Korea Zinc: Tight Zinc Supply

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The authors are analysts of Shinhan Investment Corp. They can be reached at krpark@shinhan.com and mw.choi@shinhan.com, respectively. — Ed.

1Q OP likely in line: Standalone KRW240.2bn, consolidated KRW279.9bn

Korea Zinc is expected to have recorded sales of KRW1.9tr (+12.8% YoY) and operating profit of KRW240.2bn (+3.3% YoY) on a standalone basis for 1Q22, meeting the consensus estimates (sales of KRW1.95tr, operating profit of KRW247.3bn). Sales growth should have been fueled by ASP hikes on increases in major metal prices vs. the same quarter last year (zinc +33.5%, lead +14.9%, gold +4.5%, silver -7.4%). Favorable USD/KRW exchange rate is also likely to have a positive impact on earnings.

On a consolidated basis, we expect sales at KRW2.92tr (+32.6% YoY) and operating profit at KRW279.9bn (+3.7% YoY). Sales should come in stronger than the consensus (KRW2.76tr) and operating profit largely in line with the estimate (KRW295.4bn). We believe strong sales were backed by sales from the company’s key consolidated subsidiary Sorin Corporation, estimated at KRW872.3bn (+125% YoY) similar to 4Q21, driven by metal price hikes.

2022 consolidated OP forecast at KRW1.16tr (+6.0% YoY)

For full-year 2022, operating profit is projected at KRW976.6bn (+5.6% YoY) on a standalone basis and KRW1.16tr (+6.0% YoY) on a consolidated basis. Global power shortages which started from 4Q21 have tightened zinc supply. With major refineries deciding to reduce production this year, the growth of demand for refined zinc is likely to outpace that of supply. Zinc prices should remain in the mid to high USD3,000 range per tonne throughout the year, which will translate into free metal gains. Despite low expectations for negotiations over the benchmark treatment charge for zinc, further profit improvement is possible if it turns out to be higher than 2021.

Sun Metals Corporation, the Australian subsidiary of Korea Zinc, is slated to complete the expansion of its zinc refinery (including process automation and digital transformation projects) within 2Q22. Annual production capacity will increase from 220,000 to 300,000 tonnes. The expansion effect should start showing in 2H22, helping to drive up consolidated earnings.

Retain BUY and raise target price to KRW740,000

We revise up our target price for Korea Zinc from KRW720,000 to KRW740,000 to reflect our earnings forecast revision. We retain our BUY rating in view of: 1) steady dividend payout; 2) stable earnings from a balanced business model (dealing with metals sensitive to economic conditions as well as precious metals); and 3) expectations for new businesses, such as production of copper foil and precursors and recycling of waste battery.

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