“Vedanta Resources FY2015 Results Conference Call”
November 4, 2015
MANAGEMENT:
MR. ANIL AGARWAL – CHAIRMAN, VEDANTA LIMITED
MR. TOM ALBANESE – CHIEF EXECUTIVE OFFICER,
VEDANTA LIMITED
MR. DD JALAN – CHIEF FINANCIAL OFFICER, VEDANTA
LIMITED
MR. STEVEN DIN – CHIEF EXECUTIVE OFFICER, KCM
MR. ABHIJIT PATI – CHIEF EXECUTIVE OFFICER,
ALUMINIUM
MR. KISHORE KUMAR – CHIEF EXECUTIVE OFFICER,
IRON ORE
MR. SUNIL DUGGAL – CHIEF EXECUTIVE
OFFICER,HINDUSTAN ZINC
MR. MAYANK ASHAR – CHIEF EXECUTIVE OFFICER,,
CAIRN INDIA LIMITED
MR. SUDHIR MATHUR – CFO, CAIRN INDIA LIMITED
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Vedanta Resources Plc
November 4, 2015
MR. ASHWIN BAJAJ – DIRECTOR, INVESTOR RELATIONS,
VEDANTA LIMITED
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Vedanta Resources Plc
November 4, 2015
Ashwin Bajaj:
Ladies and Gentlemen, good morning, I am Ashwin Bajaj – Director of Investor Relations for
Vedanta Resources. Thank you for joining us today to discuss our Results for half year
Financial Year 2016.
Let me introduce our management team present today. We have with us, Mr. Anil Agarwal –
our Chairman, Mr. Tom Albanese – CEO of the Group, and Mr. DD Jalan – Group CFO. We
have leaders from several of our businesses on the phone line. We have Mr. Mayank Ashar and
Sudhir Mathur from Cairn India; Mr. Sunil Duggal from Hindustan Zinc; Mr. Steven Din from
KCM in Zambia; Mr. Abhijit Pati from Aluminium; and Mr. Kishore Kumar, from Iron Ore.
With that, I would like to hand over to our Chairman.
Anil Agarwal:
Good morning ladies and gentlemen. I welcome you to the Interim Results of Vedanta
Resources.
During the first half of the financial year we drove operational efficiencies, managed operating
expenses and produced our best ever half-year cash flows post-CAPEX record from our
diversified and well-invested assets. In line with our stated priorities, we remain focused on
reducing net debt and increasing free cash flows.
Over the last six months, we have continued to witness volatile commodity markets. As a result
of current market uncertainty, the Board has not declared any interim dividend, and will review
dividend payments again in May 2016 when we deliver our FY16 results.
We are following a disciplined approach to capital spending and operational efficiency that is
leading to reduction of costs, with people across the organization working together, and this
will be the key to managing this period of volatility.
Given the recent commodity prices, the global resource sector outlook is challenging, in the
short-to-medium term. But I am optimistic about the future.
In the Indian subcontinent with a population of 1.5 billion people, Vedanta is uniquely
positioned to be a significant player in the diversified natural resources sector, with more than
25 years of history and strong moorings in its home market.
Vedanta is aligned with Prime Minister Modi’s vision for the country, to emerge as a global
innovation hub, and to “Make in India”. The Prime Minister’s upcoming visit to the UK
demonstrates the warm relationship between India and the UK.
We are focused on achieving a sustainable future for the communities, and will drive new
technologies and innovation in all our business. Our talented R&D specialists are on the job to
work towards applying disruptive technologies, which can minimise the impact to the
environment, as well as further optimise costs.
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I am delighted that as a group we have taken the lead to overcome business challenges and let
me share some of these developments.
Last month marked our first export shipment of iron ore from Goa in three years. We are also
the first company to resume mining in the state. We welcome the Goa State Government’s
immense efforts to get the industry up and running.
In July, we broke ground at the Gamsberg project in South Africa, one of the world’s largest
underdeveloped deposits of zinc. This exciting milestone comes at a time when demand for
zinc is growing and supply is shrinking.
We have a long term vision for KCM in Zambia, a truly world class ore-body, with a strong
reserve base.
Over the past six months we have been working towards simplifying our corporate structure
and announced the merger of Vedanta Limited and Cairn India. I am confident that this merger
will create significant value for both sets of shareholders.
I was delighted to welcome Cynthia Carroll as the Chairman of Vedanta Resources Holdings
Ltd in September. As you know, she is the former CEO of Anglo American and has extensive
experience in mining, oil and gas and the aluminium industry. She will drive key strategic
initiatives for our business.
As we continue to engage closely with all our stakeholders, I am pleased to mention that we
held the first Sustainable Development Day in London. This was a platform for open dialogue
with our stakeholders.
Vedanta will continue to retain its position as one of the lowest cost producers in the world.
I will now hand over to Tom, who will give you a full overview of our results. Thank you.
Tom Albanese:
Good morning ladies and Gentlemen. I am pleased to welcome you to Vedanta Resources plc
H1 FY2016 earnings call.
The last few quarters have been a testing time for the natural resource sector globally, as
commodity prices have fallen to multi-year lows. As basic forces of supply and demand
continue to drive the markets, these low prices are encouraging more consumption, and
discouraging new supply. Economics 101 still prevails. Though the global resource sector
outlook is challenging in the short-to-medium term, I am optimistic about the future for mining
and the natural resource sector. From my own perspective, China will continue to grow, albeit
at a slower pace than in the past.
I believe that following a disciplined approach to capital spending and efficiency in operations
will be the key to manage this period of volatility.
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We at Vedanta have been implementing a series of initiatives to reduce capital expenditure and
operating costs and to maintain financial strength during this period of low commodity prices.
Let me start with a review of the H1 performance and highlight some of these initiatives:
On safety, it is with deepest regret that I have to report the loss of seven of our colleagues’
fatalities in the first half. This is a deep disappointment for the organisation. We are committed
in our efforts in achieving our objective of Zero Harm and let me re-assure you that “Zero
harm” is an integral part of our strategic priorities and that set upon to us as management by the
board.
On the lighter note the picture you see on the bottom right is an environmental initiative where
our subsidiary TSPL at Punjab province attempted a world record for planting the largest
number of saplings in an hour and amazingly they planted 200,000 saplings in 200 acres of
land in one hour we will try to replicate that. This would be the second such record globally,
the first one was in Australia:
This is the first such initiative of this size and scale in the state of Punjab in India. Considering
the small forest cover in Punjab, these additional trees will help improve the biodiversity in the
region.
Moving to the next page: Operationally, we had a robust first half with higher production at
Zinc India, O&G, Aluminium and Power and high utilization at Copper India. At Iron ore, we
commenced mining in Goa and I am happy to share that the 1st export shipment was made in
October after a gap of three years.
We had a robust EBITDA margin of 30% despite softer LME and Brent prices during the H1.
This was primarily driven by strong volumes and cost initiatives across the businesses. Our
diversified portfolio helped us deliver robust margin in this weak commodity price
environment.
As a result of the volatile commodity environment, the Board has decided not to pay an interim
dividend and the Board will review dividend payments again in May 2016 when we deliver our
FY2016 results.
With strong operational performance and prudent capital allocation, we have reduced our net
debt by $900 million in the H1. At this point, I would like to re-iterate our commitment to
further reducing the net debt and de-levering the balance sheet.
We continue to progress on the Merger with Cairn India, with Indian stock exchange approvals
in hand and further approval steps in process. The EGM for Vedanta plc shareholders’ approval
is expected in the next couple of months.
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Maximising cash flows and deleveraging the Balance sheet are our top priorities given the near
term volatility and low commodity price environment. Despite the tough macro headwinds, we
have been able to reduce our net debt by $900 million during the first half and we continue to
optimize our CAPEX, focusing on reducing OPEX, reducing marketing cost and improving
marketing margins across our business and a consequence to those efforts we have achieved
about $200 million savings in first half through these measures.
At Gamsberg in South Africa, we have re-phased Fiscal Year 2016 CAPEX, and reduced
overall project CAPEX by $100 million. We want to remain positive free cash flow at each
segment and have taken a number of restructuring initiatives to protect free cash flows and
some example of the rolled product facility at BALCO has been temporarily shut down, and at
Lanjigarh, where we were always running at lower capacity, we have shut down one of the
alumina refining streams. We are committed to deliver cost savings and marketing synergies of
US$1.3 billion over the next 4 years.
While we are all naturally focused on the weak commodity prices in the near term, I would like
to remind you that our portfolio of well invested assets will enable us to deliver near term
growth with minimal CAPEX in the next few years. We will look to take advantage of this
unique growth optionality embedded in our portfolio of low cost assets, in a disciplined
manner, with a focus on free cash flows.
We are positive on the India growth story, and we want to be part of this growth. We have
contributed US$1.9 billion to the exchequer in H1 FY2016, clearly demonstrating our
commitment to development.
India is experiencing structural shift with lower inflation and energy costs. Interest rates in
India have been coming down buckling global trends, and I believe further reduction in interest
rate would fuel next leg of Indian economic growth.
On the regulatory front, there have been a few positive developments in India during H1:
District Mineral Fund contributions were notified at 30% of Royalty, and as Chairman
mentioned earlier, we made our first Iron ore export shipment from Goa in October. We are the
first miner in Goa to re-start exports after the mining ban was lifted in the state.
We are constantly engaging with the Government on various front such as Aluminium Import
duty to level the playing field on Chinese Aluminium imports, removal of export duty on low
grade iron ore, linking of cess with oil price and fair price realisation for domestic crude.
This slide reiterates that our strategic priorities remain unchanged, with production growth in a
disciplined manner, asset optimisation, balance sheet deleveraging and completion of Cairn
India and Vedanta Ltd merger being the top priorities. At the same time, we remain focused on
preserving our Licence to operate everywhere we do business, and adding resources more that
we deplete them.
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I will now hand over to our CFO – DD Jalan to provide the financial update.
DD Jalan:
Thanks Tom and good morning to all of you. Commodity prices continued to be weak, pretty
much across the board during the first half of FY16, and this environment has impacted the
performance and financials of all the major commodity producers.
Despite such a current challenging environment, we have delivered a solid set of numbers for
the first half of FY16, reflecting the quality of our low cost and diversified asset portfolio.
The Group generated EBITDA of US$1.3 billion, 39% down vs H1 FY15 but we maintained a
robust EBITDA margin of 30% thanks to both volume and cost & marketing savings. I will
talk about these initiatives in later slides. EBITDA is also down as a result of the
unprecedented ~60% depreciation of the kwacha in H1 FY16 which resulted in negative of
US$68 million on VAT receivable.
As mentioned by Tom earlier, positive free cash flow at each business continues to be a top
priority for us. Considering this, our focus remained on volume growth, strict working capital
management, and cash generation which helped to generate record half year free cash flow of
US$1.3 billion post CAPEX. In turn, this resulted in gross debt reduction of US$ 700 million
and net debt reduction of US$1.5 billion over last one year period.
Net gearing is higher at 40% on account of impairments charge taken in March 2015.
As stated earlier by Chairman & Tom, the board has decided not to pay interim dividend & the
board will again review at the year end.
Lower commodity prices were the major headwind with an adverse impact of over US$1
billion. In total, market and regulatory factors impacted EBITDA by US$1.3 billion. However,
our volume growth and cost saving initiatives helped us to mitigate this adverse commodity
price impact by US$0.5 billion. Of this positive US$ 400 million excluding one offs, over
US$50 million savings coming from Zambia.
These cost and marketing initiatives covered various areas such as more efficient procurement,
vendor development and alternate sourcing, production line optimization, and marketing
strategy around product mix or customer mix to improve realizations. As of now we are
working on 700 ideas to reduce cost and maximize the marketing benefit.
At our Capital Markets Day in March this year, we presented our cost and marketing savings
program, with target savings of US$1.3 billion over 4 years. I am pleased to report that we have
made a good progress in terms of implementation of these measures and realized savings of
over US$191 million during H1 FY16, of which US$170m are expected to be recurring
savings. In full year FY2016 we expect to deliver US$ 400 million of savings.
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These savings would get reflected in lower costs per tonne or higher realizations for our
products in result statement. These savings also include capital expenditure that has been
permanently reduced or avoided. We shall continue to bring this report card at the year end
results as well. These savings have been computed based on “Total Cost of Ownership”
methodology and do not include the benefits or extra spend due to input commodity inflation or
deflation, regulatory or technology change.
Net debt has been reduced by US$0.9 billion in H1 FY16 to US$7.5 billion primarily on
account of strong volume growth, working capital initiatives, and discipline on capital
allocation. Out of these working capital initiatives, some US$0.6 billion should be seen as
sustainable in medium term, while the balance may unwind in the second half of the current
year.
These initiatives demonstrate the Company’s ability to generate cash in a challenging
environment and we are confident in the sustainability of these optimization measures.
In line with our strategy of maximizing cash flows, we have re-phased our short and medium
term CAPEX spending. FY16 CAPEX has been further reduced to US$0.7 billion vs. US$1.0
billion announced previously and US$1.6 billion initially. Capex for FY17 is being budgeted at
around US$1 billion.
These CAPEX cuts are the consequences of a pragmatic assessment of development projects
and, whenever possible, a modular approach in order to retain flexibility between financial
disciplines on the one hand and potential growth on the other.
While we continue to optimize CAPEX, we allocate it wisely towards growth projects like
EOR in oil & gas, Zinc India and other similar projects. Further, the Gamsberg project spend
for FY 16 is now revised to US$40 million from US$80 million budgeted earlier and US$60 US$100 million is budgeted for FY17. This will result in delay of around 9 months to first
volumes shipment compared to original plan of FY18.
As a result, free cash flow for the first 6 months of FY16 was US$1.3 billion, compared with
US$1.1 billion for the full year 2015.
Lower depreciation is driven by increase in useful life of metals and mining assets with effect
from 1st Oct 2015. Amortization was lower on account of the lower asset base post impairment
charge in oil and gas business in last financial year.
Interest expense at half year is lower by $ 106 million on account of refinancing at lower costs
and lower gross debt levels post repayment of INR convertible bonds in H2 FY 15. These
savings have been partly offset by US$29 million higher charge on account of capitalization of
capacities at BALCO and power plant in Punjab. However, finance costs are likely to go up
marginally during FY16 with further capitalization of assets in the power sector.
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Investment revenue was lower compared to H1 FY15 primarily on account of mark to mark
gains booked in previous year.
The tax charge excluding the special item in H1 FY16 is US$224 million compared to US$158
million in previous period. This is on account of higher deferred tax at Zinc India and a lower
profit base at Cairn India. Deferred tax expense at Zinc India is higher due to higher bond
income in the current year. The full year tax rate will be around 40%.
The tax special item of US$174 million, pertains to Copper Zambia. This is on account of
deferred tax charge resulting from change in tax legislation.
During H1 of current the Kwacha depreciated by around 60% from 7.58 to 12.06 per US$ and\,
this resulted in a loss of US$68 million on translation of VAT receivable.
We have been successful in refinancing our maturing debt during the year both at Vedanta
Plcand subsidiaries through rollovers, issuance of new term debt and repayments from internal
accruals. In addition, we are able to lower our overall borrowing costs by 20 bps benefitting
from the interest rate cuts in India, issuance of INR bonds at competitive cost and reduction on
spreads on our term loan portfolio at subsidiary companies.
For Vedanta Limited – we continue to benefit from ample liquidity position in the Indian
market. Of the FY16 maturity of US$1.5 billion, $0.5 has been tied up and for the balance $0.9,
in-principle approvals have been obtained. We have successfully negotiated the spreads on
majority of our existing term loan portfolio and obtained an average reduction of around 22
bps. Our refinancing plans for the rest of the year will focus on extension of the maturity
profile of the debt. This will include refinancing of maturing debt for this year and for future
periods through longer term loans thus resulting in about 0.5 year higher maturity profile of the
overall portfolio.
As regards the FY17 – maturities at Vedanta Plc, we will refinance part of the maturities with
loans from banks as I have previously indicated. I am pleased to report that we have made
significant progress and our proposals are in final stages of discussion with banks for an
amount of US$0.7 to US$0.9 billion. The balance will be covered through part repayment of
the US$2.6 billion inter-company loan due from Vedanta Limited.
We have strong relationships with our banks and continue to actively work with them on the
refinancing efforts. At the same time, we remain focused on generating free cash flow and
reducing leverage through efficient operational performance and initiatives.
In summary – we continue to focus on optimizing OPEX and CAPEX, generating and
preserving cash, allocating capital prudently, and reducing net debt. We are confident that this
continued focus on financial efficiency will help Vedanta to better deliver its long-term
strategy going forward.
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Thank you and now let me hand back to Tom.
Tom Albanese:
Thank you DD.
Let us start with Oil & Gas:
Our gross production in Oil & Gas was in line with our guidance. However, production was 2%
lower quarter-on-quarter, due to conversion of some pre-producer wells at Mangala into
polymer injectors and this was according to plan. This conversion will eventually lead to rampup in our oil production. We are on track with our guidance to maintain production from
Rajasthan in current year at FY15 levels.
On the cost side, substantial savings were attained in key high- value contracts through
negotiations, optimization of field operations, and improvements in well drilling time. Our
Rajasthan water flood OPEX remained low at $5.4/boe in first half of the fiscal year. We
continue to invest in our core fields and drive growth projects
At Mangala EOR, the injection ramp up plan is on track as we increased the polymer volumes
from 80,000 blpd to 200,000 blpd Q-o-Q.
On Aishwariya Infill campaign– we have successfully brought 6 more wells online in the
second quarter increasing the total well count to 12 out of the 20 planned. Bhagyam EOR is
progressing well.
On Rajasthan Deep Development project, we have recently signed an agreement with GSPL.
As per the agreement, they will build the gas pipeline and provide us with the tie-in provision
to connect to their natural gas grid. Exclusion of pipeline from our own capital scope of work
will help us reduce our forward capital cost for the project. We are progressing on the tendering
process for the new gas processing facilities. The production is expected to start in second half
of 2017 subject to the pipeline approval. With pipeline tie-up with GSPL, we expect to close
fiscal year 2016 with a CAPEX of $300 million as against earlier estimate of $500 million. At
current crude prices, we expect that for Fiscal year 2017 we will see a capital outlay of about
$500 million. We are engaging with the Government on issues like revision of the cess on oil
production, the PSC Extension policy, etc.
Finally, I want to reemphasize that our priority in our Oil & gas business remains to be free
cash flow positive in a low oil price environment. Over 90% of our production volumes are
from the core fields of MBA, Ravva and Cambay each with very low operating cost and high
cash margin.
Moving over to Zinc India:
Our world class zinc portfolio had a very strong first half as mined metal increased during the
period, driven primarily by higher ore production across each of the mines. The refined metal
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production was even higher on account of processing of earlier inventories, and high smelter
efficiencies. We lowered our cost of production of first half to $788 per tonne due to this higher
volumes, cost savings initiatives and the Indian rupee depreciation partly offset by higher levies
like water cess and electricity duties. We expect the second half cost of production to go down
further if prices of commodities like diesel and coal remain at current levels. We also wrote
back upward the additional provision of DMF which was now notified at 30% of royalty
against earlier provision of 50%.
I am pleased to report a 50% higher silver production due to higher silver grades and higher ore
production from SK Mine, and this is expected to continue into the second half. On the
announced 1.2 million tonne per annum expansion at Zinc India, overall underground mining at
Rampur Agucha we have sunk the shaft to 850 meters out of the planned 950 meters and our
mine development plan is moving ahead at the rate of 1000 meter per month. As a matter of
fact just in October we have beat that we are at 1200 meters per month. This is a record and it
gives us the confidence to ramp up the underground mines as per plan and commitment. The
Pre-stripping work for further development of Rampura Agucha open pit also made impressive
progress during the first half.
At the SK mine the internal infrastructure works at 1,000 metres level is advancing well and we
expect to enhance the ore production capacity of SK mine by 50% by the year end from 2
million tonne to 3 million tonne. I would just add that level at SK 1000 level just last week.
At Zinc International – production was affected by shutdowns at Skorpion and ramping down
of production at Lisheen, which will now end production in November of 2015. Overall, we are
on track to produce about 220,000-230,000 tonnes in FY 2016.
At Skorpion, pushback is in progress for extension of pit from FY2017 to FY2019 which
resulted in higher cost of production as guided earlier.
At Gamsberg – the pre-stripping commenced in July and the project is being developed using a
modular approach as we have said that allows flexibility to manage the capital expenditure
program. Overall, again with the good markets and strong performance by the project team the
overall Gamsberg and Skorpion refinery project CAPEX of $782 million has now been reduced
by $100 million, and the spend is also being re-phased. Fiscal year 2016 CAPEX is expected to
be at $40 million and Fiscal year 2017 in the range $60-100 million. This would result in
around 9 months delay in the ramp up of volumes as against the original plan but certainly
improve cash flow over the next two years. In light of the current market conditions, the
business is following a lock box approach towards its CAPEX where the CAPEX would be
funded by project internal cash generation at the Zinc International business during the same
period.
Let us talk now about our Copper Zambia in Zambia:
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At Copper Zambia our production was higher in line with earlier guidance. Copper in
concentrate up 14% in the first quarter with Konkola up 18% and Nchanga 5%. TLP
production up 14% in the first quarter. At Konkola, we have started to see positive impact from
shaft remediation activities, improvement in equipment availability and other pivot initiatives
put in place a year ago more to do we would see some progress. Some of these areas would be:
On shaft remediation, #1 Shaft resumed hoisting in first quarter of fiscal ‘16 and #4 Shaft
resumed partial hoisting in 2nd quarter of Fiscal Year 2016. We have finished the rehabilitation
of the #4 Shaft Mid-Shaft Loading Station and that would remove a major constraint on waste
hoisting and consequently primary and secondary development at 950 level we would back that
up and we will see improved waste management through the installation of material tracking
system and rehabilitation of track in the hotspots which are in progress,
We talked about our pivot initiative at Konkola to reduce unprofitable areas of production is
yielding benefit and we are now focused on improving operational productivity from these
areas of focus. And we will maintain flexibility around these pivot initiatives and we expect we
will change from time-to-time as we evaluate condition on the ground. We are currently at a
run rate of 55,000 tonnes in Konkola and we hope to build on these successes and reach the full
potential of this high-grade c.270 million tonne ore body at Konkola with average 2.7% copper.
At Nchanga, where our underground costs of operations are high we have taken a number of
measures to improve the levels of profitability and we continue to evaluate the future of these
assets in light of the current copper prices and of course the continued shortage of power in
Zambia.
The production at the Tailings Leach Plant in Nchanga is up 14% compared to the first quarter
as we see an improved reliability levels of the plant following the systematic maintenance
programme which has been running since July 2015. The exit cost for the first half at Copper
Zambia was at about a USc 1.60 per pound. And those who have been following our business
you would appreciate that that has been a significant improvement.
I am pleased to inform that the refund of VAT has recommenced from March 2015 and has
started to positively impact cash flows. The royalty rates were reduced to 6% and 9% for
underground and open pit respectively compared to 9% and 20% as previously in place last
year.
Management, through the Chamber of Mines in Zambia has continued its discussion with the
Ministry of Mines and Finance to improve the competitiveness for the fiscal regime in
operation. Since the announcement of the national power shortages in Zambia our energy
savings program at KCM have reduced power consumption by 5% and we are targeting to take
this reduction to 10%. I would also like to commend the KCM Management Team under the
leadership of Steven Din, for driving the turnaround of this asset but there is still a lot more to
do. In August, we strengthened our team with the addition of Mark Adams as the Chief
Operating Officer of KCM and he brings over 35 years of underground mining and processing
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experience with him. I am confident of an even a better performance on production levels in
second half as we continue in the turnaround of this asset and expect to move in to positive
cash flow territory even in the current markets in the second half.
As stated earlier, we are focused on bringing down our costs of operations along with
increasing volumes. So we have been working closely with Zambian Government, the
workforce and the unions to make sustainable long-term cost change to the KCM cost base to
ensure that KCM moves down the cost curve and is competitive for the long term. We have a
strong ore reserve and mineral resource position, with at least 25 years of operations ahead of
it. For me, that’s a 50-year vision.
Finally, on October 30th, I am pleased to say the President of the Republic of Zambia, His
Excellency Edgar Lungu, toured the Konkola mine and met with KCM Management and its
workforce. We would like to commend His Excellency on his positive leadership during this
low commodity price cycle.
In Aluminium, production at both the smelters and the refinery were stable. Aluminium prices
and premiums decline further during the first half while our EBITDA margin has declined from
$ 480/mt in Fiscal Year 2015 to $ 158/mt in the first half of Fiscal Year 2016. The cost of
production has been lower year-on-year both at Jharsuguda and BALCO, due to currency
benefits, lower alumina cost, and lower power costs partly offset by higher coal costs at
Jharsuguda. Under the current challenging environment, we have also put in place as DD has
said several measures. We have stud down the high cost rolling product facility at BALCO
expected to result in about $10 million gross saving per annum from Fiscal Year 2017 though
we would have to face some one-time costs this year on account of resource and people
optimization.
We also plan to put the 270MW CPP, which is older and least efficient of generators at Korba
on standby, post start of the new 300MW CPP at Korba in the 3rd quarter.
At Lanjigarh, where we were always running our alumina refinery at lower capacity due to
government constraints we decided to shut one stream and enhance our utilization from another
source. We are increasing the proportion of value-added products in sales over the business
will help us also guide us and hold our head over water in the current market.
We have been in discussions with the Government of India to level the playing field with the
Chinese aluminium and scrap that is going into the Indian markets and increase the import
duty. We have seen a huge increase in aluminium production in China and we have also seen
expansion of aluminium subsidies in China so all we are looking at is leveling the playing field
to provide a competitive environment for Indian aluminium industry. So we look ahead and in
terms of further ramp up of Aluminium smelters, we will continue to follow a disciplined
approach and ramp up only if there is positive cash generation with the ramp up. We have been
in discussions with the government authorities for using power from our 2400 MW power plant
for the Jharsuguda-II smelter. The outcome of the final hearing, which is just held two days ago
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is very positive and we expect to get an order on for conversion later this month and then
commence ramp up of the remaining pots of first line of 312,000 tonne facility. However, we
are align to just focusing on the positive cash flow we have the BALCO-II ramp up and placed
it on hold until we have restructured the costs there and restructures were necessary.
Notwithstanding these above measures, we are mindful of the weak Aluminium prices and
premiums, so we are evaluating all parts of our business.
I have been talking over the past years about our intent to create a power vertical and look at
the 9000 MW of power generating capacity and look at creating maximum potential. So I am
pleased to share the progress so far:
You have seen already just in the few short months the large amount of best practice sharing
improving plant performance and bringing improved progress on commissioning of our new
units for production. We have consolidated and centralized our power sales, which is ramping
up the sales of Power to the retail market.
We have consolidated and centralized coal purchase and that seen some savings. We have been
integrated our Hindustan Zinc, MALCO, and Tuticorin on import procurement under a Central
Coal Procurement Group from the 2nd quarter. With this integration, our entire coal imports are
fully is fully centralized to leverage on volumes and bring synergies across the supply chain
and we do purchase about 32 million tonnes of coal per year and that’s going to exceed 40
million tonnes as we ramp up all our facility so huge opportunities for synergies as our CFO
has discussed.
So as we look ahead in terms of further improvement in our power we see other areas including
logistics and service contracting across the group, e-auction buying, etc. During the first half
our PLF at the 2400 MW Jharsuguda power was at 40% due to continued lower demand and
softer rates. We would expect the PLF to increase gradually in 3rd quarter of Fsical Year 2016
as we start converting one of the generators to CPP and ramping up the pots at Jharsuguda-II.
At TSPL, the first 660MW unit had availability of over 80% and that unit is expected to
continue to operate at above 80% availability requirement. The second 660MW unit of the
TSPL plant will be synchronized in this quarter. The first 300 MW IPP unit at the 1200 MW
Korba Power has commenced its operations and the second unit has been synchronized in Q3
FY2016. With the decline of imported coal prices in the 2nd quarter by 8% to 12%, we did
increase the proportion of imported coal used from previously 18% to the current 25%. And
affective this week we expect to commence mining from the Chotia Coal Block.
Moving on to the Iron Ore:
Mining resumed in the 2nd quarter with our first export shipment made on 19th October and we
expect to produce 5.5 million tonnes from Goa in this fiscals year. Our Goa Iron Ore, which is
relatively lower grade has received a positive response from the Chinese markets even though
iron ore is currently is considerably oversupplied in the global seaborne markets. Steel mills are
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trying to reduce their purchase price of Iron ore by running lower grades and again we have
value when we spent at the pit of the Goan ores so that can run at an optimal plants and of
course the phosphorus content in Australian qualities of our peers have recently spiked to 0.1%
and to off-set this steel mills are inclined to buy low phosphorus iron ore which is what we can
provide from Goa which has a positive value-in-use benefit. We would also look to take
advantage of the strong domestic demand for pig iron. We have been ramping up that facility
after seeing global pig iron prices weakened so we have increase the penetration of our pig iron
into the domestic particularly Western seaborne pig iron market.
At Copper India our 2nd Quarter production was impacted by maintenance shutdown and
however, we anticipate over 90% utilization rates on a going forward basis. Our TC/RCs are
expected to remain strong at (+24) cents per pound on account of improved mine supply and
increased concentrates into the market. So we are building enhanced complex concentrates
handling capability to improve operational flexibility and better TC/RC realizations. We are
also on downstream in to the business working towards enhancing high margin rod
manufacturing capability to serve the increasing domestic demand for copper rod.
So I can sum up:
Our strategic priorities remain unchanged. We are focused on production growth, asset
optimization, and de-levering the balance sheet. On refinancing as DD has said we are
comfortable on the progress made and I am confident that we would complete well in time. We
have demonstrated our intention to achieve our objectives through optimised OPEX and
CAPEX in first half and we would continue on this path. We have adapted to the “‘new
normal” environment of weak commodity prices, and pragmatic decisions have been made to
maximize free cash flows at each of our business unit. We are focused at the corporate front on
completing the merger of Cairn India and Vedanta Limited. And finally with continued focus
on improving production and reducing costs we aim to keep delivering superior returns for our
shareholders.
With that I am happy to open the floor for questions. Thank you very much.
Danielle Chigumira:
Thank you. Daniel from UBS. A couple of questions on aluminum. You flagged that you are
pursuing rational approach there, I would guess that at BALCO even after cutting the loading
capacity that still a marginal asset. So could you clarify whether at spot prices you are cash
positive at BALCO and what would be the approach to potentially withholding capacity if you
are not? And secondly on aluminum, the import duty was obviously recently increased to 5%,
do you have any visibility in terms of whether that duty could be increased further going
forward?
Tom Albanese:
Maybe I will take that BALCO question and if you want to add anything to that DD you may
and then maybe the import duty and Chairman if you want to say anything on aluminum I
happy to have that. But at BALCO I think we have to remind ourselves that we are not only
working to reduce the cost and restructure but also increase the value add side of it, and as a
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matter of fact we are down a position where we are not selling any ingots so everything is in
one type of alloy or another. So as we look at the business in terms of both the LME
realization, the normal physical premium realization and also the value add we are in a place
where we are confident that with our continued efforts we can continue to be running that
business. At this stage though we do not see it makes sense to expand the next part, next
tranche of power cost will be higher than the current tranche of power cost, so we would not
see that situation eventuating for that next level. So we are working very hard, reducing that
core procurement for the next tranche of power cost and certainly as we have the 300
megawatt facility replace it 275 megawatt facility, hopefully that will give us a little more free
port, but in the foreseeable future we will do what it takes to keep the current production on an
EBITDA positive basis at BALCO. I apologize, we have Abhijit on the line, so Abhijit would
you take that question any further?
Abhijit Pati:
No, I think because mostly it is covert because mostly it is covered because though as on today
the restructuring measures which we have taken in BALCO is definitely aimed to get it to a
cash positive situation, there are all indications and we are able to see that after the
restructuring measure cost is definitely coming down, maybe we need to do a little more on to
the product development side. We have couple of execution plan, it is not even a thought
process, now we have a couple of execution plan on different product development which has
gone in, so thereby we are confident that we should be in a position to take it down to a cash
positive situation. So for ramp-up this concerned is very clear for the entire aluminum sector, if
it is making certain amount of cash positivity then only the ramp up otherwise we are holding
it for the cash reserve.
Danielle:
I think Abhijit, and the chairman and I have all been involved with the discussions on the
import duty, leveling the playing field but maybe Abhijit since you have been working with the
other aluminum producers including the state owned aluminum companies and talk about some
of those efforts to keep the playing field level.
Abhijit Pati:
Yes, we have been very actively getting engaged with Government of India and I think it is a
very-very consolidated approach with all primary aluminum producers, we have a very
effective aluminum India under which that banner partnering the other companies like
Hindalco, National Aluminum Company we have been positioning our import duty. Enormous
amount of the fact based representation has been done to the Government, Government is quite
sensitive, they have heard us very favorably and we have been getting engaged and we are
getting certain amount of very positive signals that they are trying to definitely help us out
because they understand the Chinese market which is creating certain amount of the issues so
far as the domestic aluminum production is concerned. We are quite successful to get this
message up to the mining as well as the commercial department of Government of India and
we are expecting a very-very positive outcome within couple of months to really hear our story
and then create a certain amount of protection which need to be there for primary aluminum
production.
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Fraser Jamieson:
Hi, Fraser Jamieson from JP Morgan. Couple of questions, firstly on the refinancing that you
have been talking about, you have obviously got the term loan discussions going on, you say
also that you have a partial repayment of the Vedanta Limited Loan, just looking at your net
debt summary Vedanta Limited it looks like as net debt of $4.1 billion which is over three
times net debt to EBITDA, it has cash of just over $300 million, so where is that $1 billion
coming from in Vedanta Limited? That’s the first question. And then second one is on working
capital, obviously extremely strong performance in this half, you mentioned some of that is
sustainable and some is unsustainable, could you maybe just breakdown some of the initiatives
that have gone into that $1 billion that you have been able to unwind, looking at the face of the
accounts for example it looks like your payable days are now over 200 days, that kind of feels
unsustainable, but any comments around that and the portions that you think are not
sustainable, it would be great please.
DD Jalan:
So I think if we just try to look at Vedanta Limited, as Tom also had been saying that this is a
new normal that in current commodity prices how do we maximize the value from the
business, how do we reduce our cost, how do we see that whatever investment what we have
made throughout the cycle we make it operational so that the assets wherein the investment has
been made we start getting the result from that and in that process what we have done, we have
started our aluminum pots at Jharsuguda, albeit at a little slower pace and now with a clear cut
clarity will be raping up faster. Number two, we have started our iron ore operation and the
first shipment has been made, the full result of that is going to come in the second half of the
year. Third is, some of the power plants which were ready and those are also being put to the
operation. So culmination of all these assets which are being put to use and the robust plan to
manage the cost in the current commodity price scenario that is what is the belief and the
confidence what we are having to generate good amount of cash flow and in this we have got
another lever to maximize our cash flow by working capital optimization. And the third piece
what we have said, to optimize the CAPEX and we have shown that how we are reducing our
capital cost without compromising the growth aspect, where the capital is needed we are
putting the capital and where we can think that the capital can be optimized we are optimizing
the CAPEX.
Coming back to working capital, what we have done, three levers what we have pulled.
Number one, the overall inventory cycle we have tried to optimize and we have tried to see
that we work on a thin inventory lever. And the second is our debt cycle, the debt cycle was
also pretty long so earlier we were giving advance to the customers, albeit little interest bearing
so we have decided to see that we become liquid and we do not give the extended credit
facility to the debtors and we discount those bills. And the third is, some of the customers they
have put in the advance payment also for the future supplies of the material, so culmination of
these activities which are sustainable in nature our cash flow has been able to improve.
Coming back to the payment cycle what you were saying, I think the overall number of days
are a little larger, basically because we have got the extended credit facility from some of our
bulk commodity supplies like concentrate, like alumina, so that is how the overall number of
days looks little high.
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Tom Albanese:
If we look at the savings run rate, you saw with the Konkola numbers, they were better at the
back end of the first half versus the first end and we also saw the thing such as alumina
purchases where sea bourne alumina prices dropped a lot in the last month or two of the
quarter, because of inventory effect a lot of those savings will begin eventuating in the second
half. So I will just reinforce what DD is saying about having that confidence of focusing on
cash flow continuing if anything with higher momentum in second half.
Fraser Jamieson:
And if I may follow-up on that, you talked about customer advance payments, could you give
us a sense of how large that is and what are that specifically that you think will unwind in the
second half?
Abhijit Pati:
So basically I think these are normal trade advances, what happens in the purchase and supply
relationship and some of the customers they have paid the advance to us against the future
supplies over a period of couple of years and the amount would be somewhere around couple
of $100 million.
Fraser Jamieson:
That happened in this half?
Abhijit Pati:
It happened in H1, first half of the year.
Anna Mulholland:
It's Anna Mulholland from Deutsche Bank, I have three questions please. The first is on your
covenants, obviously your covenants looks at trailing EBITDA last 12 months and today if we
took a spot check on net debt EBITDA for example you would be in breach. I am just
wondering when your covenants are next tested, whether you are in discussions to change or
waive the covenants. The second question is specifically on the power situation in Zambia, you
were discussing with the government with the power supplies, I wonder if you could give us
some more details on what the options are, what the situation is today? And finally, an update
on your discussions or lack of with the Government of India around the proposed sale of the
stake in HZL. Thanks.
DD Jalan:
So basically I think the covenants are tested on a half year basis, so these were tested in
September, now the next testing is going to be done in March. And we have to remind
ourselves that the net debt to EBITDA covenant is one of the strictest covenant in the sector
what is there with us 2.75 and in spite of that comfortably we have seen that we are well within
the covenant ratio in September and with the cash flow what we are generating and with the
emphasis what we have got in our entire businesses to see that how do we adopt the new real
world of the low commodity price we are quite confident that the cash flow is going to be very
positive and that positive free cash flow what the business is going to generate that brings us
the confidence that yes all the covenants will get complied with.
Tom Albanese:
I mean on power in Zambia, Steven you want to talk about power in Zambia?
Steven Din:
So as far as power is concerned in Zambia, so if I can just summarize. Back in July the copper
belt Energy Company which transmitted the power to the mining companies in the copper belt
did put up force majeure and all this on 30% of each companies' requirement. Now what we
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have managed to do since then is look at internal efficiencies and we have managed to reduce
5% in some months, 10% in the other, so we are still exposed to the extent of 20% of our
power requirement. Now you asked about the auctions, now what has happened is that 20%
requirement is now being delivered by the copper belt energy company however at the
elevated price and then the next option that we have is to look at the blocks of power that we
have within our operations to see whether we can take our certain blocks. Now taking out
certain blocks of power means that you have to close down various operations and that
requires a consultation engagement with government and we are in discussion at the moment
around one of those possibilities. The other option that we obviously have available to
ourselves is to look at see whether we can set up our own generating facilities, we have
significantly expertise in power within the Vedanta Group and we are also looking at a
Greenfield coal deposit here which shown good thermal characteristics at the moment. So
those are the various options that we have available to ourselves. Thank you.
Anil Agarwal:
On the HZL, a new government which has come, they have promised us that their process has
started, the cabinet has approved sale of 29% share what they have in HZL. In their budget
also they have made a provision that this amount will come for the budget this year. We have
not seen any much activity at this point of time, I believe the government is very serious, this
government believes in going business and should come thorough.
Menno Sanderse:
Good morning. Its Menno Sanderse Morgan Stanley. Two questions, first on Copper Zambia.
Did I hear correctly that the exit costs were $1.60 per pound for the half? First of all, does it
include the elevated power cost that you spoke about and secondly, is that a sustainable
number because that clearly is a kind of amazing turnaround from where it was? And secondly,
this is a bit more nitty-gritty, on Slide #18 where DD you talked very helpfully about the debt
and the debt payback, want to come back to the question by Frazer and talk a little bit about the
Vedanta Limited loan that is going to be repaid, so that $2 billion there in 2017. If you go to
slide 35, I am sorry it is going to be nitty-gritty, Slide #35 where the company helpfully splits
out debt and cash, where is that money going to come from because the cash position as Mr.
Frazer alluded to is only 234 million in Vedanta Standalone and the TSMMHL only has 30
million of cash. So how is that going to go up to the PLC, clearly if we can achieve that that
would be a very big hurdle that’s been removed?
Tom Albanese:
On KCM Steve I think we can talk about how much of that power increases in September
numbers, from my own perspective and I would like for Steven, I think that Steven and his
team would be uncomfortable with that not improving from that run rate, I mean that the
efforts of the team there is to keep continuously improving it, we are very mindful of copper
markets, we are mindful of our needs to see that business paying its way so it can begin then
attracting necessary capital for the next generation of its development. But Steven, can you talk
about September’s run rate number?
Steven Din:
Yes, of course Tom. Yes, the answer to your question is that the September numbers do
include the increased power tariff and on a monthly basis that is just under $2 million a month
extra that we are paying our power bill compared to previously. And the amount of $1.61 is the
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exit cost in September where we did have some very good production levels and as Tom says
the team is pushing very hard. In H2 we are even more aggressive in terms of where we want
to end up on production and it is really the production levels now which are going to give us
bigger improvement on the overall cost of production into H2. And is it sustainable? Except
for the benefit that we are getting from the depreciated Kwacha which is around about $300 or
$400 a ton, I would say that the rest of it is definitely sustainable and on top of that we are
looking to see where we can get more efficiencies in consumption of materials and even a drop
in rate from some of the suppliers.
Participant:
Maybe one small follow-up, the production rates in September were equivalent to you let's say
the run rate where you want to end the year in the second half or were it still a little bit lower
than the way you hope to end the financial year?
Steven Din:
Well, they were still a little bit lower the way we wanted to be running between October and
March for the remaining six months, so we expect more improvement.
DD Jalan:
On Vedanta Limited ability to make the repayment of $2.6 billion loan, if you just try to look
at what I have been saying that out of $2 billion of loan which is required to be paid by
Vedanta PLC in the next financial year, about $800 million to $900 million will be coming by
way of loan from the bank and balance $1.2 billion will be upstream by way of part repayment
of the intercompany loan. So $1.2 billion loan is required to be repaid by Vedanta Limited to
Vedanta PLC and that is going to come partly from the cash generation what we are going to
have from the business, partly from the unlocking of the working capital what this business
has, this business has we should keep in mind the copper concentrate where it is a tolling
business so a lot of working capital gets employed over there. So I think combination of these
two will be in a position to enable $1.2 billion of upstreaming of the fund.
Ellie Ong:
Hi, This is Ellie Ong from Bloomberg intelligence. We have heard a lot recently about China,
Chinese metal demand, so my first question is on India. We are doing the presentation that
India represents a unique opportunity of growth for Vedanta and the focus will be on
production growth. So the first half of my question is that can you actually provide an insight
on what you are seeing in terms of the Indian commodity consumption, especially for your
products. The second part of the first question is that, in terms of your 66% copper equivalent
projection growth in the near term how much market share penetration or sales volume
increase for Vedanta are you expecting from India compared to your 2014 numbers?
And the second question is on your group structure, given your focus is on cutting cost and
delivering your balance sheet, could you provide us an insight on or an update on your plans
for further simplification of your group structure and do you have any criteria's that you need
to meet debt levels that you need to do so before you take the next step? Thank you.
Tom Albanese:
Maybe I will start, but just my own personal observation, I mean chairman is the expert on
this, from my own perspective looking at say base metals consumption, we have been seeing if
you include scrap imports somewhere between 5% and 10% type increases in consumption we
have found that we have held market share in some of our metals and we have lost market
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share in others as scrap that used to go, over past 10 years a lot of the scrap went into the
Chinese market, I think it is being diverted now again we are seeing going into other markets
as China is slowing, so it is coming into that Indian market beginning to cannibalize a lot of
our other business. But I do see the signs of that steady improvement, but it is early stage, it is
not going to be investment led, it is consumption led, we did see some investment led project
building activity is picking up a bit, you certainly see it in the major cities, I expect to see it in
those tertiary cities. I do not think we can assume that China or in India in the next 10 years we
will have that galloping pace that we enjoyed in China for a whole variety of reasons, but I do
see that it is just taking it's early stages and it has kind of level of resilience to it, as long as the
Indian economy is growing at that 6% to 7% plus type pace it will be good for individual
businesses. I think in terms of iron ore production sold into the domestic Indian market, as long
as we are producing higher grade product we can probably sell it to domestic producers, but
the Goa material by its nature is less than 58% which is not desired by the Indian steel mills.
So any growth in the Goan production we recognize it needs to be destined for the Chinese
market until usage preference in the Indian steel mills were to change because I do not see in
the foreseeable future, because Indian steel mills seem to have plenty of the 58% plus
products.
Anil Agarwal:
India sub-continent, 1.5 billion people, the consumption is one-tenth of China with a similar
kind of population and it is on this stage where the government and the people, the young
population or 40% of the population is below 30 or 35 years, with that kind of everything you
need and I am seeing aluminum consumption double-digit growth 15%, copper double-digit
growth, everything is going double-digit growth. And we are the only mining company, natural
resource company in India, so as far as the consumption is concerned, as far as the growth is
concerned it has tremendous potential. This company is a UK company focusing on India
growth and we are completely committed and very-very excited on the Indian growth and
some of the African countries' growth that require the similar pace. So this is as far as the
consumption is concerned.
Participant:
And on the group structure?
DD Jalan:
So basically I think as Chairman has been talking about, as Tom also has said we are
committed to deliver a simplified group structure to the shareholders of the company and in
that process we completed one phase of simplification of the group wherein we consolidated
some of our aluminum business, iron ore business and copper business in India and now in the
second phase of simplification the proposal is to simplify the structure by merging Cairn along
with Vedanta Limited. We have received the requisite approval from SEBI and stock
exchanges and now we in the second stage of filing a circular with UK LA to take the approval
from the Vedanta PLC shareholders and post that we will be filing the scheme to the High
Courts to convene the shareholders meeting of Vedanta Limited and Cairn to take forward the
process and we think that we are on track and what we have said that in Q2 of next financial
year we are likely to complete this simplification process.
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Tom Albanese:
And for my own perspective, and if we said this, these will be a step at a time, this is layout of
what the next step is and then execute and that’s effectively what we are focusing on now is
that Cairn merger, we have laid out the process, we are going through those approval
processes, we are mindful of market conditions but the intention is to execute.
Frazer Jenson:
It is Frazer Jenson again, JP Morgan. A very quick one, the criteria's that reinstate the
dividend?
Tom Albanese:
I guess as with every company the boards will look at it at reporting period and look at the full
range of market conditions, performance of the business, the balance sheet we have a stated
policy which is a progressive dividend and take those all into consideration, that s what we
would intend to do next May.
Frazer Jenson:
So maybe to extent that pie, I think for some time people view dividend as arguably
unsustainable pie what it will take put it into balance sheet, etc., need to get it be instated.
Tom Albanese:
These are always holistic discussions looking at all considerations, I do not think we can just
sort of say one thing or another thing, it takes everything in to consideration.
Ioannis Masvoulas:
Ioannis Masvoulas from RBC, three questions. First in oil and gas, what is the three year
production profile following the additional CAPEX cuts? Second, just to clarify on the
working capital, you mentioned about 200 million of inflows from customer advances, would
you expect that to grow further? And third on iron ore, what would be the steady state unit cost
of production on CFR China basis, assume you deliver the 5.5 million tons.
Tom Albanese:
So maybe Mayank you can start with that then DD then Kishore, I may just make one
comment on iron ore once Kishore is done.
Mayank Asher:
As far as Capital is concerned for Cairn, we have given guidance for this year as well as next
year and you ask for three year forecast. What I can share with you is at this point we are not
giving the capital guidance for third year, however are working on making sure that the growth
pipeline of projects from tight oil is well defined and once we have clarity perhaps this time
next year when crude oil price environment and variety of external environment will be more
definitive but our job as management is to make sure that we spend capital wisely, produce
cash flow in this environment but continue to make advances in technology, capital cost,
operating cost and make sure that the growth pipeline is robust as it can be and the capital
guidance for third year we will kind of do it later on.
Abhijit Pati:
Coming to the second part of your question, I think in the current commodity price scenario
our main focus is to see that how do you generate positive free cash flow and how do we
always remain liquid, so we will not be averse to the idea of accepting more of such advances
in future also.
Kishore Kumar:
And for the iron ore business, the CFR delivered cost to China which includes the taxes and
duties that we paid to the Government of India, it is at about $34 to $35, now practically
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breaking even in terms of cash cost at this prices and out of this $35 about 40% of that is taxes,
that is almost $15 we pay in terms of various taxes between these local state governments and
the central government.
Tom Albanese:
I guess I would say on iron ore, the overall approach we are taking is a progressive one which
is that we will get some production going, we are starting the initial production without the
relief we would like to see on export duties or the double taxation between the development
mineral fund and also the permanent fund. And then assure we are getting positive cash flows
for that, work towards lifting the caps so we can increase our overall production, a work so that
we can take relatively our narrow margins down and make them more comfortable margins
because we have to recognize sea borne iron ore prices can decline and we have to stay
positive even in the face of that decline and rebuild that position but recognize that it is going
to be a long time before we are back at the levels of production, we would have been before
the shut downs. It is important to recognize that this is not enough volume to change the
balance in itself, a one year expansion here is still a couple of days of production expansion in
some of the other players. So we are not going to disrupt the market, what we want to do is we
want to free this material in the market, we want to make increasing cash flows and increase
our optionality so that when the markets are right we can be there.
Moderator:
Thank you very much sir. Our first question is from the line of Harsh Agarwal of Deutsche
Bank. Please go ahead.
Harsh Agarwal:
Hi Mr. Jalan, I had two quick questions for you. one was this to tie-up the refinancing for
Vedanta PLC next year, you mentioned you are talking to banks in final stages for $700
million to $900 million of loan, can you give us a bit more color who these banks are, what
exactly do you mean by final stages? I mean has the term sheet been signed, have you received
approval from the investment committee, I guess a bit more color on the exact stage of these
potential new money would be very helpful. The second quick question I had was, how much
outflow should we expect from the PLC level to support KCM on an annual basis let's say in
the next six to 12 months from here on? Thank you.
DD Jalan:
So I think as I have articulated in my opening remark, basically this is with the host of the
Indian banks with whom we are talking about this facility of $700 million to $900 million and
this has already been agreed in principle, now they are just trying to lay down the complete
process for themselves and post that the final term sheet will be signed. The second question is
regarding the funding of KCM, as Tom mentioned about that the cost of production of KCM is
now $1.60 and that business is turning around, so given that we expect that the business will be
self-sustaining henceforward but at the same time during this year we have commitment to pay
about $140 million, out of that about $100 million has been already paid by Vedanta PLC to
KCM and $40 million will be paid in the second half.
Moderator:
Thank you. We will take our next question from the line of Varun Ahuja of JP Morgan. Please
go ahead.
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Varun Ahuja:
I have three quick questions. Firstly, this $700 million to $900 million term loan at PLC level,
can you guide whether that will be secured or unsecured? And also can I confirm the 1.2
billion part repayment of inter-company loan that is to be raised at Vedanta Limited, did I get it
right that you said it will be purely from internal cash flows and net working capital inflows
rather than external debt raising? Secondly regarding this 2.6 billion inter-company loan, is
there any restriction within let's say the twin star loans that are there between the two levels
that they need to be repaid before you repay the 2.6 billion or part of the 2.6 billion intercompany loan? And lastly on Vedanta Limited results we saw that there was Rs.38 billion or
$600 million of inflow from advance on sales, does that add up to the 1 billion working capital
inflow that we saw at the consolidated number? Thank you.
DD Jalan:
So basically I think as I articulated on $700 million to $900 million of PLC loan, this loan is
going to be largely unsecured. And the second point was regarding internal cash of $1.2
billion, I think I amply narrated that how this $1.2 billion will be getting generated at Vedanta
Limited and how it will be up streamed. Basically this is going to be done over next three to
four months’ time and the $1 billion of working capital initiative that includes this advance
from the customers that is part of that. And then the last point was regarding the inter-company
loan, basically inter-company loan is going to be repaid by Vedanta Limited to TSMHL and
the money has to be up streamed from Vedanta Limited to TSMHL and then TSMHL has to
repay the inter-company loan between TSMHL and Vedanta PLC, that is what is the process
which has to be followed and in this process definitely we have to take the approval of the
lenders also before upstreaming the fund from Vedanta Limited to TSMHL that will be by
purchase of the shares.
Moderator:
Thank you. Our next question is from the line of Bharat Shettigar of Standard Chartered Bank.
Please go ahead.
Bharat Shettigar:
First question is, if I look at the holdco level debt that has increased by about $325 million in
the first half, can you tell me the exact terms and maturity profile of this debt and what has this
debt been used for?
DD Jalan:
So basically I think this debt is largely as I said that some money had been downstreamed to
KCM as a part of their refinancing plan, restructuring plan, so partly it is because of that and
partly it is because of some of the operational needs at Vedanta PLC and this is in a normal
course the loan has been raised at a term of somewhere around LIBOR plus 350 to 400 basis
points.
Bharat Shettigar:
And what is the tenure?
DD Jalan:
So these loans are ideally for a tenure of four to five years.
Bharat Shettigar:
The other question is with respect to the upstreaming of cash from Vedanta Limited level
through the inter-company loan repayment, just trying to understand what you exactly meant
by purchase of shares in the earlier answer and are you ruling out any further inter-company
loans from Cairn that you did last year.
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DD Jalan:
Bharat Shettigar:
Sorry, what was the last part of your questions please?
Are you ruling out any further inter-company loan from Cairn India to Twinstar Mauritius,
something which you did last year?
DD Jalan:
So as of now there is no plan for any further intercompany loan between Cairn India and
Vedanta Limited, so that’s number one. And the first part of the question, for upstreaming of
funds there are various optionalities which is available. One, as I said that it is repurchase of
share and another is the capitalization of TSMHL by sending loan from Vedanta Limited to
TSMHL, so both these optionalities are there, so depending on the circumstances we will
chose one of the option.
Moderator:
Thank you. Our next question is from the line of Imtiaz Sirfuddin of Societe Generals. Please
go ahead.
Imtiaz Sirfuddin:
I just have two questions, one is, if I can just have yes or no answer with regards to how you
are going to raise funds at Vedanta Limited level for the loan repayment, so just to clarify,
Vedanta limited is not in discussion for another loan at their level in order to pay off Vedanta
resources because there was an article recently, Vedanta limited is in talks with Stan Chart
over loan which carries an SBI performance guarantee, could you just perhaps provide some
clarity on that please. Secondly, it is on the 1.25 billion Cairn loan that supposedly falls due in
quarter one 2016, what is your thinking behind that, what if the merger does not happen by
then, what is the probability of you seeking an extension on that loan rather than repaying it,
also, would you need a minority shareholder approval at Cairn if that is what you are thinking
about?
DD Jalan:
So basically, I will tackle all your three questions. The first question was regarding the loan at
Vedanta Limited, of course we are in discussion with loans at Vedanta Limited and as I
mentioned to you that our main priority at Vedanta Limited is to see that how do we refinance
some of our loan, to see that the majority profile gets extended, so in that process we are in
discussion with the bank to see that how can we get a longer term loan at Vedanta Limited and
reduce our cost of interest also. The second part of the question was regarding Standard
Chartered Bank, so I think if you have heard the news it was in relation to some of the
customer advance what we have been discussing with them, so that transaction has already
been done. The third part is regarding the Cairn loan, so basically we have got various
optionality to deal with the Cairn loan which is due in the month of May and June, so we are
evaluating all those options but be assured that any of the option is going to be used within the
framework of the law and we will be evaluating those options and will be dealing with it.
Imtiaz Sirfuddin:
Can I just have a follow-up please, now the company has indicated on several occasions that
all options are on the table with regards to meeting your refinancing needs, can you say that
you are confident enough where you are today in all your discussions and options that you are
working on that debt restructuring is not an option that you may be looking at?
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November 4, 2015
Anil Agarwal:
No, we are more than confident that we deal with each and every, if you look at in our peers
group our loans are very balanced with the peer groups and we are very confident that we will
deal with each of our due payment.
Tom Albanese:
I guess I will just want to reinforce, that what we are focusing on is maximizing cash flow
from operations, I think the best way to mange balance sheet is generating cash from
operation.
Moderator:
Thank you. Our next question is from the line of Alex of HSBC. Please go ahead.
Alex:
I got two questions. The first one, I noticed that time table for Cairn India merger is actually
postponed by one quarter, may I know the reason why? And the second question is on the 1.2
billion of the refinancing from the Vedanta Limited LIBOR upstream to Vedanta PLC, just
want to clarify that with the 1.2 billion will be purely based on the unlocking working capital
from the copper segment? Thank you.
Tom Albanese:
Can you repeat the first question please.
Alex:
The first question is on Cairn India merger time table, I noticed that it has been delayed for one
quarter, so is there any reason why?
Tom Albanese:
I think it is a normal process, we are going through the CB approvals, and having a position, so
we are seeing it's really a month or two.
DD Jalan:
Yes, I think there was a delay in getting the SEBI approval for about a month or so, I think it is
just a spillover effect of that. And number two is that, $1.2 billion loan what you have been
talking about, as I said I will reiterate the point that it is going to be there, it is going to be
upstream either from the cash flow which is generated from the business or from the working
capital initiatives and leaning of the working capital at Vedanta Limited.
Alex:
So Vedanta Limited to actually raise funds from bond issuance or bank loans to pay this 1.2
billion, am I right?
DD Jalan:
Basically I think if I am understanding your question right, Vedanta Limited is in discussion
with some of the banks for refinancing their existing loan to extend the maturity profile and for
this $1.2 billion loan it is not contingent upon any fresh borrowing, it is going to be there from
the leaning of the working capital as well as from the free cash flow which gets generated from
the business.
Moderator:
Thank you. I now hand the floor back to the management that was our last question. Over to
you, sir.
Ashwin Bajaj:
Thanks operator. Thank you Ladies and Gentlemen for joining us today. And if anyone has
further questions please contact us at investor relations. Thank you.
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November 4, 2015
Moderator:
Thank you. Ladies and Gentlemen, with that we conclude this conference. Thank you for
joining us and you may now disconnect your lines.
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