Despite Falling Metal Prices

The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.

 

Despite falling metal prices, Korea Zinc logged solid 1Q20 results. Although it is difficult to expect a rise in zinc or lead prices, strong precious metal prices and increased TC income should enable the firm to record 2020 (consolidated) OP on par with last year’s level, despite the Covid-19 crisis.

1Q20 review: OP climbs on spread improvement and spot TC increase

On a preliminary basis, Korea Zinc logged consolidated 1Q20 sales of W1.73tn (+15.8% y-y), OP of W204.3bn (+15.1% y-y), and NP (excluding minority interests) of W137.8bn (-8.9% y-y), with sales and OP exceeding consensus by 5.3% and 13.2%, respectively, but NP falling 2.4% short of expectations.

In 1Q20, non-consolidated OP totaled W196.9bn (+28.1% y-y, +20.6% q-q). Looking at metal sales, both lead (+5.7 q-q) and silver (+8.0 q-q) sales increased, while zinc sales remained similar q-q. The price of zinc applied to sales (one-month lagging average) narrowed 6.4%, and that for lead fell 9.3%. We attribute the healthy results to: 1) increased zinc and lead concentrate spot TCs; 2) spread improvement on the completion of zinc plant repair work; and 3) the reflection of adjusted costs due to metal price decline in March.

Major consolidated subsidiaries SMC and ZincOx Corporation saw their OP plunge 70.7% and 93.2% q-q, respectively, due to a rise in zinc concentrate TC and decrease in zinc prices.

OP to remain at 2019 level this year, despite falling metal prices

We upwardly adjust our consolidated 2020 OP estimate for Korea Zinc by 4.7% to W819.3bn (+1.7% y-y). On a non-consolidated basis, OP should outperform our previous forecast by 10.0%. However, our outlook for earnings at consolidated subsidiaries (which have relatively high OP sensitivity to metal price decline) has been revised down.

While metal prices are unlikely to rise, we note that: 1) the 2020 zinc and lead benchmark TCs have increased; and 2) global liquidity supply expansion and ultra-low interest rates should strengthen precious metal prices. However, the recent drop in the spot TC for imported zinc concentrate in China to US$215/ton (-32.8% m-m) will likely mute expectations for TC income growth.

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