Vedanta Resources' (VDNRF) CEO Tom Albanese on Q2 2014 Results - Earnings Call Transcript

Aug. 3.14 | About: Vedanta Resources (VDNRF)

Vedanta Resources Plc (OTCPK:VDNRF) Q1 2015 Earnings Conference Call July 30, 2014 4:00 AM ET

Executives

Ashwin Bajaj – Director, Investor Relations

Tom Albanese – Chief Executive Officer

DD Jalan – Group Chief Financial Officer

Sushil Kumar Roongta – Chief Executive Officer, Aluminium & Power Busineses

Steven Din – Chief Executive Officer, KCM

Kishore Kumar – Chief Executive Officer, Africa Base Metals

Sudhir Mathur – Chief Financial Officer, Cairn India

Analysts

Liam Fitzpatrick – Credit Suisse

Jason Fairclough – Bank of America Merrill Lynch

Menno Sanderse – Morgan Stanley

Ritesh Shah – Espirito Santo Securities India Pvt Ltd.

Tim Huff – RBC Europe Ltd.

Jatinder Goel – Citigroup Global Markets India Pvt Ltd.

Operator

Ladies and gentlemen, good day, and welcome to the Vedanta Q1 FY 2015 Production Release Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to, Mr. Ashwin Bajaj. Thank you, and over to you, sir.

Ashwin Bajaj

Thank you, Melissa. Ladies and gentlemen, good day this is Ashwin Bajaj, Director of Investor Relations for Vedanta. Thanks for joining us today to discuss our Production Results for the First Quarter of FY 2015.

Let me introduce our management team present with us today. We have our CEO, Mr. Tom Albanese; our CFO, Mr. DD Jalan; we also have Mr. S.K. Roongta, CEO of our Aluminum & Power business; Mr. Sudhir Mathur, CEO of Cairn India; Mr. Kishore Kumar, CEO of our Africa Metals business; Steven Din, CEO of KCM; Pramod Unde and AN Joshi from our iron ore business.

Tom will make his initial remarks and then we will be happy to take your questions. So with that I'll hand it over to you. Tom?

Tom Albanese

Thank you, Ashwin, and good morning, everyone, and for some of you in India, good afternoon. I'm pleased today to present the first quarter fiscal year 2015 production results. Maybe, I'll first with some highlights.

In Cairn India, then we probably want, we can have Sudhir talk a little later, we've seen stable oil and gas production and ongoing exploration has yielded good results. Our exploration results have identified significant potential for gas development in Rajasthan. That's probably been the biggest development over the past quarter.

At Zinc India, the performance was per the mine plan in both the Agucha and SK mine shaft projects are progressing well. And the team has been reinforced by recruiting specialists for critical, technical roles in the underground mines.

Meanwhile, Aluminum, the smelters continued to operate efficiently. We've had strong EBITDA margins at about 18% and the first phase of the 84 pots at the core above 325,000 tonne per year facility at BALCO commenced production.

So overall, EBITDA was about $1 billion for the quarter. Before I talk about the performance of each of the segments, I'd like to speak some observations about the current regulatory framework. And clearly most important thing that's happened in the past several months have been the change in government in India and decided to shift toward in more of a focus on job creation.

And I would say that myself and other senior executives in both Vedanta and subsidiaries have been actively involved in discussions with the government ministerial level and throughout the central government. In addition to – in talking with at the state level, again we've seen the similar type of shift at the state level recognizing the importance of job creation.

I'd say first of all that the approach that the government is taking I would describe as being pragmatic and when we're there settling in for the long term we're not looking at – we're not seeing any quick fixes, nor we're seeing anything that would be seen as an immediate reaction or a quick promise that could fade over time. When said, it feels like they're making sure that, all the processes are by the book and that they do clear the files. And that term, clear the files, is something that regularly comes up in the engagement.

I think some from a perspective of Vedanta, clearly the – making progress on the divestment of government stakes at Hindustan Zinc and BALCO are quite important and there've been some progress even though will pass few weeks with approvals, valuers been appointed, et cetera.

In aluminum, we had I think very good progress with the new audacious state government on bauxite and particularly laterite allocations and we've had I think good discussions with the state government to use power from 2,400 megawatt Jharsuguda power plant which is ours for our own aluminum smelters at Jharsuguda.

Another power site, I think that we are seeing a renewed focus from the government, faster clearance and increased coal availability, but as I'll talk about in the discussion of operations coal availability is probably the biggest headwind that we're facing in the coming months. And I think that for us it's quite important to create a roadmap to ensure that we have those coal linkages to those nearest plants but we don't have our own captive source.

In oil and gas, we very clearly see, and I think that geopolitical events over the past several months have reinforced the needs of the government to work toward improving energy security in the country. And yeah, we've definitely been involved with discussions with the ministry. We're looking at the incentive regimes and what should be done in terms of the revenue sharing and cost sharing approach to incentivize new exploration, particularly to bring in the oil majors into the country again, and, yeah, that we would hope to see that ministry working on uniform policy of the licensing of hydrocarbon resources.

And then finally on iron ore, we have seen the central government focused on resolving the current situation and again with the combination of the steel and the iron ore industry, I think it's fair to say there's more engagement between steel and iron ore in terms of trying to resolve those differences between the two sides.

At the state level we have seen the Goa government talking about working towards formulation of its mining policy. Of course, we said that we like to see mining start by the end of the monsoon season, so there's only a few months to go before we get to the end of the rains. So if I can look at each of the operations and these segments a little more detail again starting with oil and gas.

I would like to ask you to start by briefly discussing the two clear trends that drive the global oil and gas industry outlook. On the supply side the continued revolution with regard to technology and tight resources in U.S. continues to witness the fundamental change in production growth in U.S. has been changing the supply-demand picture on a global basis but also causing others outside of the U.S. to recognize do we have the same type of resources, can we employ the same technology.

And on the demand side, emerging market economies such as India and China are continuing to – see continued relentless demand increases for both oil and gas. And I think the message for India is clear. Policy reform, enabling oil and gas business environment, and deploying of technology will be fundamental to enhance energy security and achieve the country's goal of self-sufficiency. So we continue to actively engage with the government of India and we're confident in their continued support to further reduce India's dependence on oil imports.

And when you think about the fact that Cairn has over the past three years, almost entirely contributed to the growth in oil production in India, you can imagine that, that Cairn is an important part of this picture, now producing about 26% of India's total domestic production.

During the first quarter, average daily gross production was 217,000 barrels of oil equivalent driven primarily by the production ramp up in the Rajasthan block. At Rajasthan we had an unplanned outage at the Mangala Processing Terminal what we were doing tie-in works and we all are planning and move into August for routine operations such to our maintenance shutdown at the processing terminal for about 10 days in August.

And we'll be utilizing this opportunity to create tie-ins for ongoing facility enhancement, some of the field injection activities, development projects, and future growth projects.

And the other two producing assets did help along the way to sustain overall volumes in the quarter, during the course of the quarter we did carry out an intended third-party assessment for our Rajasthan operations and we were rated in the top quartile for technology deployment and operational efficiency.

We did set a target for drilling 3 billion barrels over three years and this is a potential and toward the end of the quarter we established 1.2 billion barrels with an additional 0.6 billion barrels currently under evaluation. So we target to finish most of this drill-out in the current financial year. Meanwhile, we ask the exploration team to focus on the next generation of targets and that team has continued to deepen our faith in the Rajasthan block.

As a consequence of some detailed work done by the team over the past several months we've doubled our guidance of in-plays from – potential from 3 billion barrels to 6 billion barrels. And we're particularly excited that gas is likely to be up 15% to 20% of the resource space currently being drilled. Our Cairn team has been diligently detailing a plan to ensure that gas becomes a substantial part of Cairn's near future.

And moving to EOR we are on track to initiate the injection by the end of this year.

For gas, the Raageshwari Deep Gas field just made a whole 1 TCF to 3 TCF of gas in place. The recovery factors of about 50% have been achieved from sour [ph] and tight reservoirs elsewhere in the world. And in addition to the Rajasthan field the ongoing exploration results are encouraging and we indicate the presence of a multi-TCF gas resource based in around the Raageshwari field towards the seven portion of our Rajasthan block.

In terms of development and production, the current production volumes from Raageshwari would be doubled. And considering the significant multi-TCF gas potential in the block we sought government of India approval to lay a 30-inch gas pipeline from the block to connect the existing gas grid in Gujarat and we hope to award the major contracts within the next 6 months or so.

I'll move into Zinc India and Hindustan Zinc. In line with our mine plan, during the first quarter we evacuated more waste than ore from the Rampura-Agucha open pit and hence our overall mined metal production and so subsequently our refined metal production was lower. This production was also impacted by great variations which we do expect to normalize in the second-half of the year.

Silver production was lower due to temporarily lower silver grades at the SK mine resulting from deeper sequences and the grades are expected to improve as we go deeper. We maintain our fiscal 2015 guidance of delivering marginally higher production of mined and instrated [ph] metal including silver. Coming to Rampura-Agucha and the Sindesar Khurd shaft projects, both of these projects are progressing well. And from the Rampura-Agucha open pit the mine design and planning for further deepening of the pit is also under progress to explore extension of the mine life.

And as you know on a global basis large safe mines are coming to an end of their mine life including probably routine and we will be seeing some supply constraints going forward. And this has been reflected in the recent run-up of the zinc prices. We are very well positioned to benefit from this area with our large scalable, low cost mines. And just as an example to treat silver and lead as byproduct of zinc, our cost of producing and refining zinc would have been around $500 per tonne.

For Zinc International, during the first quarter we had a production loss at BMM and at Lisheen. And at BMM the main reasons for the production loss were drop in grades and lower ore production and this was further impacted on the account of planned maintenance shutdowns for the mill.

As I mentioned earlier, detailed feasibility studies in addition to the associated test works for the Skorpion conversion to treat sulphide ores are underway and expected to be complete by fiscal year of 2016. And the prefeasibility study for Swartberg and definitive feasibility study for the Gamsberg is effectively an extension of Black Mountain, are progressing well and expected to be targeted and completed within this financial year.

Our target overall and vision would be to create integrated zinc lead mining and smelting complex between BMM, Gamsberg and Skorpion. Full year production is expected around 350,000 tonnes to 360,000 tonnes for fiscal year 2015, and as I said, we – barring any through the last minute exploration success, life of mine or machine is nearing its end and expected to close by the second quarter of fiscal year 2015, 2016.

Looking at our copper smelter, this is in India, we completed our planned maintenance shutdown at Tuticorin during the quarter and resumed operations. This smelter is further ramped up post the shutdown and operating at over 90% capacity utilization. And as all of you been sure watching TcRcs due to the ban imposed by the Indian government on copper concentrate exports, we have seen some softening in spot TcRcs in the last three months.

And very recently the government of Indonesia has resumed exports and we'd expect the top of the spot TcRc market to improve. But of course, just to remind you, about 75% of our purchases are tied-up to the long term contracts as a fix for the year the rate of about 25% per pound.

At CMT in Australia, the existing mines put under care and maintenance after rock fall in June delaying the restart of the mine. We are looking at a higher level resource within the same Mount Lyell deposit is referred to as the D-panel and this is on the flanks of what had been mined in the past within the existing ore-body and we're not drilling that, we'd be undertaking feasibility for that and other ore bodies over the next several months.

And our hopes would be that over the end of this fiscal year, moving into next fiscal year, we'll complete that feasibility and we'll make a case for developing the D-panel and mining would resume in the next fiscal year.

Our group has had a long association with Mount Lyell. I have been there myself, there's a quite a lot of long term exploration potential there. So, we've shifted the geology so now I'm looking for what will be intermediate production target or also I'd like to find some bigger targets, it may be a bit deeper, but certainly the ground in the area is very, very prospective.

Moving on to copper in Zambia, as stated earlier we're working on turned around of the copper Zambian business. We've all met with the new underground mining team. We've also appointed a new CEO, Steven Din, who is on this call, who has nearly two decades of experience in Africa in resource development. We're working on delivering higher operational efficiencies through a conservative approach involving basic improvements such as equipment maintenance, reduced downtime and productivity improvement measures.

I think it's still, to say, it's early days. At Konkola, we've improved dilution and grade control and so we've seen 10% improvement in planned production grades and as you know the grades are already some of the highest in the industry. So any work we can do to improve dilution certainly benefits that business.

We've entered into some skill transfer contract with one of our service provider Sandrick [ph] to improve equipment maintenance and availability levels. And the trainees have started to mobilize this quarter. However, we've been facing operational and safety challenges particularly at the new shaft number four, which I think have set back production a bit and we're working pretty hard at the moment to address.

At Nchanga, we had stable production at the lower ore body LOB, but the upper ore body UOB has been more complex on geologic perspective than expected. And so we've suspended mining operations in the interim while we reevaluate the mining method. Meanwhile, we're looking at ways to extend mining at lower ore body by few more years. And in the meantime on the surface we've had sedi-improvement [ph] on the TLP, Tailings Leach Plant where grades have been setting, slowly improving following the dip in April.

And we just received new equipment in the open pits which we just commissioned so our hope is that we'll be able to pick up some of the tonnage lost at UOB with new tonnes coming in from the open pits.

But as we had planned during the second quarter of fiscal year 2015, the Nchanga smelter will undergo a month long maintenance shutdown. Now, we've had some media articles over the past few weeks about a matter of possible resolution of the VAC refunds by the government. We welcome those comments. We're cautiously optimistic and we certainly would welcome any such decision by the government of Zambia.

Moving on to Karnataka, the auction process for the sales of product have now picked up and we'll be producing the remaining provisional capacity of 2.29 million tonnes in the coming quarters. We will be liquidating the 1 million tonnes of inventory from last year that we have at Karnataka and we're working toward the renewal of the mining license.

At Goa, the operations continued to remain suspended. The state government is working toward the formulation of the mining policy and we understand that it's expected to be tabled in the state Goa assembly by early August.

Any resumption of operations will need a resolution at the state level with regard to the leases but also require renewal of the mining lease and the restoration of the environmental clearances by the Ministry of the Environment and Forest and other approvals, but again we hope to see all this happening by the end of the wet season.

And moving to Liberia we have identified significant tailings at Bomi and then some soft weather cap rock in Mano. And in terms of looking at how could we be developing our business is Liberia, we'll – we will be looking at focusing on some more capital friendly plans that we'll focus on some of these softer materials that will not require full beneficiation and probably require some type of road trucking option at least in the first couple of years.

And these ores that we're really targeting now in our exploration are easier mine and certainly a lot cheaper to beneficiate and we been engaged with the government of Liberia and the early start up for the Bomi project and road logistics solutions for the transportation of this ore. I know those of you who have been following the news have been – all justifiably concerned about the – efforts in West Africa and so we're working with the team there. I think we have a good plan in terms of hygiene for the team. I just spoke with the local manager this morning as a matter of fact and he's got to call whether he keeps the team in country or whether we start downsizing the team. But we want to remain with those people who want to stay in the country. We'll keep going but certainly being very, very mindful of the situation in West Africa.

In aluminum our smelters continue to operate very efficiently. The Jharsuguda 500 kilo-tonne smelter operate above its rated capacity despite some recent grid failures and I think we should recognize that as the additional grid system is now in the process of being increased to improve the overall evacuation. We're finding that the grid itself is not as reliable as it needs to be. So we've had to really focus quite a bit on resilience within the pot line, so that any kind of grid failure does not lead to any smelter failures. And I think we've had a pretty good job by the team so far, but we're very mindful of that in the coming months.

We did convert 56% of our metal production into valuated product and realized a strong physical premium of about over $450 per tonne. And we continue to maintain the second quartile cost even with the third-party bauxite and alumina. As we discussed in the yesterday's Sesa Sterlite call availability of domestic coal is expected to be lower, with lower e-auction volumes, which could result in higher coal prices and more imports and power cost rising in our smelters in the coming quarters.

Regarding the starting of main smelter capacities, at BALCO the 325,000 tonne smelter of the 84 pots, we commissioned 74 of those by the end of the quarter and the remaining 10 pots was commissioned in July. I actually had the privilege to be at BALCO. Last Friday, I switched on pot number 84.

The 50 pots from the first line Jharsuguda 1.25 million tonne per year smelter will be commissioned during fiscal year 2015. And we are engaged with the Odisha State Government to use power from again our 2,400 megawatt power plant for our own smelter.

And as you know one of my key priorities for this business is to secure a captive fee for the refineries and we've engaged with the Odisha government for the same thing. The refinery has recently received confirmation from the government of its intent to grant prospecting licenses for three laterite ore deposits in the Koraput District in Odisha.

While again, these aren't the biggest deposits, they're probably modest in size, what we want to do is, is to get off to an early successful start and we hope to see these deposits yielding some production during fiscal year 2016.

On Power, the first unit of the TSPL power plant is under commissioning and the remaining units we commissioned during the financial year. At TSPL the Punjab State Power Corporation has agreed for the usage of imported coal to meet the shortfall that we've seen from Coal India. And overall the plan was envisioned to be producing on domestic coal. We are working out a suitable blending arrangement with an imported coal combined with the coal of India coal.

At Jharsuguda, we continue to face transmission constraints which lead to low PLFs and this transmission is expected to improve in the second-half of the year as the new transmission capacities become commissioned. So if I look at this from a perspective of the overall efforts to meet our strategic-pressure [ph] or anything increased the extent of momentum. My feeling is that beyond the numbers of cells we have been creating the momentum in the right direction.

We've been reducing the trend of net debt over the last one year. We've been progressing with our government minority stakes on Hindustan Zinc, in BALCO. And we've had a consistent and strong EBITDA margin driven by the diversified portfolio. The largest in exploration is extended to continue with this existing gas pipe. And, again, as I've said to you earlier it's very important that we make the successful transition at Hindustan Zinc from the Rampura Agucha open pit to the underground and that's progressing well. And finally, it's good to see some pots beginning to have power, and bauxite and alumina being put to them.

So I'll turn it back over to you Ashwin.

Ashwin Bajaj

Yes, thanks, Tom. So, operator, we can now take questions from the audience.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin with the question-and-session. (Operator Instructions)

Tom Albanese

Thank you, operator. While the question queue assembles, as we did last time, I'll start-off with each of these questions to give you my flavor on them and then we'll direct them to the appropriate participants from Vedanta and co.

Operator

Thank you. We have the first question from the line of Liam Fitzpatrick from Credit Suisse. Please go ahead.

Liam Fitzpatrick – Credit Suisse

Morning. Two questions for you, both on really focusing on group structure rather than operations. Firstly, just on HZL, you mentioned a valuer has been appointed now. Do you have any feel for the timing and the process from here that you can share?

And then secondly, I guess on a similar point Cairn India, the intercompany line got a lot of attention last week, I guess, that move is to complicate the group structure and the relationships between the companies. Is the plan over the medium to longer term to also consolidate your shareholding there?

Tom Albanese

Okay. Maybe, let me just say a few things on Hindustan Zinc and then let DD and Ashwin if he wants to say anything further on that. And then I think maybe DD to take the Hindustan or the Cairn intercompany loan.

On Hindustan Zinc, I think that it is realistic to expect that it will be a transparent process. We do expect that most on that, because I think in the Modi government in India and elsewhere around the world any efforts to disinvestment the government have to actually ensure to their own citizenry that they are getting the right price for it. So the value overall will be (inaudible) of course, and in the case of Hindustan Zinc you have actually a sort of an online transfer price mechanism through the fact that it is already got many of it shares on the – in the public markets. That should be seen as a direction toward value.

I'd say that, we've seen some positive comments coming out of the government. I can't say we've heard anything from the government beyond what we've seen in the public domain so we just take this as it goes in terms of the timing and the process and the specifics in the coming month.

And maybe, DD, I'd turn it over to you for both anything further on Hindustan Zinc and the Cairn intercompany loan.

DD Jalan

Okay. I think – thanks, Tom. As far as Cairn intercompany loan in there, it is between Cairn and Sesa Sterlite. It's a built-in transaction between both the parties. And Sesa Sterlite has used the money to repay accrued interest as well as the principal sum to Vedanta Resources Plc and as we disclosed in the release it's now has been used for refinancing some of the high cost there as well as for some of the corporate purposes.

I think hope it answers your question on this.

Liam Fitzpatrick – Credit Suisse

Yeah, so the question on Cairn. Thanks for the answer on Hindustan Zinc, that's fine. On Cairn it was more the fact that you're now restarting these intercompany transactions which aren't always go down that well with investors and whether your longer term plan is to continue to simplify the group and actually can consolidate your shareholding i.e., take out the minorities in Cairn India.

DD Jalan

I think it's little premature in this stage but I think we have said this is one of the primary objective find solutions to simply the group structure for that. So we are continuously working on that and then the next stage of simplification will be once the government minority shares are acquired.

Tom Albanese

And then I just want to add to that, that certainly, Liam, from my perspective. And what I've said, what we've said is that, that simplification of the corporate structure is something we've heard from all the shareholders. Of course, (inaudible) away which is – it successfully navigates a series of complicated regulatory and technical hoops that have been run through but also in a way that seemed to be fair to a minority interest. So we're very mindful of the fact that this is a long-term objective. Obviously, the buying of minority interest in Hindustan Zinc and BALCO is a huge step along the way and last year's successful merger of Sesa Sterlite was also a big part of this.

Liam Fitzpatrick – Credit Suisse

Okay. Thank you.

Tom Albanese

Next question, operator.

Operator

Thank you. The next question is from the line of Jason Fairclough from Bank of America Merrill Lynch. Please go ahead.

Jason Fairclough – Bank of America Merrill Lynch

Hi, good morning, Tom, everybody. Two questions from me. One on infrastructure at Lanjigarh and the other one on Konkola. First on Lanjigarh, and Tom, you and I have spoken about this little bit before. There's previously been big problems just with getting coal and alumina to the plants up in Lanjigarh. Do we still have these huge lines of trucks that stretch out miles leading up to the smelter in the plants? And I'm just wondering if you're closer to a real solution there.

Secondly on Konkola and perhaps a question for your new CEO there, given the hoisting capacity, giving the processing capacity of at Konkola, is it fair to say that metal production at this asset is ultimately just limited by ore production? So perhaps your new CEO could talk about how he thinks about the potential production out of this asset and how long it takes to get there?

Tom Albanese

Okay. Well, thanks, Jason. After you asked me the question about Lanjigarh supply chains and the lines of trucks, I've been there and asked the question. I and Mr. Roongta did a follow-up with any further details but have did some upgrade in the rail capabilities going into there. We don't see that as being in any way a barrier to the expansion of the refinery. But maybe Mr. Roongta, you can talk about one in more detail first.

Sushil Kumar Roongta

Yes, so you raised two issues on logistics in coal and probably you mentioned alumina but you probably meant bauxite as far as Lanjigarh is concerned. So well we have adequate infrastructure to take of care our coal requirements which are not huge as far as Lanjigarh is concerned. And for bauxite also we have rail connectivity and rail logistics and infrastructure to get the bauxite, including imported bauxite, for the last about eight months to nine months we are moving even imported bauxite also from port to Lanjigarh through rail successfully.

Of course, then we come to the full capacity of refinery, some more upgradation of our infrastructure will be needed which will be – we will undertake at the right time.

Tom Albanese

Thank you. And then on – I think you've nailed the issue on the head with Konkola, we knew the hoisting capacity, we knew the processing capacity and we don’t have the ore production capacity underground. So maybe Steven, you can talk about some of the recent efforts and Kishore Kumar, if you want to step in and add any flavor to that too, you're welcome.

Steven Din

Yes, thank you, Tom, and thank you for the questions, Jason. Yes, as Tom said, you hit the nail on the head, we've got excess capacity sitting on the surface in our concentrator and we've got a value concentrator at Konkola and we've also done shaft four, which has a total capacity in terms of hoisting we have 8 million tonnes and there are two other shafts there, which each have 1.5 million tonnes each, so total hoisting capacity of 11 million.

The point at the moment is the level of ore production which is coming out of the mine. So various reasons to the – for the ore production being below expectations, so what we have in the process right now of doing is currently there are six sections in the mine, which are being exploited, okay. And each of those sections has different challenges. So what we decided to do as part of an improvement process is, we are going to take the part of the mine, one of the section which has very good cross-activity and already been developed. And we are actually going to step that out as a model section.

So we'll be looking at where the equipment levels are in terms of availability. All the resources in terms of mine captainship [ph] process et cetera are interacting with each other, what the world [ph] conditions look like, but more importantly out of all of that what the productivity level should be on the benchmark of any other mines. And hopefully over three months, we will get a productivity increase out of that mine, out of that section, and then we will be able to transfer it across it the other five sections.

So this is something we are working on very closely at the moment and I'm confident that we will get a significant volume improvement out of the current level that we are getting from queue at the moment which is in the region of 2 million tonnes a year. I hope that answers your question, Jason.

Jason Fairclough – Bank of America Merrill Lynch

Yes, thanks very much about that.

Tom Albanese

Kishore, would you like to say anything?

Kishore Kumar

Am I audible?

Tom Albanese

Yes.

Kishore Kumar

Yes. I think Steven has told well, Jason. I think the issue, in addition to that, we have also gotten good talents from Lisheen, because the mine Lisheen closed – we're closing the – in the process of closing. So good talents have migrated towards KCM Konkola for helping and assisting the local Zambian work population to get used to the fast-track mining as well as the development. But I presume in the next coming quarters you will see the gradual improvement in the technical side of the operation of Konkola.

Jason Fairclough – Bank of America Merrill Lynch

Again, thanks. I appreciate that. Thanks.

Tom Albanese

Thanks for your questions, Jason. Next question operator.

Operator

Thank you. The next question is from the line of Menno Sanderse from Morgan Stanley. Please go ahead.

Menno Sanderse – Morgan Stanley

Hey, good afternoon, and morning, everybody. Just a couple of short ones please. First, on the cost impact from the coal linkage on the corporate [ph]. Could you give us some sense of how much it could be, and I presume that next year that that should fade again if that coal linkage comes back?

Secondly, on the J-III smelter, is there any – do you have a better line of sight on when you can start the first pot line there, given now a quarter is past or more than a quarter and we haven't started yet? And then finally, on Cairn energy, there's clearly a lot of work going on and a lot discovery is being made, can all this still be developed within the $3 billion envelope that the company set itself for the next three years or is there case to make to put more of CapEx into it to develop these resources quicker?

Tom Albanese

Okay. Why don't Mr. Roongta, again, if you can talk about those please, the cost impacts from the coal linkage and the coal challenges in the coming quarters and then J-III smelter, which I'm asking you about when we get this 50 pots going as the more frequently the menace [ph] is. And then we'll ask Sudhir to say a few words on the recent discoveries in Cairn and how they be developed particularly in the context of the 3 billion CapEx we've already flagged.

Sushil Kumar Roongta

Yes, so first of all coal – this impact on account of lower e-auction quantity which government has recently decided. Then I have the impact in terms of lower availability of e-auction coal as well as prices of e-auction coal could more by about 15%, 20%.

Now we are trying to substitute this e-auction coal with imported coal. We have already been using imported coal in our overall coal basket. We will increase the share of imported coal. And as of to-day, as of now, the imported coal prices are really low, so that cost of imported coal is more or less in line with the cost of e-auction coal, because the cost dynamics can change depending upon the international prices of coal. So it’s very difficult at this moment to quantify exactly the cost impact.

But immediate impact we are seeing there about 15% to 20% increase in e-auction coal. But I must add that government is evolving a policy with regard to the coal distribution for power plants, which his still in discussion stage at the government level. And what impact finally it will have in terms of maybe higher linkage coal is yet to be seen so we have to await the government policy.

Coming to Jharsuguda's smelter III, yes, we have plans to really start the new smelter operation this year to begin with 50 pots out of our captive power plant, which has surplus power of about more than 100 megawatt. In this we are working on a plan to start as early as possible and we will follow it up and get the more pots to be powered from our 2,400 megawatt power plant. There we are awaiting declaration of the SEZ policy by the Government of Odisha with whom we are engaged, because this smelter has been put as a special economic zone by us.

So we are hopeful that Government of Odisha will come out with that policy and we will be able to continue firing on those smelters beyond 50 pots. As Tom said that, the 50 pots is just small [ph] in the sense that we want to start this smelter and obviously – finally, we have to really get the power from our 2,400 megawatt to really carry on these activities.

Menno Sanderse – Morgan Stanley

And back to Tom's introductory comments, do you get a sense that the local government shares your sense of urgency around these 50 pots or do they – is this a file at the bottom of the pile?

Tom Albanese

Mr. Roongta.

Sushil Kumar Roongta

Yes, local government definitely shares, because they understand that value addition creates employment as well as the economic activities in the region. We have had discussions with the – at the level of Chief Secretary as well as at the political level. And they definitely appreciate. In fact, local government is very keen that this smelter activity starts as early as possible.

Menno Sanderse – Morgan Stanley

Okay.

Tom Albanese

I will just reinforce on that, and it's that and I've got these meetings with the Chief Minister myself. But we are the largest private employer in Odisha. And, again, so when we talk about job creation, we do talk with some product.

Menno Sanderse – Morgan Stanley

Perfect.

Tom Albanese

Okay. Maybe, Sudhir, if you want to talk about the Cairn business and capital plan?

Sudhir Mathur

Yes. Good morning, Mr. Sanderse. The three year business plan that we have laid out as two broad objectives. One is to achieve 150% reserve replacement ratio and 7% to 10% growth over the average of last year, which is about maybe 180,000 barrels a day. This includes projects such as polymer flat and till [ph] drilling, facilities upgrade as well gas – phase I of gas development in Barmer Hill.

The exploration that we are – and the exploration cost as well, which you have laid out. The outcome of exploration of which we are seeing very positive outcomes is likely to generate a huge pipeline of opportunities for us. And we will – as we go along in the following quarter’s outlay, what it is likely to cost us in order to create a much higher growth than 7% to 10% that what we have laid out.

Menno Sanderse – Morgan Stanley

Okay. Okay, thank you.

Sudhir Mathur

Thank you, there.

Tom Albanese

Operator, next question?

Operator

Thank you. (Operator Instructions) The next question is from the line of Ritesh Shah from Espirito Santo. Please go ahead.

Ritesh Shah – Espirito Santo Securities India Pvt Ltd.

Yes, hi. Thanks for taking the question, couple of them. First is, what are the exact timelines for 1,200 megawatt power plant at BALCO? And secondly, Mr. Roongta recently mentioned about an approval that we are seeking from the Orissa State Government to utilize 2,400 megawatt for captive purpose. So what are the timelines that we are looking at (inaudible) as well?

Tom Albanese

Okay, maybe, Mr. Roongta, you can handle both of those recognizing that we did have discussions as recently as last Friday with the state on the 1,200 megawatt power.

Sushil Kumar Roongta

Yes. As far as 1,200 megawatt power is concerned, we are in the final stages of regulatory approval that is consent to operate. A very important milestone at least just about a fortnight back where government has notified, issued a gazette notification about allotment of some small patch of land which was not formally agreement-wise not entered into when they had handed over this land long back to BALCO. So that’s a very important process and there are few more steps left.

And we are expecting that next 45 to 60 days this regulatory approval should come after some more intermediate steps before this consent to operate is given. And thereafter we are ready with all our operations. Our plant is fully in a position to start as soon as we have the regulatory approval. So well, we can look at time horizon of about three months to really start the operation on the plant.

Ritesh Shah – Espirito Santo Securities India Pvt Ltd.

Okay.

Sushil Kumar Roongta

Coming to Jharsuguda there is new smelter. Well, this new SEZ policy of the Orissa Government has been in the offing for quite some time. They had been – there had been internal discussions in the government we had in various departments. And we believe that that is also now reaching the final stages and it has to be finalized at officer level and then to be put up to the cabinet.

So well we are being assured in discussion that it will be coming out soon, but well, I can't give a very specific timeline for which Government of Orissa has to deal with it, but we have assurance that government is serious of the matter and they want to bring it out as soon as possible.

Ritesh Shah – Espirito Santo Securities India Pvt Ltd.

All right. And I've got a question for Tom, sir, how do you look at physical market premiums on aluminum going forward. So currently, definitely it’s a far more lucrative to operate aluminum asset as against power stays outside. And so what's your view on physical market premiums? How do you look at the aluminum business?

Tom Albanese

Yes, obviously, the physical market premiums, got to look that in combination with the LME price.

Ritesh Shah – Espirito Santo Securities India Pvt Ltd.

All right.

Tom Albanese

And what we've seen over the past three years now is that a combination of the rising Chinese supply and the overhanging threat from above ground stocks, what are now stable in inventories that are some type of cash and carry transaction have led to a situation where non-Chinese smelting capacity has been gradually trend back, while Chinese is expanding. And what Chinese is probably reasonably self-sufficient. They can – but you have to take secondary scrap into account. The west is actually in a tight physical market.

So you’ve had I think – if you were to look at the – even the current LME prices, which is quite a bit higher than it was a few months ago, it still actually not necessarily well positioned on the cost curve and there is an awful lot of non-Chinese players here. And Chinese player, they aren’t doing very well on the cost curve in this market. So you’ve got still relatively low LME prices leading to a tighter supply situation on the ground and until that inventory unwinds which is partly why LME prices are lower in the first instance, you have tight physical premiums.

I would say that as long as that inventory underground is stable with a cash and carry transaction that we are going to see these premiums continue, but I can't count on that forever. And we realistically at the time when you start seeing longer-term interest rates and short-term interest rates, particularly in the U.S. begin to move off of a almost a 0% base, then you might see some of this with inventory coming into market that would probably put a threat to these premiums. And what effect to LME is going to be very interesting, it’s probably going to see immediately reaction to LME, but to some extent LME has been waiting for this stuff to get off-loaded and that they actually be better for long-term LME price over time.

But I've talked to the team saying, recognize that here we are enjoying the strong margin, but this may not be a permanent situation.

Ritesh Shah – Espirito Santo Securities India Pvt Ltd.

All right. One last question for Mr. Jalan, so specifically if you could elaborate on the debt maturity profile for say, the balance nine-month of this fiscal and should one expect incremental in the company loan say from Cairn to Sesa Sterlite loan?

DD Jalan

Hello, Ritesh, if we just take a look at the debt maturity profile which are there in the presentation what we highlighted in the month of March, after that the major maturity which was happening on the put option of convertible bond, there is in a $1.2 billion amount, which is – which has been put is $1.133 billion, so which has been paid on time.

And then after that the balance $1.1 million goes off in hereafter next. So the debt maturity totally in control and refinancing plan has been elaborated is in place. And also as far as the intercompany loan is concerned and as I mentioned that out of $1.25 billion, $800 million has been used up to June quarter and balance $400 million is planned to be utilized during this quarter. And this amount will be again expected to be repaid by Sesa Sterlite by way of intercompany loan repayment to Vedanta Plc.

Ritesh Shah – Espirito Santo Securities India Pvt Ltd.

Okay. So the balance $400 million, should one assume that it will also be towards more of repayment of debt?

DD Jalan

It could be mix of both. As of now the final plan is being rolled out, partly in terms of loan and largely for the corporate purposes.

Ritesh Shah – Espirito Santo Securities India Pvt Ltd.

Okay, that’s fine. It answers all my questions. Thank you so much.

Tom Albanese

Thank you. Operator, next question?

Operator

Thank you. The next question is from the line of Tim Huff from RBC. Please go ahead.

Tim Huff – RBC Europe Ltd.

Yes, just two questions on Zinc India, if that's all right. Just a little bit more detail on the fiscal first quarter, was there either more waste evacuated or less ore produced, then you expected, I know it says according to the mine plan, but it was less than we were expecting so I thought I'd just ask.

Also, going forward, it implies a significant step up in ore production going forward. I was just wondering if you expect to see that trend start to turnaround at any point in the second quarter or is it a trend that you expect to reverse in normally the fiscal second-half that you are expecting? Thank you.

Tom Albanese

Thank you, Tim. I'll take that question. Again I think in the – in our previous call, I think also in Hindustan Zinc's call, we referred to the fact that as Rampura Agucha pit gets deeper and then you start working through the cut III and cut IV, in a deeper narrow pit, right in pore free, copper pore free phase is getting toward the end of its expected mine life, you end up with fewer working phases.

And so what happens, I think we referred to the term, feast or famine, that you are either in the orebody or you are not in the orebody. You are either in the main ore-zone, you are not in the main ore-zone. And I think what we are seeing is that in the past quarter as we had seen our mine plan, we were not in the main ore-zone. We do expect as we go in the second-half as we are progressively exposing with number 4 that we will be basically in a position where a larger, much larger portion of our mining capacity can be focused on exposed ore and that we'll be seeing the main ore and the tonnage is coming out of the orebody increasing substantially at that point.

That’s why even though we had softer production in the first quarter we are not changing our guidance for the full year.

Tim Huff – RBC Europe Ltd.

Okay, that’s really helpful.

Tom Albanese

And I would say that to be realistically any operator running at deep pore-free operation would say that, the pits get more mature, you have fewer – you get less freedom of movement to actually change the sequesity [ph], so that (inaudible) unusual in the sector.

Tim Huff – RBC Europe Ltd.

Thank you.

Tom Albanese

Okay. Next question?

Operator

Thank you. We have the last question from the line of Jatinder Goel from Citigroup. Please go ahead.

Jatinder Goel – Citigroup Global Markets India Pvt Ltd.

Good afternoon, gents. Two questions, firstly on Cairn, two parts to it, what sort of profit sharing assumptions have you got beyond 2020 when you worked out your capital allocation plan for Cairn India? And secondly, how much bargaining power do you have, if the government was to increase ONGC's shareholding above 30% when grant and extension due beyond 2020 operations?

Secondly, just numbers, are you able to share the net debt number at standalone Plc as of June 30? And secondly, how much of the intercompany loan outstanding now after the repayment Sesa Sterlite to Plc? Thank you.

Tom Albanese

Okay. I think obviously, Sudhir, will handle the Cairn questions and DD on the debt questions. But I just want to make a comment on the Cairn, in that it is – there's a lot of sort of news flow that what happens post 2020. We have our view based upon the PSC contract.

But I think that the important point is that this is not just a Cairn issue, but anyone looking to invest in the oil and gas sector in India will be watching this in terms of what kind of confidence they have in the continued ability to invest and have the tenure from leases as it come through the normal term, but you are still within the economic life of field.

And this is the big question, it's that, how do you manage and then optimize economic life of field in an environment we have anything but full assurance is that to what the fiscal regime would be. And again, I think from my perspective and some of the engagement I am seeing that, there is quite a bit of interest in India in attracting back the foreign multinationals in oil – in the oil business. So I would say that this is a case that we'd expect they'd be watching too.

So with that, Sudhir, if you have any further comments.

Sudhir Mathur

Yes. We are modeling in the profit petroleum and our share withstand at 70% up to 2030, as is – and be such in the contract within. But I think as Tom mentioned out, there is a lot of work going on in the government to create a policy to extend most of these PSCs to their natural life. And we are eagerly awaiting the outcome of that, from the government as well. But as I mentioned for the foreseeable future till 2030, we continue to model the way as we've indicated in the past, be profit petroleum being at 50% and our share being at 70%.

Tom Albanese

And again, we should remind ourselves that within that configuration the government take is about 80%, so it’s actually a pretty high government take in the context of the global profit sharing formula.

Sudhir Mathur

And coming back to your next question, Jatinder, basically net debt at Plc level on a standalone basis is $7.9 million and the intercompany debt receivable is $3.5 billion as on June 30.

Jatinder Goel – Citigroup Global Markets India Pvt Ltd.

Great. Thank you very much.

Operator

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

Ashwin Bajaj

Yes, thanks, operator. Tom, any closing comments here.

Tom Albanese

No, thank you. Thank you for these questions. They were wide ranging across the range of our businesses. Again, and I look forward to in the coming months continued visibility by the visibility by the Government of India in terms of its efforts to create the incentives necessary for job creation, of reinvestment back into the important mining, resource, oil and gas sectors. It’s pretty exciting from my perspective. That’s all I have. Thank you.

Operator

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

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