Hindustan Zinc Benefits from Silver Rally Despite Production Capacity Constraints
Hindustan Zinc's Q3FY26 performance was driven by a 74% YoY surge in silver prices to $54.70 per ounce, with silver contributing 44% of EBIT. Production costs fell to a five-year low of $940 per tonne due to renewable energy adoption and lower coal prices. However, near-full capacity utilization constrains volume growth, with meaningful expansion only expected by Q2FY29 when the 0.25 mtpa project comes online.
*this image is generated using AI for illustrative purposes only.
Hindustan Zinc's third quarter performance has been significantly enhanced by a remarkable silver price rally, though the company continues to grapple with production capacity constraints that limit its ability to capitalize fully on favorable market conditions.
Silver Rally Drives Strong Q3 Performance
The unprecedented surge in silver prices emerged as the primary catalyst for Hindustan Zinc's robust Q3FY26 results. Average prices at LBMA reached $54.70 per ounce during the quarter, representing substantial growth both sequentially and year-on-year.
| Price Movement: | Q3FY26 Performance |
|---|---|
| Sequential Growth: | +39% |
| Year-on-Year Growth: | +74% |
| Silver EBIT Contribution: | 44% (vs 35% previous year) |
The silver business has become increasingly important to Hindustan Zinc's earnings profile, with its contribution to earnings before interest and taxes expanding from 35% in the previous year to 44% in Q3. This shift reflects both the price appreciation and the company's strategic positioning in the silver market.
The US inclusion of silver in its list of critical minerals in November appears to have further amplified demand, contributing to the sustained price momentum. Additionally, zinc prices benefited from higher demand, rising 12% sequentially after experiencing declines in the first half of the fiscal year.
Cost Structure Improvements Enhance Margins
Hindustan Zinc achieved significant improvements in its cost structure during Q3, with the cost of production declining to $940 per tonne, marking a 10% year-on-year decrease and reaching the lowest level in five years.
| Cost Metrics: | Q3FY26 | Previous Guidance |
|---|---|---|
| Actual CoP (excluding royalties): | $940 per tonne | - |
| Sustainable CoP Range: | $950-1,000 per tonne | $1,025-1,050 per tonne |
| Power & Fuel Cost Share: | 11% | 17% (previous year) |
| Renewable Energy Share: | 20% | - |
The cost reduction was primarily driven by declining coal prices and an increasing share of renewable energy in the company's power mix. Management indicated a sustainable cost of production range of $950-1,000 per tonne, representing an improvement from earlier guidance of $1,025-1,050 per tonne.
The renewable energy transition is expected to generate additional savings, with the RE share projected to grow to 70% by FY28, potentially delivering savings of approximately $25 per tonne.
Capacity Constraints Limit Volume Growth
Despite favorable market conditions, Hindustan Zinc faces significant challenges in scaling production due to near-full capacity utilization. The company has maintained its volume guidance for FY26, though achieving this target would require Q4 output to grow approximately 15% over Q3 levels.
Recent debottlenecking projects have provided only marginal capacity additions of about 2% to total capacity. Meaningful expansion will only materialize after the 0.25 million tonnes per annum expansion project becomes operational, which is expected by Q2FY29.
Market Outlook and Valuation
Analysts have responded positively to the improved cost structure and favorable commodity price environment. JM Financial Institutional Securities raised its earnings guidance by 10-29% for FY26-28 to account for the price improvements, citing the company's position in the lower end of the global cost curve.
| Investment Highlights: | Details |
|---|---|
| EV/EBITDA Multiple: | 11.6x (estimated FY27) |
| Stock Performance: | +50% (past two months) |
| Key Advantages: | High-grade captive mines, 100% captive power, diversified revenue |
The stock trades at an enterprise value of 11.6 times estimated FY27 EBITDA and has surged approximately 50% over the past two months. However, analysts note that near-term earnings growth is likely to remain capped, with commodity price movements serving as the primary catalyst for incremental upside.
Investors remain focused on silver and zinc price trajectories, as these commodities continue to be the dominant drivers of the company's financial performance in the absence of significant capacity additions.
Historical Stock Returns for Hindustan Oil Exploration
| 1 Day | 5 Days | 1 Month | 6 Months | 1 Year | 5 Years |
|---|---|---|---|---|---|
| -5.65% | -5.61% | -7.75% | -16.99% | -30.23% | +62.92% |
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