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Sterlite Industries India Limited (ADR) (SLT)

Q1 2014 Earnings Call

July 25, 2013 8:30 am ET

Executives

Ashwin Bajaj - Senior Vice President of Investor Relations

Mahendra Singh Mehta - Chief Executive Officer, Member of Finance Standing Committee and Chief Executive Officer of Siil

Din Dayal Jalan - Chief Financial Officer, Principal Accounting Officer, Whole Time Director, Member of Shareholders' / Investors' Grievances Redressal Committee and Member of Finance Standing Committee

Tarun Jain - Director of Finance and Member of Finance Standing Committee

Analysts

Saumil Mehta - IDFC Securities Ltd., Research Division

Prasad Baji - Edelweiss Securities Ltd., Research Division

Ash Lazenby - Liberum Capital Limited, Research Division

Anuj Singla - Deutsche Bank AG, Research Division

Pinakin M. Parekh - JP Morgan Chase & Co, Research Division

Ram Modi - Dolat Investments Ltd., Research Division

Ashish Kejriwal - Elara Securities (India) Private Limited, Research Division

Tanuj Rastogi

Dhawal Doshi

Kamlesh Bagmar - Prabhudas Lilladher Pvt Ltd., Research Division

Giriraj Daga - Nirmal Bang Securities Pvt. Ltd., Research Division

Moiz Tambawala - Amit Nalin Securities Pvt. Ltd., Research Division

Operator

Ladies and gentlemen, good day, and welcome to the Sterlite Industries First Quarter Financial Year 2014 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ashwin Bajaj, Head of Investor Relations. Thank you, and over to you, sir.

Ashwin Bajaj

Thank you, operator. Hello, ladies and gentlemen. This is Ashwin Bajaj, Director of Investor Relations. Thanks for joining us today to discuss Sterlite's results for the first quarter ending 30th June 2013.

From our management team, we have with us today Mr. M.S. Mehta, CEO of the group; Mr. D.D. Jalan, group CFO; Mr. Tarun Jain, Director of Finance; and Mr. S.K. Roongta, CEO of our Aluminum and Power businesses.

I'll now hand it over to Mr. Mehta who will take you through the results. And then, we'll be happy to take your questions. So Mr. Mehta?

Mahendra Singh Mehta

Thank you, Ashwin, and good evening everyone, and welcome to Sterlite earnings call for the first quarter of FY '14.

Before reviewing business operating and financial performance, I'd like to go over a few key points. Despite ongoing challenging commodity and regulatory environment during the quarter, we delivered an EBITDA of INR 2,174 crores. During this quarter, we delivered a strong performance at Hindustan Zinc, Power business and our Aluminum business delivered a steady production performance.

As you're aware, our Tuticorin smelter was closed for most of the quarter and started operation again from 23rd June. Our balance sheet continues to be robust with a cash and liquid investment of almost INR 26,000 crores.

Regarding the Sesa-Sterlite merger, the proposed Vedanta Group Consolidation simplification has received the approval of the High Court of Madras on 25th July and approval of the High Court of Bombay at Goa on 3rd April. One of the shareholders of Sesa Goa has filed an appeal against the order passed by the High Court of Bombay at Goa before the Division Bench of the same court. The hearings before the Division Bench have completed, and the order is awaited.

Now let me walk you through the business highlights. First, with Zinc India. We delivered strong production growth in Q1, and we delivered better performance going forward, driven by the improved asset utilization and operational efficiencies. With higher volumes and stable CoP, we achieved 9% higher revenues and 7% higher EBITDA despite lower aluminum [ph].

We delivered 27% higher mined metal production and remain on track to deliver about 1 million tonnes of mined metal production during the year, with higher volumes coming from SK, Kayar and Zawar mines. With the higher availability of mined metal, we'll also sell excess concentrate later this year.

Our integrated production of refined zinc was 10% higher due to utilization. Integrated production of lead was in line with the previous Q1, and integrated saleable silver production was 9% higher driven by higher volume from SK and Zawar mines.

We are on track to produce 360 tonnes of saleable silver this year. Marginal increase in cost of production, in rupee terms, essentially were flat, impact of price and increase in excavation costs, lower acid credit, depreciation of rupee and positive impact of volume increase and reduced specific consumptions. Going forward, we expect our costs to stay stable in the current bank.

Moving to Zinc International. Total production at Zinc International was lower, due to disruption of production at Lisheen and Black Mountain, which has come back to normalcy now. We expect the full year production at Zinc International to be in line with the earlier guidance of 390,000 to 400,000 tonnes.

At CoP, Zinc International remained stable, and we expect to sustain this through the year. The lower production and lower aluminum resulted in 12% lower EBITDA at Zinc International.

Moving to Copper India. The Tuticorin smelter, as I've mentioned before, is operating normally since 23rd June and it is expected to produce its normal run rate of 85,000 to 90,000 tonnes quarterly in the remaining quarters. Since the plant is operated only for a few days in the quarter, sales, revenue, and EBITDA are not comparable with the prior periods.

At Australia, MIC production was lower due to lower grade. We expect full year production of about 25,000 to 26,000 tonnes of mined metal at Australia. Overall, the EBITDA was lower due to plant closure in Tuticorin and fixed cost in Tuticorin, which is partly offset by sale of surplus power. We sold some 137 million units from the first unit of 80 megawatt [ph] power plant at Tuticorin. The second unit is ready for commissioning, awaiting consent to operate.

In custom smelting business globally, Tc/Rc is favorable to smelter at this moment. And this year, we expect an average Tc/Rc of about 16 cents. Within [indiscernible], CoP of custom smelting business in Q4 -- Q1 was not meaningful. We expect to achieve a figure of around 7 cents in the whole year despite current weak acid realizations.

Moving to aluminum and first, to BALCO. The 245,000 tonne smelter operated at its rated capacity. This plant continues to convert most of its metal into value-added products. Our net sales realization over LME was strong at about $450 per tonne.

BALCO CoP of aluminum was higher by around INR 4,000 per tonne of aluminum due to tapering of linkage coal. In addition, one-off development in Q1, also, power generation went up during the quarter due to maintenance shutdown of one of the units of 540-megawatt power plant. We should go back to normal levels in Q2 however.

This business, BALCO, in the third quarter [indiscernible] largely is happening due to coal tapering and will get corrected with the production coming from coal block. On the BALCO project, the smelter -- the new smelter of 325,000 tonnes is expected to commence tapping of metal in Q3 this year. The 1,200-megawatt power plant is ready and awaiting consent to operate, which we're pursuing.

Regarding coal block as you're aware, we had earlier obtained the second stage forest clearance and are currently working to obtain the remaining approval from the state and other regulatory bodies. These were taking longer than expected. At this moment, we expect to commence the mining in Q1 of the next year.

Moving to Vedanta Aluminium. The VAL smelter operated at 7% above its nameplate capacity, and delivered 8% higher volume for the corresponding quarter last year. Going forward, we expect to maintain and sustain current production levels on this plant. Asset optimization and driving cost efficiencies are top priority, and we continue to deliver significant improvements in specific power consumption, throughput volume and other operating parameters, which has helped us to drive the CoP down to around INR 94,000 per tonne. In dollar terms, $1,575 per tonne. So this is lower than Q4 on a sequential basis, and on the year-on-year quarter comparison.

Current CoPs are well within the second quartile of the global cost curve, and we hope to sustain and maintain this position going forward. I must emphasize the strong cost performance in Q1, where despite the fact that Lanjigarh refinery was not operating, the refinery restarted operation in July, and we hope to reach our capacity run rate by end of Q2. The fixed cost will be sourced from conventional sources, including BALCO and augmented by imported bauxite.

For long-term bauxite sourcing, we remain engaged with Government of Orissa in looking for different alternatives. The VAL smelter continues to convert about 45% of its metal into value-added [ph] products, which is helping us to deliver robust performance on realization. And during the quarter, we delivered or achieved $320 per tonne of sales realization over LME.

EBITDA was lower due to LME and fixed costs in Lanjigarh, partially offset by higher volumes and cost performance. In additional information, VAL II smelter interest expenses, which we were eager to recapitalize, are now being charged out of P&L account, which has also impacted the factory VAL level.

Moving on to Power. Power sales was higher by 20% during the quarter, driven by higher power generation from the 2,400-megawatt Jharsuguda power plant. The plant operated at a PLF of 54% on 4-unit basis as compared with the 50% for 3-unit basis a year ago.

For full year, we expect to deliver significantly improved PLF close to 60% to 70% driven by improved access to the realization of power. As I've mentioned earlier, one of the units, a 540-megawatt power plant in BALCO had a maintenance shutdown during the quarter, which made us the average of about 204 million units of power in the 270-megawatt power plant at BALCO, resulting in net commercial sales on BALCO.

The average realization of Power business was higher due to higher sales of open access. The cost -- -- generation cost at SEL has also been stable. Overall, we delivered 21% higher EBITDA driven by higher volumes. On Talwandi Sabo power project, we expect the first unit to be synchronized in Q3 this year.

On an overall basis, in view of the impending merger, the company borrowed INR 5,000 crores at a lower rate of interest and lent it to Vedanta Aluminium with an objective of optimizing the overall borrowing cost at VAL. Accordingly, the increase in interest cost on borrowing was largely offset by increases in other income.

Before I close, I would like to reiterate that we had a good production performance at Zinc and Power businesses. We have a world-class portfolio of assets, which has been well invested and grown over the years. Our strategy of strong focus on cost control and the culture of continuous improvement will help us to deliver strong operational performance even in an uncertain environment, and we hope to maintain the same performance going forward.

With that I'd like to take your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] We have the first question from the line of Saumil Mehta from IDFC Securities.

Saumil Mehta - IDFC Securities Ltd., Research Division

So a couple of questions. One is, what was the average cost of -- the average coal cost for the quarter for SEL and BALCO? And what was it as on Q4 FY '13?

Mahendra Singh Mehta

Average coal cost for SEL for the current quarter is 1 rupee, 82 paise.

Saumil Mehta - IDFC Securities Ltd., Research Division

No, no, sorry. In terms of rupees per tonne, if you can give the rupees per tonne coal cost.

Mahendra Singh Mehta

Yes. Rupee per tonne coal cost, roughly, will be around INR 2,070 per metric tonne.

Saumil Mehta - IDFC Securities Ltd., Research Division

So this is for SEL?

Mahendra Singh Mehta

Yes, that's right. Basis on GCB.

Din Dayal Jalan

This is per GCB. This is different visibilty, based upon 3,000 GCB.

Saumil Mehta - IDFC Securities Ltd., Research Division

Okay, okay, okay. And also, what would be as on Q4 FY '13?

Din Dayal Jalan

Q4 FY '13 was much less. It was up here about INR 1,600.

Saumil Mehta - IDFC Securities Ltd., Research Division

INR 1,600. And so how do you expect that going forward? Should the linkage proportion come down in that case or this should be the average coal cost for the entire FY '14?

Din Dayal Jalan

Yes because one of the primary reasons for this increase is that the linkage percentage has come down, and our PLF has improved. That is why Q4 and Q1 are not technically comparable because the additional coal, we add to sources other than linkage.

Saumil Mehta - IDFC Securities Ltd., Research Division

Okay, okay. And so what could be, then, the similar coal cost in BALCO? Because I think the tapering of percentage in BALCO is coming down because the coal mine is going to commission very soon.

Din Dayal Jalan

Yes, BALCO, we take coal on the synergy GCB parameter for BALCO is 3,600. So on 3,600 GCB, our coal cost for BALCO has been roughly about INR 2,800.

Saumil Mehta - IDFC Securities Ltd., Research Division

And so what would that cost be in Q4 FY '13?

Din Dayal Jalan

Q4 FY '13, cost was certainly lower than this.

Mahendra Singh Mehta

Maybe we can pause this and we can come back to you, Saumil, but I think I also would like to supplement that all this is doing is supply of linkage coal from Coal India and it's more, I would say, biased towards Q4. That also, gives you in fact and -- this one I've seen work over the years quarter-on-quarter, year-on-year, you're going to see that. So there is distinct pattern of almost 10%, 15% difference in supply.

Din Dayal Jalan

Yes, here's the data. I can give the data now. Coal costs in the current quarter is roughly about INR 2,380, not what I mentioned. Four, we're also around the same, they were INR 2,410.

Saumil Mehta - IDFC Securities Ltd., Research Division

2,410. My second question is basically on the captive coal mine. Despite taking all the clearances, stage 1, stage 2, we have seen some delays. I mean, you did mention that some of the approvals are pending. So I just wanted to know what kind of approval, is it more on the state and government part? And how do you see that or whether we can expect those, actually, will also come by in a couple of quarters?

Mahendra Singh Mehta

Yes, these approvals are primarily on the state government part. We only have these 2 clearances from central government, and they primarily relate to forest diversion because this has got forest land that are blocked and so these certain approvals are required from the state. And also, there will have to be some type of committee approval for that land. So these 2 approvals are in the process. You know that all our regulatory and environment is taking longer than what we had anticipated for obvious reasons. So -- well, that's why it is taking longer than what we had anticipated, but we are pursuing. And there is no serious issue except that well, regulatory authorities are taking this long time.

Saumil Mehta - IDFC Securities Ltd., Research Division

So where are we in terms of land acquisition? Have we acquired the entire land or there are some, still, land acquisition pending?

Mahendra Singh Mehta

There are 2 parts to this. Saumil, forest land, which even after that approval, we will have that forest land diverted. Then, private land. Private land acquisition. We have done some acquisition, but major terms of the acquisition is yet to be done. But we don't have to acquire all the land before we start mining. We can start the mining operations even if it's partly finished.

Saumil Mehta - IDFC Securities Ltd., Research Division

Okay. And so my last question is basically on VAL. Did I hear you correctly that there has been some interest cost because the Jharsuguda-II has been commissioned?

Din Dayal Jalan

Saumil, I think what Mr. Mehta said, that even though the Jharsuguda plant II is yet to be commissioned, but since the plant is almost ready, so that is why as per Accounting Standard 18, we have started charging the increase to profit and loss account.

Saumil Mehta - IDFC Securities Ltd., Research Division

Okay. So what about the interest of INR 316, that should be more or less recurring in the subsequent quarters as well?

Din Dayal Jalan

Yes, the interest of around INR 300 crores, that should be almost recurring in the quarter. If we start the commissioning and once we start commissioning, but as I said, at that point of time, we can decide to capitalize.

Operator

The next question is from the line of Prasad Baji from Edelweiss.

Prasad Baji - Edelweiss Securities Ltd., Research Division

First question on the Sterlite Energy business, the Jharsuguda unit. I believe we have signed all the references. So how do you see division for the full year FY '14 and perhaps, FY '15? And how do you see coal [indiscernible] for the unit in Jharsuguda?

Din Dayal Jalan

Yes. We already have, Prasad, in place for 3 units and only for 1 unit, as I say, is to the fence [ph]. So in terms of the new guidelines with Ministry of Coal is giving it to Coal India, we will sign that effective for the fourth unit. And as Mr. Mehta had mentioned that we have set our PLF to be in the range of 60% to 70% for the full year.

Prasad Baji - Edelweiss Securities Ltd., Research Division

So full year average -- so currently, since you're at 55%, do you expect next quarter itself to go to a higher level of 70%? I mean, how do we see the progression in the coming quarters?

Din Dayal Jalan

Well, I suppose, the larger improvement will come in third and fourth quarter because in the second quarter, for some -- a few days we had some issue of water availability. But otherwise, we expect progressively PLF to improve in third and fourth quarters.

Prasad Baji - Edelweiss Securities Ltd., Research Division

Okay. So full year average will be 60%, I mean, just to be clear?

Din Dayal Jalan

That's what we have said. Full year average will be 60% or about...60% to 70%, in that range. That's what we expect.

Prasad Baji - Edelweiss Securities Ltd., Research Division

Right. And what kind of coal cost, I mean, obviously your guide -- I think the additional coal and you signed FSS but at the same time, you mentioned that the linkage proportion fell in this quarter. So how should we see the coal cost going forward?

Din Dayal Jalan

Well, we are able to even -- non-linkage coal because we are in the midst of the coal well. So we are able to source it competitively at competitive rates because our logistic quotes are much lower. And also MCL and Coal India, some of the subsidiary there bought extra coal there with cash because they are allowing outside the linkage quantity also. So we have access to that coal as well. That's a part of the Coal India policy to sell the excess captive coal as long as the buyer can make its own logistic arrangement, which we are able to do. So -- well, certainly to the extent that the proportion of linkage coal comes down and the coal proportion cost, your average cost will tend to move up. But we will try to see that our costs are maintained as much as we can.

Prasad Baji - Edelweiss Securities Ltd., Research Division

Understand. Just on the copper business, we have seen intermittent shutdowns by the various authorities at the current stage, we have restarted, but how do you see the sort of, on an overall basis, sort of, how do you see that unit working? I mean, do you expect further regulatory action or have you seen the end of it? How do we see on an overall, or on a yearly basis, the units operating?

Mahendra Singh Mehta

I think, Prasad, you do also see that Lanjigarh operating for 15 years now. And it is one of the benchmark plants and the mine is getting a lot of attention. And every attention also attracts a lot of committees visiting and inspecting the plants. The last 2 years, I would say that more inspections have been carried out, 2 under NGT direction and 2 under Supreme Court direction. And everything has been seen upside down. But in fact, if you go carefully by the NGT's recent order they observed based on expert committee finding is neither an existing polluter nor the threat of future pollution resulting in health hazards. So what we can say that this plant has gone through all the kind of scrutinies in the past, and we stand by to commit -- our commitment that we need to operate the plant with the best environmental practices. Having said that, yes, you are right. We have faced the challenges often. Any number of reasons for that, we are not the only plant who see -- who are getting this kind of attention. There are many plants around that -- even Konkola is also one of the examples. So we'll have to deal with it as it comes, but we remain committed that we must operate the plant to the best standards. And at this moment, for NGT order, we wish to continue running the plant with our current standards.

Prasad Baji - Edelweiss Securities Ltd., Research Division

All right. Just one question. I have follow-up questions, I'll just take one up. With Sterlite having increased borrowings of INR 5,000 crores, that interest cost would start immediately, right? I mean, from this quarter and next quarter onwards, the interest cost should fully reflect this INR 5,000 crores. The interest on this INR 5,000 crores should be fully reflected immediately. I just want to confirm that.

Din Dayal Jalan

Prasad, on an overall basis, it is just a refinancing. And Sterlite has borrowed the money and given it to VAL. So -- in Sterlite, basically, the borrowing cost has increased, and that much amount is coming in other income. With -- by way of interest, with it coming from VAL.

Operator

The next question is from the line of Ash Lazenby from Liberum Capital.

Ash Lazenby - Liberum Capital Limited, Research Division

Just a quick question relating to the merger of Sterlite and Sesa Goa. Obviously, you said today that a shareholder of Sesa Goa has filed an appeal, and there was a hearing before the Division Bench, which is completed, and the order is awaited. Just wondering, to the extent that you can comment, what the process is now to deliver deal completion? And whether, to the extent that you can give an indication, perhaps, of the timing of that? And whether there have been other appeals where there's risks of then further hearings that may have to occur as a result of them?

Mahendra Singh Mehta

Tarun, would you like to take this question?

Tarun Jain

Yes. As you rightly observed, there was an appeal from one of the shareholders in Goa with -- and we have said that hearings are already over, the judge's order is to be announced, which we expect in the next 1 or 2 weeks. And thereafter, the scheme can be implemented because now we have the order from the High Court. So once court processes are over, I think within a week or so, we will be announcing the court date and completing the share swap exercise as well. At this point in time, there's only one appeal from one of the shareholders of Sesa Goa, which is pending. Order is pending. The hearings are over.

Operator

The next question is from the line of Anuj Singla from Deutsche Bank.

Anuj Singla - Deutsche Bank AG, Research Division

My question relates to the cost of production of aluminum at VAL, as well as at BALCO. Over the last few quarters, we have seen a wide divergence in the cost of production. Whereas VAL has been declining, BALCO has, in fact, remained stable or slightly increased. So could you throw some light on what is the key reasons of this differential? And secondly, should we expect the cost of production at VAL to go down in the coming quarters, given that it already includes some amount of fixed cost on account of the Lanjigarh refinery, and we should expect some savings as Lanjigarh comes online? And also on BALCO, is there a chance of reduction in this cost of production without assuming that the coal block is coming over the next 2 to 3 quarters?

Din Dayal Jalan

Yes, I know you have rightly observed about the well[ph] plants in CoP of Jharsuguda and BALCO. Now first, taking BALCO. There is a spike in CoP of BALCO. As Mr. Mehta has explained in his opening remarks that INR 4,000 per tonne is the impact of tapering of coal linkage. We have the next 25% coal linkage has been tapered with effect from June this year. So as against our additional 100% linkage last year, 25% was shut off and now another 25% has been shut off. So that is making a difference of total[indiscernible] billed tonnes. So we will not be able to offset that cost. But also we had another impact, as it was mentioned, that we had a shutdown of one unit in our more efficient 540-megawatt CPP. And as, again, that we have to draw the power for the smelter from less efficient 270-megawatt CPP, which has a higher cost of production because of efficiency parameters. So those kind of costs we will be able to adjust going forward, and we are driving the cost parameters relatively in BALCO. We expect also lower cost in terms of the carbon cost going forward because carbon prices are softening, to some extent. And also once we have the Lanjigarh operational, then part of their alumina requirement, we're done controlling while [ph] Lanjigarh. That will bring down the alumina cost. Certainly we expect BALCO cost to come down. As far as Jharsuguda is concerned, the primary reasons for cost efficiency had been in a better operational efficiency parameters in terms of our consumption parameters of alumina carbon, as well as our power consumption and power costs. And through various measures, we had been able to keep our coal costs contained at Jharsuguda by getting the improved quality of coal from Coal India. And that has kept -- there is somewhat reduction in coal cost we have been able to achieve at Jharsuguda, and it will be what I'll refer to [indiscernible] and drive this cost going forward. Of course, there can be seasonal impact like, in monsoon periods, there is always lesser availability of coal, and also the coal quality deteriorates. But certainly we will make best possible efforts to keep our costs down and maintain our cost levels. And yes, well the impact of fixed cost of Lanjigarh was not very high, but certainly it will also help in keeping the first term.[ph]

Anuj Singla - Deutsche Bank AG, Research Division

Okay. Mr. Mehta, just one follow-up question. In this quarter, there is a difference of around $260 between the CoP at VAL and BALCO. Will it be fair to assume that a significant portion of that is primarily on account of coal, higher coal and power costs at BALCO? Or are there any other differences, any other hedge [ph] or signs where BALCO is inefficient compared to VAL?

Din Dayal Jalan

No. Yes, primarily coal and power, of course, but, there are also elements of fixed cost. Fixed cost at BALCO because of the employee cost and others cost. For historical reasons, we have higher fixed cost at BALCO. That is also another major factor. But we are reducing our manpower going forward, and certainly, there is a plan to progressively reduce our manpower and bring down this fixed cost.

Mahendra Singh Mehta

In fact, as [indiscernible] being used later, it will help us to reduce the manpower cost element. This shouldn't happen, but delayed -- it will be very delayed that impact also. But it will depend on also those fees reduction in these fixed assets [ph] of BALCO, which is quite significant.

Operator

The next question is from the line of Pinakin Parekh from JPMorgan.

Pinakin M. Parekh - JP Morgan Chase & Co, Research Division

Two questions, so first one, VAL. One is the company has announced the restart of the alumina smelter at Lanjigarh. Now just trying to understand how would this change the VAL smelter cost of production going forward. Will it increase or will it decrease and roughly by how much? And my second question on VAL is that a couple of quarters back, the company had mentioned that it is evaluating the decision to start the second smelter. What are the thoughts over there? And where do we stand?

Mahendra Singh Mehta

Well, as far as the cost impact on account of restarting of Lanjigarh Alumina refinery, well, the difference between our lended cost of imported alumina, which we have to resource to run our VAL smelter. To service our cost at Lanjigarh will be roughly about $40, but we are not going to source the entire alumina from Lanjigarh because part of the alumina will go to BALCO, and only part of the import we'll get to play [ph] to Lanjigarh. So we think...

Pinakin M. Parekh - JP Morgan Chase & Co, Research Division

Lanjigarh would be cheaper by $40 per tonne?

Din Dayal Jalan

Yes, roughly as compared to imported alumina.

Pinakin M. Parekh - JP Morgan Chase & Co, Research Division

As compared to imported alumina and on the Jharsuguda smelter?

Din Dayal Jalan

So if we -- once we attend the full production at Lanjigarh, then Lanjigarh will be making roughly about 50% of -- a little less than 50% of Jharsuguda in the commerce so. Overall the smelter cost, it will make a difference of about $30 to $40.

Pinakin M. Parekh - JP Morgan Chase & Co, Research Division

Okay, and any thoughts on the Jharsuguda smelter restart of the second smelter, which is right now not operating?

Din Dayal Jalan

New smelter, [indiscernible] smelter is concerned, as the smelter is almost ready now and so we commissioned. And we are continuing to evaluate our options with regard to power sales versus smelters. But I suppose, since now all our facilities are ready, we will take that decision shortly. Of course, we are closely watching the moment in LME and also the power sales rates.

Pinakin M. Parekh - JP Morgan Chase & Co, Research Division

Sure. Just one more question on the interest cost. The company did mention that it is refinancing. But if we were to look from a merged entity basis, then the other income will get cut off from VAL to Sterlite. But VAL's accounting interest has gone up because of the secession of interest while the net borrowing at Sterlite would have also gone up. So on a merged entity basis, the interest cost has taken a step up from the previous quarter. Would that be a correct way to look at it?

Din Dayal Jalan

If you just try to look at it, out of INR 7,000 crores is increasing borrowing, INR 5,000 crores is refinancing. Whatever money is linked to VAL, VAL has [indiscernible] refinancing with higher cost borrowing, eventually, they're just getting off somewhere around 2.5% in the VAL's borrowing cost as a merged entity. And basic[ph temporary increase in the borrowing -- in Sterlite because of the working capital and the stoppage of the plant. So once the plant gets re-maintenance[ph] it could get to normalized and that increase in volume will reproduce.

Pinakin M. Parekh - JP Morgan Chase & Co, Research Division

The 2.5% interest cost saving will be on the quantum of INR 5,000 crores?

Din Dayal Jalan

That's right.

Pinakin M. Parekh - JP Morgan Chase & Co, Research Division

And this would be -- given the volatility we have seen in interest rates over last few weeks, is this staying still in place or these are shorter-term borrowings, which will get repriced over the coming quarters?

Din Dayal Jalan

These are long-term borrowings, and this will definitely will remain.

Operator

Next question is from the line of Ram Modi from Dolat Capital.

Ram Modi - Dolat Investments Ltd., Research Division

I just wanted to know what would be the impact of the recent increase in price by Coal India on a cost of production, both at BALCO and VAL?

Mahendra Singh Mehta

Coal India has increased the price of linkage coal by over 10% recently. And going by the composition of linkage coal in our total basket, it makes a difference of about 4 paise per unit.

Ram Modi - Dolat Investments Ltd., Research Division

About only 4 paise per unit?

Din Dayal Jalan

Yes, because we don't have full linkage. 4 paise to 5 paise, roughly around that.

Ram Modi - Dolat Investments Ltd., Research Division

4 paise to 5 paise per unit. Okay. And I just wanted to check on [indiscernible] power plant at BALCO which is a 1,200 megawatt V. It is ready to operate, but we're not getting the consent to operate. Any specific issues which are there, which is taking so long for them to consent to operate permission?

Mahendra Singh Mehta

Well, yes, consent to operate is taking a little longer than what it should have. There are certain formalities, which government objectives there has to complete in their revenue reports with regard to the registration of certain land. And they are -- there are certain processes they are going through in the state government between district and Secretariat, and that's taking a little extra time. So -- but there are no issues. We will get the consent offer.

Ram Modi - Dolat Investments Ltd., Research Division

Okay. Lastly, on Zinc International, we have not seen any updates coming out in terms of Gams -- progress on the Gamsberg project. So where is it? When is the feasibility study completed? And what are the timelines we're looking at? I just wanted a view, I was curious about that.

Mahendra Singh Mehta

Yes. Sure. I think the study is still underway, and as we've mentioned before, as and when we complete, we start with the project, we will like to complete in a phase fashion. So it can be maybe 1, 2 or 3 kind of different multiples. But at this moment, the study is going on. And since the study is going on, the board hasn't taken any view on the project commencement so far. At that parallel, we are also in the process of obtaining the necessary regulatory approvals for environment clearance such as dry [ph] and post [ph] jurisdictions. That process is currently going on.

Operator

Next question is from the line of Haven Cheda[ph] from Inam [ph] Holdings.

Unknown Analyst

Does the entire impact of reduction in linkage coal at BALCO captured in the quarter? So that the linkage coal quantities now would be almost similar in the coming quarters or would we see a further decline in coming quarters?

Din Dayal Jalan

It is more or less captured. Of course, we had some small quantity in the month of April, which I have in the linkage, and -- but going by the fact that they don't give the full quantity in the quarter 1 and there were some reduction in the linkage quantity by the railway, I suppose the impact is you can see more or less captured the linkage.

Mahendra Singh Mehta

I think it's a representative of current picture of linkage reduction, yes.

Unknown Analyst

Okay, and at Sterlite, Energy also, out of the 4 units, I believe you have linkage for first 2 units only, right? Last 2 are purely based on the option coal?

Mahendra Singh Mehta

No, we have linkage for 3 units already. We already have [indiscernible] are in place for 3 units.

Unknown Analyst

For 3 units, and you get around 50% of your requirement at SEL?

Mahendra Singh Mehta

We get an average of around 55% of the 3 units requirement.

Unknown Analyst

55% of 3 units requirement. Okay. So the other thing is can you give the gross consolidated debt number? And if possible, company wise, particularly Sterlite Energy, Sterlite standalone and BALCO number?

Din Dayal Jalan

Yes, sure. The gross consolidated loan unit is INR 27,300 crores. And of this, BALCO is INR 4,800 crores, SEL is INR 2,700 crores.

Unknown Analyst

SEL is INR 2,700 crores? [indiscernible]

Din Dayal Jalan

That's INR 4,100 crores.

Unknown Analyst

INR 4,100 crores and balance would all be Sterlite standalone, right?

Din Dayal Jalan

By and large, it is small amount of loan in one of our coal companies and then balance in Sterlite.

Unknown Analyst

And Zinc International has net cash, right?

Din Dayal Jalan

Yes, absolutely right.

Operator

Next question is from the line of Ashish Kejriwal from Elara Capital.

Ashish Kejriwal - Elara Securities (India) Private Limited, Research Division

This is regarding Gamsberg project only. When we are talking about that study, still end up robust [ph], which means, is it safe to assume that it will not be commenced before FY '15?

Mahendra Singh Mehta

I mean, that's a very fine question. So it's a question of commencement. We're prepared to answer your question so sharply. But if we're looking at the cash flow point of view, that you can imagine that particularly cash flow takes about from 4 to 6 months within commencement. So I hope I labeled my response to be able to answer your inner inquiry, which is behind your question. So that's the way I can respond.

Operator

Next question is from the line of Tanuj Rastogi from Marwadi Shares & Finance.

Tanuj Rastogi

See, for my question is for SEL. Are you started finding PPAs for all the 4 units?

Din Dayal Jalan

Well, we don't have to necessarily find PPAs for all the 4 units. We already have PPAs with one unit [indiscernible] with the Orissa, and well, we have MPOS for some of our plants. And we will be using some of our -- some of this power for running our smelters. So we don't have to really find PPAs for all the units.

Operator

The next question is from the line of Dhawal Doshi from PhillipCapital.

Dhawal Doshi

First, I just missed a couple of things in the start. Mr. Mehta, you said BALCO's coal cost was INR 2,380 crores in the first quarter, right, per tonne and INR 2,410 crores in Q4?

Din Dayal Jalan

Yes, for INR 3,600 crores.

Dhawal Doshi

GCB, yes. But, sir, if I'm not wrong, sir, with the coal -- tapering of the coal linkage, the cost should have gone up on a per tonne basis, right? This is showing a INR 30 decline. And so it's a bit difficult to understand why would that be the case?

Din Dayal Jalan

We have been able to source the option call at a cheaper rate, for quarter 1 of this year as compared to quarter 4. That has brought down the average costs. And also we saw some of -- as we reject coal for our power plant, that cost has also come down. So these 2 will have an impact of around [indiscernible] coal cost, plus this also is a factor of quality. The specific quality improve the coal and that can also bring down the cost.

Dhawal Doshi

Okay. Sir, secondly, with regards to the debt at VAL, does this 32, 44 [ph] include the working capital debt or that is all in about this?

Din Dayal Jalan

Date of consolidated debt of INR 27,300 crores was of...

Mahendra Singh Mehta

To VAL.

Din Dayal Jalan

Okay, VAL.

Dhawal Doshi

No, no, I was talking of VAL, sir.

Din Dayal Jalan

Okay. That includes the total debt.

Dhawal Doshi

Okay. And how much will be working capital in this?

Din Dayal Jalan

I think working capital will not be much. It will be somewhere around, give me a minute, please. That's probably around somewhere around INR 450 crores also.

Dhawal Doshi

Okay, which is included in this, right?

Din Dayal Jalan

Yes.

Dhawal Doshi

So my next question was with regards to the 1,200-megawatt power plant at BALCO. I just wanted to understand is the delay in consent to operate on account of the factory license, which has been suspended by the government some quarters back?

Mahendra Singh Mehta

No, I don't infer due to that, that factory license will get to start. And as I had mentioned that there are certain records, which government has to be reconcile with their own departments, and that's taking it's time to really get executed.

Dhawal Doshi

Okay, so we've not even got the factory license still right because I believe...

Mahendra Singh Mehta

No. That action is [indiscernible] on. So I don't think that that's a cause for worry. That factory license, we are confident of getting it.

Dhawal Doshi

Okay. And sir, this $320 that we've earned over and above the aluminum prices in VAL that would include the custom duty part as well, right? And the regional premium?

Din Dayal Jalan

Yes. It includes the custom duty.

Mahendra Singh Mehta

The fact of all factors x factory, yes. But it also includes the premium of our export, where we don't get this custom duty premium. So it is $320 including domestic and export.

Dhawal Doshi

$320 is the blended that we got over and above LME, let me put it that way?

Din Dayal Jalan

Yes, yes.

Operator

The next question is from the line of Kamlesh Bagmar from Prabhudas Lilladher.

Kamlesh Bagmar - Prabhudas Lilladher Pvt Ltd., Research Division

I just wanted to understand your stride under this ceiling like sale of [indiscernible] . What we understand that like Coal India gave the color on under the [indiscernible] for the companies that held the PPAs with them. So in our case, what is the structure in terms of power sales within the PPAs and the like or of patnam [ph] or sale of power. So what is the breakup, broad breakup and like, when we -- in fact, with Coal India, they do mention that all the coal which they are selling, all is going at like the linkage prices, provided the buyer has a PPA with them?

Mahendra Singh Mehta

Yes. So we are in line with the Coal India policy, and as I mentioned, we do have PPAs, with [indiscernible] coal which qualifies for -- We also have medium-term PPAs and taking all that into account, we have sourcing our coal as Coal India has promised.

Kamlesh Bagmar - Prabhudas Lilladher Pvt Ltd., Research Division

But like currently I think the coal under MOU or it is under the FSE?

Mahendra Singh Mehta

No, it is under FSE. As I've mentioned that we have FSE for 3 units, and we are getting under [indiscernible].

Kamlesh Bagmar - Prabhudas Lilladher Pvt Ltd., Research Division

But like Coal India, there should be a long-term PPA. So when we say there is some midterm or short-term PPAs, how does that like -- like broadly defined under that?

Mahendra Singh Mehta

Yes, as a policy, it's evolving after Coal India. So new wirelines [ph] from time-to-time are coming, and whatever coal we are growing, it is as per Coal India's policy.

Operator

We will take the last question from the line of Giriraj Daga from Nirmal Bang Equities.

Giriraj Daga - Nirmal Bang Securities Pvt. Ltd., Research Division

I have one question regarding the -- what is the sales volume of copper during the quarter?

Mahendra Singh Mehta

What is that?

Giriraj Daga - Nirmal Bang Securities Pvt. Ltd., Research Division

Sales volume of copper? Like we did a production of 16,000 tonnes, but volume was different that was sold in inventory out there.

Din Dayal Jalan

Sales volume of copper, okay. 16,000 tonnes.

Mahendra Singh Mehta

16,000 tonnes.

Din Dayal Jalan

About 16,000 tonnes.

Giriraj Daga - Nirmal Bang Securities Pvt. Ltd., Research Division

16,000 tonnes. That is the same with the production, okay. And my question is regarding, again, on the cost of coal for Vedanta Aluminium and BALCO. It will be very helpful if you give the breakup like, what is my alumina cost, what is my smelting cost, and what is my other cost for these 2? So that should, I guess, will clear many doubts. Like, we will be able to understand what is like my alumina, smelting and other cost for these 2, BALCO and VAL.

Din Dayal Jalan

Give me a minute, please.

Ashwin Bajaj

We can start giving this from next quarter.

Mahendra Singh Mehta

Yes.

Ashwin Bajaj

And I mentioned that BALCO. No he's wanting a breakup of the different components of cost; alumina, power and... That's what you're looking for?

Giriraj Daga - Nirmal Bang Securities Pvt. Ltd., Research Division

Yes, actually.

Ashwin Bajaj

So actually the alumina cost is more or less comparable.

Giriraj Daga - Nirmal Bang Securities Pvt. Ltd., Research Division

But the number is what? $700? $800?

Ashwin Bajaj

Alumina cost is -- I don't have with me but I say it's close to over INR 42,000 or so.

Ashwin Bajaj

INR 42,000 or so. So that should be roughly $700 part.

Mahendra Singh Mehta

$700 that's right.

Giriraj Daga - Nirmal Bang Securities Pvt. Ltd., Research Division

And smelting of Vedanta Aluminium should be around $800?

Ashwin Bajaj

And well, our power and carbon cost put together yes, you take it, so it's roughly 155 [indiscernible] About $900.

Moiz Tambawala - Amit Nalin Securities Pvt. Ltd., Research Division

$900 per tonnes for that.

Ashwin Bajaj

No, no ,sorry yes.

Mahendra Singh Mehta

BALCO.

Ashwin Bajaj

It's BALCO. So it is BALCO number I am telling you.

Giriraj Daga - Nirmal Bang Securities Pvt. Ltd., Research Division

BALCO is $900.

Ashwin Bajaj

Yes.

Giriraj Daga - Nirmal Bang Securities Pvt. Ltd., Research Division

And what other cost should be?

Ashwin Bajaj

Other costs of BALCO is roughly about INR 11,000.

Giriraj Daga - Nirmal Bang Securities Pvt. Ltd., Research Division

INR 11,000.

Din Dayal Jalan

The corresponding cost of --

Giriraj Daga - Nirmal Bang Securities Pvt. Ltd., Research Division

So there's one -- you had the VAL smelting cost. Is it like BALCO $900, for VAL it should be what $700, $600?

Ashwin Bajaj

No, it will be less.

Ashwin Bajaj

$953 including fixed cost, yes. So that should take it to about $950 including fixed cost.

Giriraj Daga - Nirmal Bang Securities Pvt. Ltd., Research Division

Okay, including fixed cost at VAL is $950?

Ashwin Bajaj

$700 plus $950 about $1,650.

Operator

Ladies and gentlemen, that was the last question. I would now like to hand the floor back to Mr. Ashwin Bajaj and the management for closing comments. Please go ahead.

Ashwin Bajaj

Ladies and gentlemen, thank you for joining us today. And if you have further questions, please feel free to contact us at IR. Thank you.

Operator

Thank you, gentlemen of the management. Ladies and gentlemen, on behalf of Sterlite Industries, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.

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Source: Sterlite Industries India Limited (ADR) (SLT) Management Discusses Q1 2014 Results - Earnings Call Transcript

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