Zinc-Led Triumph: The HZL Mining Feat
By Binu Alex-Udaipur
17 Jun 2008 at 09:53 AM GMT-04:00
resourceinvestor.com
MUMBAI (CommodityOnline.com) -- During the pre- and post-Independence era, the “Iron Man of India” made headlines. In the 1990s, it was the turn of software code writers both onshore and offshore to put India on the global map at a time when much of the manufacturing industry was struggling to adjust from a protected environment to a competitive market ushered in by economic liberalisation. Post-2010, the spotlight will be on ferrous and non-ferrous metals. India is destined to be the third largest steel producer by 2013.
In the non-ferrous segment, the biggest news of all is that an Indian company is set to become the largest integrated producer of lead-zinc by 2010, even as global zinc and lead prices are moving only sideways.
As its CEO, M.S. Mehta says the market for Hindustan Zinc Limited's [NSE:HINDZINC] products are global and therefore it really goes by the dictum think globally and acts locally. Not many people might have expected the fortunes of Hindustan Zinc Ltd to dramatically reverse following disinvestment in 2002. But when it went into Vedanta Group's hands they nurtured it into a globally competitive lead-zinc integrated production company and not to forget the changes they brought in to the mining regions because of their corporate social responsibility (CSR) initiatives.
World output of refined zinc metal is forecast to rise by 6.4% to 12.06 million tonnes in 2008. Further significant increases are expected in China and India, where Hindustan Zinc's second 170,000-tonne per year capacity refinery at Chanderiya was commissioned in December 2007, according to International Lead and Zinc Study Group (ILZSG). This is the story of how Vedanta converted a run-of-the-mill PSU into a globally acclaimed and keenly watched company.
Disinvestment
In late 1990s when the Union government thought of disinvestment in PSUs several controversies erupted over which ones to be sold. In the case of HZL, which was operating in a non-core sector with no margins and decreasing zinc prices in international markets, government might not have thought twice. It put HZL on the disinvestment block. The rationale was to sell the stake of a zero debt PSU as continued operations for HZL at that point of time was thought as unviable especially with zinc prices witnessing a 14-year low. Any further delay could have lowered the company's valuation.
When Vedanta group took over the firm what they did was to bring down costs through efficient cost management. The cost was reduced mainly by utilising maximum capacity and also have captive power plants (CPP) installed at all the sites. After acquisition, the cost per unit was reduced from Rs 6.07/kwh to Rs 2.19/kwh. A 40 paisa increment in power can increase the operating costs by Rs 2,000 which can be fatal for viability.
Moreover, drawing power from the grid was risky because of the inconsistency. So power becomes a key component in all the mining and post-mining operations. Globally, the industries which used zinc as its main components were in glut. Consequently, the demand for zinc went down and down.
According to the International Lead and Zinc Study Group, world consumption of zinc, which went up 5.3% in 2000, fell 1.33% in 2001. The same group now says that zinc and lead are likely to remain in surplus for 2008-09 periods although demand is expected to grow marginally.
“All these predictions are based on estimation that new plants, new mining capacity will come up as scheduled and none of the existing mines will close down. But we also know that a significant component of mining capacity is working in very high cost level operations. If the price drops below $2000, 10% to 15% capacity may also get knocked out,” says Mehta. He doesn't expect the fall of prices below the current level. But he also cautions by citing Lennard Shelf producing about a lakh tonne of lead and zinc together wanted to close down the plant in 2010 as the mine was coming to the end of its life.
Now the owners of the mine, Teck Cominco and Xstrata, announced that they might advance the closure to 2009 itself because they find the prices are not as per their expectations. As Mehta pointed out, most zinc and lead mines were dependent on management skills than the capacity. Demands were coming down and so many players were either shutting down their mines or lowering the capacity.
HZL's nearest competitor in India, Binani expanded its capacity only when the prices stabilised. So when a huge and sudden demand came in the form of economic boom in BRIC nations especially related to hosting Olympics in China HZL could match the requirement.
Besides, HZL has dynamically increased its exploration focus through a team of 40 geologists employing the latest geophysical, geochemical and GIS technologies and high speed deep drilling equipment. This has resulted in an addition of 110.7 million tonnes of reserves and resources, before depletion of 22.1 million tonnes, in the period from April 2003 to March 2008. As a company policy, only the CEO and the group chairman Anil Agarwal are authorised to speak. But the figures speak high of the growth of the company. In the entire south belt of Rajasthan, one can see HZL boards either in its producing capacity, its mines or its corporate social responsibility initiatives.
Visible Results
In 2002, when Sterlite Industries (Vedanta group) picked up 26% stake in the government-owned Hindustan Zinc for Rs 445 crore, its metal production capacity was 204,000 tonnes per annum (tpa) which grew to 754,000 tpa in May 2008. At the time of acquisition, HZL had three lead-zinc mines with a combined annual ore production capacity of 3.17 million tonnes. It also had three lead-zinc smelters with zinc capacity being 169,000 tonnes and lead being 35,000 tonnes. Currently, HZL is the only integrated primary producer of zinc and lead in the country and accounts for 80% of the total zinc production.
Sterlite acquired HZL when demand of zinc domestically was much more than production. Initially to meet this growing demand and till the new capacity became operational; HZL exported zinc concentrates to smelters outside the country and imported ingots. Primarily this decision was to keep intact a loyal market. HZL’s Special High Grade Zinc produced in its Hydrometallurgical Zinc Plant at the Chanderiya Lead-Zinc Smelter Complex is registered with the LME under the brand-name HZL SHG 99.995.
Its lead ingots are registered under brand name 'VEDANTA 99.99'. The Central Research & Development Laboratory of Hindustan Zinc is ISO 9001, 14001, OHSAS certified unit, and is listed in American society of Testing Materials' (ASTM) Directory of International Testing Laboratories and is Recognized laboratory from Department of Scientific and Industrial Research (DSIR).
When a mining company is confident enough to declare that it will become the numero uno in that sector, it catches worldwide attention. More so, when the company was once an unviable public sector unit. Normally, a PSU acquisition is marred by hangovers of job security, privatization fears, political interference and a host of other problems. But Udaipur headquartered Hindustan Zinc Limited is humble enough to admit that is faced none of these problems. In fact it says these problems turned out to be their strength.
HZL's sprawling office which looks like a palace may not be bubbling with activity but its mines and smelters are. They work to the full capacity 24 hours a day. The Vedanta group plans to take its total integrated zinc-lead capacity to 1,065,000 tonne per annum with fully integrated mining and captive power generation capacities putting in Rs 3,600 crores. This will make HZL the world's largest integrated zinc-lead producer by 2010.
This is a remarkable achievement for a company which had a turnover of Rs 1,470.48 crore at the time of disinvestment in 2001-02. Its 2007-08 turnover was around Rs 7,877.77 crore a compounded annual growth rate of over 32.28% in the six years since disinvestment. The total reserves and resources at March 31, 2008 were 232.3 million tonnes containing 27.5 million tonnes of zinc-lead metal. The reserves and resources position has been independently reviewed and certified as per JORC standard.
Volume growth from 200,000 to 750,000 tonne is the biggest driver in increasing the profit, according to the CEO. The second biggest driver is the increase in commodity prices. “Zinc prices used to be $750-800 five years ago and it is $2200 now. Last year there was a drop of about 17% in zinc prices and 11% appreciation of Indian rupee. Both are adverse for us in terms of sales realisation. Yet with increased volume we are able to maintain same PAT,” he said.
According to EMKAY Research, Mumbai Zinc had hit an all time high of $4,603/t (on November 24, 2006) before correcting by 52%. The metal closed at $2,207/t on April 23, 2008. Lead has been on a downtrend after hitting an all time high of $3,989/t on October 10, 2007 and has lost 30% from its peak. That goes on to prove that Vedanta group did not enjoy a prolonged period of high zinc-lead prices and if it has survived it is only because of intelligent management solutions.
HZL employs close to 6,400 employees, including about 1,750 executives from a position of 8,300 at the time of disinvestment. In February 2003, about 2,100 employees took the benefit of VRS scheme. Practically, barring a couple of people who came from outside, all the employees are the same PSU guys, according to Mehta.
“They are in charge of all the major positions. How do they see this change is important. In their times decision making was a long process. People did not have the courage or the power to take right decisions. Lot of energy used to get wasted in finding justification in taking some decisions. Today it is the other way round. Even if there is a mistake in taking a decision, they don't get hanged. Mistakes are part and parcel of any system. Out of ten decisions one can go wrong, so be it. We allow people to stretch out and reach out,” he said with beaming confidence.
Capex
Two brown field smelter projects, which will increase the production capacities of zinc and lead by 210,000 tonnes and 100,000 tonnes respectively, silver production from the current levels of approximately 100-120 tonnes per year to a level of approximately 500 tonne per year in the form of silver and silver bearing residue mostly from the Sindesar Khurd mine.
Primarily the zinc and lead will come from the expanded ore production capacity at the Rampura Agucha mine from 5 to 6 million tonnes per annum. Further, ore production at the Sindesar Khurd mine will be increased from 0.3 mtpa to 1.5 mtpa. HZL will also start mining activity at the Kayar mine, which will have a production capacity of 0.3 mtpa. The buck doesn't stop there. Vedanta's philosophy of having its own power, it plans to commission a captive thermal power plant with a capacity of 160 MW at Rajpura Deriba.
The zinc and lead smelters as well as the 160 MW captive power plant and the Rampura Agucha mine expansion will be completed by mid-2010. The expansions at the Sindesar Khurd and Kayar mines will be completed in phases by early 2012. It is the global competitiveness and the pricing that makes HZL a name to reckon. “Both commodities there are no local market. It is a global commodity. Whether you make in Australia and sell in India or vice versa, only the transport is the extra cost otherwise same count you can travel anywhere to anywhere,” Mehta said.
According to HZL annual reports, the change in technology and approach were the key factors in making the company what it is today. Asset optimization and least cost production played a major part. A culture of continuous innovation at the grass-root level, TCO, e-procurement, performance, contracting, etc. have also played big roles in the growth and transformation.
Clean green technology, adopted by very few mines in the world due to not only its capital expenditure but also its operating costs, is used extensively in HZL plants. The state-of-the-art environment friendly. “Jarofix process” technology is being used in Zinc Smelter and “Ausmelt Technology” in Lead Smelter. Hindustan Zinc also uses Cansolv Technology to recover Sulphur values in the form of Sulphur dioxide gases to be converted into sulphuric acid.
HZL claims it is for the first time in the world this technology is used in metallurgical application. It adds that the sustained exploration and aggressive drilling programme at Sindesar Khurd mine has successfully augmented the resource base to the current level of 37 million tonnes, making it the second largest ore body in HZL's portfolio after Rampura Agucha, with potential for further additions, through ongoing exploration.
In FY 2008, the drilling programme successfully increased the strike length, by 300 metres, to 1,600 metres averaging 5.8% zinc, 3.8% lead and 215 parts per million silver. India's mining policy which was outdated is now being replaced with a new National Mineral Policy or NMP, 2008. The major hindrance that cropped up for formulating this policy has been the centre-state relationship. While the policy is formulated by the centre, the mineral rich states claim they get peanuts. Some mine rich states like Orissa has publicly gone against the NMP alleging that the government has just followed the orders of international mining lobby.
The new policy puts the onus of keeping the mining area in a better ecological shape to the miner, which HZL says it has been doing since it began the work. But has the Indian mining policy helped Hindustan Zinc? Mehta says the answer is in Huda committee report.
“I believe once the new mining policy becomes operational by amendment and notification etc, those shortcomings will be taken care of. Right now there are challenges in terms of time loss and that is the reason why Indian mining industry is growing only at 3 to 4% per year whereas manufacturing sector is growing at 9 to 10% per year despite the fact that India has very good mineral reserves,” he concluded.
“We do not have a rating on the HZL stock but, given the strong capacity expansion (Capex) along with a debt free balance sheet, and 100% backward linkage with one of the top 3 zinc mines globally, we remain positive on the stock,” according to analysts at EMKAY Research.
This article published in COMMODITY MARKET, India’s No 1 news magazine on commodities. With inputs from Sreekumar Raghavan. Republished by arrangement with www.commodityonline.com. |
