Business Portfolio Highly Profitable
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
We now expect Korea Zinc’s 3Q20 OP to exceed our previous forecast. Despite economic recovery concerns, zinc and lead prices have risen, with silver and gold prices also widening on liquidity expansions and a preference for safe assets. We advise paying attention to both Korea Zinc’s earnings stability and the possibility of further silver price hikes.
To record solid 3Q20 earnings on rising metal prices
With the prices of zinc, lead, silver, and gold, all of which are major target metals for Korea Zinc, rising q-q, we now expect Korea Zinc’s 3Q20 earnings to surpass our previous estimates. Accordingly, we hike our 2020 and 2021 consolidated OP forecasts by 5.4% and 6.9%, respectively. However, we raise our respective EPS estimates by only 2.1% and 2.9%, considering the significant uncertainties in the financial markets, which will likely have a strong impact on the firm’s non-operating income. We maintain a Buy rating and TP of W495,000.
We estimate Korea Zinc’s consolidated 3Q20 OP at W206.7bn (-1.0% y-y, +26.0% q-q), up W27.5bn (+15.4%) versus our previous forecast of W179.2bn. Metal prices applied to product sales (one-month lagging average) have climbed 14.1%, 9.4%, 39.9%, and 11.0% q-q as of late for zinc, lead, silver, and gold, respectively, outperforming the estimates laid out in our previous report. Meanwhile, major consolidated subsidiaries SMC (Australia) and Zinc Ox Corporation (Korea) are projected to turn profitable this quarter (following operating losses in 2Q20) on the back of strengthening zinc metal prices.
Zinc spot TC weakens; concerns in play over economic recovery, but profit stability remains high
In China, the spot TC for zinc concentrate fell from US$175/ton at end-August to US$155/ton on Sep 8, hitting levels seen at end-June, when a bottom was touched following the high of Dec 16, 2018. Although expectations for zinc concentrate supply growth are restrained, improvement in smelters’ TC income is unlikely. With the Covid-19 pandemic continuing to rage worldwide, concerns over economic recovery are also in play.
However, backed by a highly profitable business portfolio, Korea Zinc’s consolidated OP is anticipated to increase 12.9% y-y in 2021 on silver price expansion. In addition, we view the current market structure in which metal product prices are set by the LME as favorable for the firm.