Silver prices have doubled in the past 12 months, closely on the heels of the boom in commodity prices.
A direct but not so obvious beneficiary of the bullishness in the silver counter is country's largest zinc producer Hindustan Zinc. The company's zinc mines are rich in silver and therefore it produces zinc as a by-product while purifying zinc. It plans to expand zinc mining capacities in the next two years. This would also result in higher silver production at a time when the pricing scenario for the white precious metal is bullish.
LME silver has soared at a faster pace from year-ago levels, buoyed by strong investment demand. Investors have turned to the precious metal in light of the prolonged economic recovery in the West and recent geopolitical tensions in the Arab world. Also, the industrial demand for silver has been steadily rising, given its electrical and thermal conductivity and ability to endure extreme temperature ranges.
For Hindustan Zinc , cost of silver production is negligible since it is recovered in the stripping process to purify zinc. The company has lead-zinc rich mines at Rampura Agucha, Sindesar Khurd, Rajpura Dariba and Zawar, with a total production capacity of 964,000 tonne per year.
During the first three quarter of FY11, the company was operating at 63% of its total capacity, 3% higher than the same period the previous year. An appreciation in LME zinc lead and sliver prices resulted in 17% year-on-year rise in the company's net sales.
However, higherstripping costs negatively impacted margins. The company plans to increase its annual silver production capacity to 500 tonne in the next two years, from the current 140 tonne. Silver currently contributes 6-7 % to the company's operating profit. This will be enabled through the 1.5 million tonne per annum capacity expansion at its Sindesar Khurd mine, which is rich in silver content.
After the expansion, the contribution of silver in the total revenue will increase up to 16%. The company's valuation has closely tracked its improved financial performance in the past two quarters, At Rs 136.9, the company's stock trades at a trailing 12-month price-earnings ratio of 13, which is closer to its yearhigh P/E of 15.
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