, air cooled condensers, dry tailing plant and rainwater harvesting structures are some of the key initiatives towards managing water resources. Due to continued efforts the company is certified as a 2.41 times water positive company and there is continual reduction in specific water consumption.

“All our operating units are maintaining zero liquid discharge across locations. Sourcing renewable power internally has enabled us to set up 40 MW of solar power in our wastelands which has enabled resource utilisation and helped us to avoid carbon emissions. Taking a step closer to achieving carbon neutrality, HZL signed an MoU with global manufacturers for ‘Zero Emission and Sustainable Mining’ by introducing Battery Electric Vehicles (BEV) in underground mining”, identifies Misra. 

This will help HZL explore the possibility of introducing battery operated vehicles in underground mines which will help reduce carbon emissions, enabling the mine operations to become more environment friendly. HZL has committed to invest $1 billion towards electrification of vehicle over the next five years. Recently, the board has also approved the proposal for entering a long-term group captive renewable power development plan for up to 200 MW of capacity which will lead its pathway to Net Zero.

Owing to such efforts, HZL was ranked fifth globally in the mining and metal sector, in the Dow Jones Sustainability Index (DJSI) 2021. These rankings are an affirmation of HZL’s conscious efforts towards achieving all-encompassing sustainability across its operations and practices. ‘However, HZL realises that this is only the beginning and vows to continue its ESG journey with more vigour and to set new benchmarks in sustainable operations.’

The rainwater harvesting structures at the company’s Rampura Agucha Mine (RAM) are another noteworthy water conservation effort initiated by Hindustan Zinc. These structures enable rainwater harvesting and help replenish water within local watersheds to help HZL further reduce freshwater consumption. Furthermore, the fumer plant will help eliminate Jarosite generation from one of the Hydro Zinc smelters and ensure that all the slag generated is used in cement industries. To ensure zero waste, the fly ash generated in power plants is sold to the cement industry.

One result of the technological advancements in energy conservation is that the zinc smelter Debari has revamped the cell house and eliminated current losses through electrolytic cells by successfully replacing 600-plus concrete cells with poly concrete cells. As a result, the power rating has improved. Additionally, the turbine revamping project is certified as a carbon reduction project by VERRA (the world’s most widely used voluntary GHG program) resulting in a decrease of 270,000 tCO2e per year.

HZL has also built India’s first ‘dry tailing plant’ at its Zawar mines in Rajasthan. The dry tailing system enables recirculation of over 80 per cent of the process water in tailings, quicker rehabilitation, and restoration of the storage site after mine closure, and guaranteed water re-availability for future usage.

All this is in line with Prime Minister Narendra Modi’s vision of making India a ‘Net Zero emissions’ country and HZL has set an ambitious target to achieve a 40 per cent reduction in its carbon footprint by 2030 and to achieve carbon neutrality by 2050.

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