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In 2020, we expect favorable TC conditions to be offset by the effects of weak metal prices. But, amid significant stock market volatility, Korea Zinc’s solid fundamentals (end-2019 net cash of W2.1tn and 2020E EBITDA of W1tn) and advancement into the electrolytic copper foil business should enjoy increasing attention.
2020 zinc concentrate TC set at US$299.75/ton
According to Metal Bulletin, Canadian mine Teck Resources and Korea Zinc have agreed to a 2020 zinc concentrate TC of US$299.75/ton. As a result, the 2020 zinc concentrate benchmark TC has climbed 22.4% y-y, rising from US$245/ton in 2019 by US$54.75/ton.
This year’s zinc concentrate benchmark TC is the highest level witnessed since the 2008 level of US$300/ton, having more than doubled in the span of two years versus the US$147/ton of 2018. We note that the spot TC in China for imported zinc concentrate stands at US$300/ton (high: US$320/ton, low: US$280/ton), a figure similar to the above-noted 2020 benchmark TC.
We estimate that the increase in benchmark TC will translate into a y-y OP increase for Korea Zinc of W85bn in 2020. Having assumed a 2020 zinc TC of US$290/ton, we note that additional earnings estimate adjustments due to the benchmark TC settlement should not prove significant. Meanwhile, with the spot TC of lead concentrate currently siting above US$150/ton, we expect the 2020 lead concentrate benchmark TC to rise by US$50/ton~US$80/ton y-y.
Focus on strong fundamentals amid high stock market volitility
While zinc and lead concentrate TCs look to be in good condition, zinc, lead, and silver prices have fallen 20.1%, 15.0%, and 20.2%, respectively, since the beginning of the year. With concerns towards the global spread of Covid-19 and economic downturn affecting the entire commodities market, the effect on profits of TC increase is likely to be offset by falling metal prices.
Nevertheless, we anticipate that Korea Zinc’s solid fundamentals will come to stand out amid volatile stock market conditions. We note that: 1) as of end-2019, the firm had net cash of W2,114.5bn; 2) its 2020 EBITDA is projected at W1tn; and 3) its external growth and capital efficiency are to be enhanced by entry into the electrolytic copper foil business. In addition, the possibility of rising silver and gold prices (driven by large-scale global liquidity expansion) looks significant.