Vedanta Resources' (VDNRF) CEO Tom Albanese on Q1 2017 Results - Earnings Call Transcript

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Vedanta Resources PLC (OTCPK:VDNRF) Q1 2017 Earnings Conference Call August 1, 2016 4:00 AM ET

Executives

Ashwin Bajaj - Director, IR

Tom Albanese - Group CEO

D.D. Jalan - CFO

Samir Cairae - CEO, India Diversified Metals

Kishore Kumar - CEO, Iron Ore Business

Steven Din - CEO, KCM

Analysts

Anna Mulholland - Deutsche Bank

Operator

Ladies and gentlemen, good day and welcome to the Vedanta Resources PLC Q1 FY 2017 Results Conference Call. [Operator Instructions]. I now hand the conference over to Mr. Ashwin Bajaj, Director, Investor Relations. Thank you and over to you sir.

Ashwin Bajaj

Thank you, Operator. This is Ashwin Bajaj and good morning to all of you. Thanks for joining us today to discuss our results for Q1 of FY 2017. Let me introduce our management team present with us today. We have Tom Albanese, CEO of the Group; D.D. Jalan, CFO of the Group; we have Samir Cairae, CEO of the India Diversified Metals and several of our business leaders, we have Sudhir Mathur from Cairn India, Sunil Duggal from Hindustan Zinc, Steven Din from KCM, Abhijit Pati from aluminum and Kishore Kumar from iron ore.

With that let me hand over to our Tom.

Tom Albanese

Thank you, Ashwin and good morning ladies and gentlemen. It's a pleasure to welcome you to Vedanta Resources First Quarter Results Call. As we started the fiscal year we saw significant strength in commodity prices as you know. Investor sentiment which were pretty tricky and difficult last year has turned positive towards the sector. Among the commodities, zinc and silver prices have gone up materially in the last three months and I'm consistent in my belief of strong fundamentals for zinc and expect same prices to remain strong in the near future.

The Chinese economy continues to post steady growth with second quarter GDP in line with market expectations at 6.6%. This stimulus provided by the government has supported growth in China. All of us hope that the lows we witnessed earlier in 2016 should be the trough for the commodity markets and the recovery we’re seeing now is here to stay. At Vedanta we've used the current market volatility to our advantage as we optimize operating and capital cost. This improvement in commodity price comes at a very opportune time for us as we are ramping up our capacities in aluminum, iron ore and powder. Zinc and oil contributed 60% of the first quarter EBITDA and both commodities perform well in the quarter.

I will now review the first quarter fiscal 2017 performance and update how we faired. First of all overall in terms of the highlights, we had a strong quarter in terms of ramping up latent capacities. Our Mangala EOR production maintain it's upward trajectory and Rajasthan production remains stable during the quarter. Zinc production was lower in the first quarter as per the mine plan as we evacuated more waste that were in the quarter. However we expect full year production to be higher in the previous year as the second half would have been substantially higher and it's again consistent with our previous flagging to the market.

At Copper Zambia the cost of production was reduced 8% year-on-year and coal mine mobile equipment increased by 10% in the quarter. Aluminum, the ramp up for the first line [indiscernible] smelter was completed, the second line has started commencing in July. Ramp up of Balco 325,000 tonne per year smelter is nearing completion and at Goa we maintain the monthly run rate of about 800,000 per month in the first quarter.

At CSTL we have the third operating unit operational ready and that unit is expected to be capitalized in the second quarter. We delivered EBITDA $527 million and our gross debt was reduced by 300 million in the quarter. In the first quarter we paid close to 1.2 billion of bonds maturing in June and July and it stayed -- earlier committed to bringing down our debt and delever the balance sheet.

Group's [indiscernible] remains a strategic priority and in line with this we've announced the revised and final terms of the merger of the Vedanta Ltd and Cairn India on July 22nd. We expect to complete this transaction by the end of this fiscal year. The strategic rationale for merging Vedanta and Cairn India remains highly compelling as diversified first five resource companies have delivered superior returns to shareholders as we look at the trend either over the past 10 years or at the past one year.

Before I talk about operations let me talk a bit about the strong performance of zinc and silver. I’ve been talking about the strong fundamentals for Zinc for at least the past year and I'm happy to say I continue to believe Zinc still looks strong and strong is amongst the pack of metals. Along with being zinc, silver also had a good run this calendar year 2016. And as you see in the global cost curve in the slide Hindustan Zinc operates at the lowest decile of the cost curve. Post the silver credits, cash cost further reduced to approximately 650 per tonne. Refined zinc will continue to remain in deficit, this deficit with slow improvement in demand is drawing inventory for LME and the Shanghai Warehouses and as we can see the zinc inventory is six year lows and since this helped significant improvements in zinc prices.

Commenting on the silver prices, we've seen the silver prices increasing by more than 50% from the lows of H1 2015. As silver prices move up the gold or silver ratio has gravitated towards longer term mean. I can talk specifically about Zinc India, mine metal for the quarter was lower at 127,000 tonnes as per the mine plan and refined zinc with lower in-line with mine metal. Silver production has increased 20% over the first quarter of fiscal year 2016 due to the higher contribution from the SK Mine and this goes in line with what we mentioned during the last fiscal year from mine sequencing report [indiscernible] where the first half was expected to be substantially lower in the second half and within the first half the second quarter will be higher in the first quarter. For projects, they are -- underground shaft in sunk to 900 meters, the ultimate depth of 950 meters. Expansion of the SK Mine is running ahead of schedule and we're working to further expand the mines to 4.5 million tonnes per year capacity.

The Kayad mine expansion is nearing completion with a capacity of 1 million tonne per year. We expect the fiscal year 2017 production to be higher in the previous year where the second half is expected to be much stronger. Silver production will improve further in the current year and we expect to produce 15 million to 16 million ounces of silver. Our zinc cost production remains stable compared to last year, however between quarters it will have some inverse swings proportional to the lower volumes in the second quarter.

Moving to Zinc International in Southern Africa, the first quarter production was lower primarily due to the closure of the Lisheen mine. However, the other mines form well during the quarter with Black Mountain production having record highs in this acquisition. As we guided earlier the cost of production was lower at $1167 per tonne due to our cost saving initiatives and we're progressing well to meet our guidance of 170,000 to 190,000 tonnes of production and we would expect cost of production to be in the $1200 per ton range in fiscal year 2017.

At the Gamsberg Zinc project prestripping is well underway and we've escavated 8 million tons of waste to-date, and we're on schedule to mine the first ore in early calendar 2018 and we will ramp up at full capacity of 250,000 tonnes in 9 to 12 months thereafter. Gamsberg is expected to come on stream in a deficit zinc concentrate market and generate strong returns for shareholders. Speaking on oil and gas, I'm pleased to share that the world's largest polymer injection project is now being maintained at 400,000 barrels of injection of polymer per day. The Mangala EOR production has increased to an average of 42,000 barrels of oil per day on the back of enhanced well performance and new wells coming online.

Water flood OpEx is now been brought down by 38% over the past six quarters to $4.4 per barrel and the good part is while maintaining the polymer injection being maintained at the target level we've been successful in reducing the blended overall OpEx and we've been able to reduce our polymer flood OpEx by approximately 25% from our earlier guidance.

In fiscal year 2017 we expect production of Rajasthan remain broadly flat at the fiscal year 2016 level and we have routine maintenance plan for the latter half of September 2016. We maintain our CapEx plan of 100 million for the year. However, we have retained the lever to increase CapEx if oil prices further improve during the year and with that we are working on the various options for growth projects which include the RDG gas project, polymer flood in the Bhagyam reservoir and Aishwarya reservoirs and the Aishwarya Barmer Hill formation.

Now I'm going to move over to copper and Copper Zambia. Total production was 5% higher at 45,000 tonnes despite the Nchanga underground being put under care and maintenance at the end of last calendar year primarily due to this increase is -- this offset increase was primarily due to improved production from our TLP project, higher mine metal from coal underground mine and approved custom smelting. Our C1 operational cash cost excluding increased power cost and currency gains on VAT receivables increased by 8% year-on-year to U.S. improved by 8% year-on-year to $1.95 per pound for the quarter.

At Konkola our production increased by 2% to 12,000 tonnes due to improved recovery. Equipment availability at Konkola improved by 10% in the quarter leading to higher production. At the TLP production was 5% higher during the quarter and supporting of integrated production was lower by only 1% year-on-year despite the Nchanga underground which had contributed previously 6% of production in the first quarter of fiscal year 2016 going offline.

We have put a lot of emphasis in our KCM operations on innovation and as announced in the fiscal year 2016 results I'm pleased to share the elevated temperate leach project is now under commissioning since June 2016 and the recovery improvements have been encouraging. The significant improvement of copper recoveries due to elevating leach temperatures and as the first phase of scale presents a unique opportunity to bring online ore resources such as additional tailings and additional rehandle [indiscernible] materials which were previously uneconomic to process and recoveries achievable under the historic traditional ambient temperature leach conditions.

In order to optimize our power cost, we have moved to install HFO fire boilers up in Nchanga copper refinery which will enable us to ramp up the refinery and reduce energy consumption by the end of the third quarter. In the meantime, we've been basically selling [indiscernible] while we make this conversion in the Nchanga refinery.

Moving to regulatory developments in Zambia, we have been happy to see the sliding share royalty mineral royalties linked copper prices, receive presidential approval on the June 6, 2016 and those amended rates are effective from June 1, 2016. On VAT, we have been receiving regular VAT refunds with effect from March 2015 and we're working closely with the government on previous receivables.

I’ve to say a few things about the power situation in Zambia. The Government of Zambia has increased power tariffs by 25% effective January 2016. We have been seeing improvements in the water level at the Kariba reservoir and that water level decreased to 33% in June with lows of 23% in April. Although this still remains significantly below last year's level of 43%.

For KCMs outlook we've always maintained our views of long term potential at KCM with 50 years of probable mine life. In fiscal year 2017 we are committed to a forward outlook on volumes and cost as previously guided that is 130,000 to 140,000 tonnes of integrated production at about $1.50 to $1.70 pound C1. The smelter is expected to undergo a bi-annual shutdown in the second quarter which will improve the smelter feed rate from 70 tons to 80 tons per hour. Apart from this equipment availability is slowly improving at Konkola and this will increase in Konkola production going forward. Our key focus areas are remains on the Konkola turnaround, processing stockpiled refractory ores and maximizing customs smelting production.

A dedicated team is working on long term optimized production model and workable implementation strategies. On aluminum, the ramp up is progressing well. With capacities that were idle are now being run and ready to run or at full capacity. The ramp up of the first line of the JR2 smelter has think completed just this weekend and the second line commenced in July. The ramp up at Balco 325,000 tonne per year smelter is nearing completion.

We have recommenced our second stream at the Lanjigarh refinery and we produced 275,000 tonnes of alumina in the quarter. We’re progressively ramping up alumina production to 1.4 million tonnes as we move through the year. The Aluminum cost of production stations that $1476, this has been higher due to the increase in power costs. Power cost have increased for the last quarter due to a new clean energy cess that as the government had doubled the cess on thermal coal during the 2016 budget. Apart from that we had some increases in power costs as a consequence of power purchases from the grid due to power outage at the smelter and water shortages both of these we see as one-offs. Although the power cost has gone up we are seeing improved availability of coal in the country and we maintain an EBITDA margin over $200 per ton of our aluminum produced in the quarter.

On the outlook side, we’re on course to deliver a full year production guidance of 1.2 million tonnes of aluminum. We started ramping up the second line of [indiscernible] in July I mentioned and a further ramp up of the third line is expect in the fourth quarter fiscal year 2017. The Balco 325 smelter should be ramped up by the second quarter and we will be operating -- we would expect to be operating at 1.7 million tonne per year equivalent capacity and run rate by the end of the year.

Move over down to power, on power in TSPL 2 units were operating at an availability of 72% in the first quarter. At in TSPL all units are running efficiently and we expect all three units to run at availability of 80% in the fiscal year 2017. We expect a margin of INR1 per unit from TSPL. The PLF at the 600 megawatt [indiscernible] power plant continues to be low on account of lower demand. And overall we expect power segment to deliver higher volumes in fiscal year 2017 as a third unit at TSPL is capitalized during this quarter and the plant delivers its full potential.

Make a few comments on iron ore, at iron ore we maintain the positive momentum to previous quarter. Goa production continued at 800,000 tonnes per month, the overall sales for the quarter were 3.2 million tonnes of which Goa contributed 2.4 million tonnes. Operations at Karnataka produced 800,000 tonnes in the June quarter.

Iron ore operations started in the third quarter fiscal year 2016 and within six months we've scaled our operations to 800,000 tonnes per month. We continue to engage with respective governments for allocation of higher volumes and maintain our low cost of operations. We maintain production outlook for the year at 5.5 million tonnes and 2.3 million tonnes from Goa and Karnataka. Few words on Copper India, Copper India, performance remained strong for the quarter with strong spot the TC/RCs. We have a plant maintenance shutdown of three days in the second quarter which will hence smelter efficiency, our production outlook for fiscal year 2017 remains at 400,000 tonnes.

To the core [ph] power PLF remains low due to lower demand. However as mentioned on previous calls we get compensated 20% of the contracted rate for any of uptake below 85%. And with that I would like Mr. Jalan our CFO to make a few remarks regarding our balance sheet and financial statements. Over to you D.D.

D.D. Jalan

Thanks, Tom. Good morning to you ladies and gentlemen. We have delivered an EBITDA margin of 28% during the quarter with a strong focus on cost efficiencies. The ramp up of volumes of aluminum, iron ore and power also contributed to the EBITDA for the quarter and the contribution from aluminum and power would be even higher in the coming quarters with capitalization of assets.

The EBITDA was negatively impacted by the lower production and Zinc India on the account of mining sequence as communicated earlier. However we’re on track to produce substantially higher volumes in Q2 and H2. Overall we’re on track to deliver a strong EBITDA growth of 30% for FY ‘17.

On the balance sheet side, we had been actively managing our balance sheet to maximize free cash flow, refinancing and turning out maturing debt and simplifying the group structure. We maintain a strong liquidity with cash and liquid investment of $7.7 billion and undrawn committed lines of 1.1 billion. Our gross debt as of June 30, was lower by $300 million as Tom also mentioned as compared to March. Net debt was higher mainly due to the special dividend by Hindustan Zinc and reversal of some of the working capital initiatives as mentioned by me in the month of May.

A lot of these working capital increased -- will hold back in quarter two and we expect net debt to be lower in Q2. The group debt maturities for FY ‘17 has come down from 3.8 billion in March 16 to 2 billion in June 16 with PLC maturities fully taken care of. I'm pleased to report that we made good progress with regards to meeting FY ‘17 maturities at Vedanta PLC. All the bond maturities for FY ‘17 had been paid and we are now focused on maturities for FY ‘19. FY ‘18 debt maturities are mainly all bank debt which we expect to be met through roll-overs.

In summary, we have begun to focus on FY ‘18 and FY ‘19 bank and bond maturities at PLC. Our outstanding debt maturities at Vedanta Limited for FY ‘17 comprises of $1.4 billion of short term debt and 0.5 billion of term debt. Repayment of 1.4 billion is expected to be made through internal generation and rollover/replacement with the term debt. Along with this extending the maturity profile of the debt remains a key focus area and we continue to work on the same.

With this let me hand back to Tom. Thanks.

Tom Albanese

Thank you, D.D. and now to summarize, I would like to state that as we continue to focus on discipline ramp up of capacities of aluminum, power and iron ore in this fiscal year. Additional capacities without spending a lot of capital will generate strong EBITDA and free cash flow and this will enable further deleveraging from what D.D. just talked about. The resource sector has performed more well overall, over the past quarter commodity prices strengthened in the first quarter of this year although still lower year-on-year from the first quarter of 2016 with silver and zinc prices particularly strengthening. We have a strong financial profile which will further strengthen with our business priorities increasing production.

And lastly, as I've said before in the past we have a strategic priority for a group simplification and so recently we announced revised and final terms for the merger between Cairn India and we believe that this transaction will deliver long term sustainable value enhancement for all shareholders.

So we'll now be happy to take questions. I will turn this over to the Operator. As usual. I'll probably take the first run at the questions and then redirect them to a variety of our executives that we have on the call also to help.

With their Operator over to you,

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from the line of Anna Mulholland of Deutsche Bank. Please go ahead.

Anna Mulholland

I’ve three questions please. The first is on the costs in Copper Zambia, you’ve given us a number of different without royalties excluding increased power tariff etcetera, could I just ask for some clarity on what royalty costs was and what the unrealized gains on the quarter denominated VAT receivables would be if we added those in? Thank you.

And the second question is on iron ore you received about $36 a ton from your Goa product. Just wondering are you actually making a margin on that given that it's such a low price realized relative to spot and the third and final question is what was your rationale for approaching Anglo-American to talk to them about a potential combination? Thanks.

Tom Albanese

Let me go probably in the reverse order of what and on your question regarding Anglo rationale to be quite clear that Vedanta as a matter of corporate policy like every other company would not comment on media speculation. So we will leave there at there. On question number two, I will ask -- Peter [ph] would make a few remarks but I do want to note two points about our iron ore margins The first is as we do sell generally a 56% - 57% product which by the way has zero export tariffs with recent Government of India supports the iron ore industry.

We will get an FOB discount from what would be an Australian 61% and that would be reflecting us $36, it's approximately $20 per ton discount from a 61% CIF product price to what would be a 56%, 57% FOB product and that’s been relative consistent. But with that our C1 costs have been running in the $10 per ton range, actually lower than the Pilbara, so that has allowed us to have even with fairly higher royalties than you see at Pilbara, it has allowed us to have a reasonably attractive free cash flow margin for every ton we produced and sold in Goa. Pete [ph] is there anything else you would like to add to that and particularly talk about some of the things you’re doing to ensure we stay cash flow positive in these weaker iron ore markets.

Kishore Kumar

Our cost competitiveness will depend on largely two issues, number one, which obviously is with the scale of production and as I mentioned in the earlier call, our EC limit which is our production limit at 5.5 million tonnes is something which is constantly getting reviewed by the business as well as by the state authorities and the supreme court for increasing the volume and as Tom has mentioned our C1 cost or sub-$10 then we continue to be competitive as with low price. The second one that of course in terms of cost management that we continue to do is to focus on A, the quality and offering that we can do upto 58% grade, because upto 58% there is no export duty tax and we obviously keep chiseling our quality in terms of upgrading the headline to 57.5 and also making sure that the [indiscernible] items if any in the product are always marginalized, so the BI discount remains at the lower end. So constantly we’re benchmarking ourselves both with the international praise from Australia as well as from Brazil and of course we continue to work [indiscernible] Steel Mills to make our low end of low grade product economical for those mills.

Having said that the other important cost which remains at one page and this can be harnessed as the freight cost where the scale would really help in terms of dispatching our products in the [indiscernible] which we have not really managed to do that at this moment of time because all the mining companies haven't geared up to produce together and couple of them has ramped in the first quarter but largely the second half we will see many mining companies in Goa which start dispatching all the ores and the possibility of bringing in large vessels to our shore is much better and finally the important element remains is on the taxation side where government continues to have duplicate taxes in Goa with respect to the metal taxes that they collect and they agreed therefore removal of duplicate taxes which of course is something goes in the NSR [ph] but it helps in any cases in terms of many viable and difficult times.

Tom Albanese

Thank you, Kishore. So moving over to Zambia, Steven I think you can take the question but maybe if you can just looking at the C1 numbers that we’ve disclosed just could provide us what royalty component is, what was the effective increase of the power tariff and then talk about the amount and the effect of the unrealized gains on the VAT because of the appreciation of quarter during the quarter.

Steven Din

So if I can respond specifically to your two points, the C1 cost at operational level before the royalty is $4297 a ton, and the royalty which would be added to that is $316 a ton. Now the impacts of the two items which we have considered as exceptional are -- there is a benefit coming through from the exchange rate differences on the VAT receivable. Now that gives a benefit of $247 a ton to the operational cash cost. But then there is an increase once again per dollar in terms of dollars per ton of 325 which is related to power. So the net increase that we see on that C1 cost is 78 which is the 325 which is related to the power and then the benefit that we see on the 247 which is related to the quarter revaluation. I hope that helps.

Operator

[Operator Instructions]. Sir, there are no further questions from the participants.

Tom Albanese

Okay. Thank you very much again I think we’re looking at a world of continued volatility but hopefully sum up the momentum in pricing from the beginning of the calendar year. We have continued to focus on reducing our costs, getting our costs savings in place and ramping up the production that we said we would be ramping up particularly in those businesses, we have spent several years ago the capital for those businesses. I think for my own perspective operationally the challenge of Zambia's turnaround is still something that confronts us but I’ve been very pleased with the steady progress that we’re getting on that over the past year or two. We have been at as D.D. said, continue to focus on improving the balance sheet, we met this year's bond maturities at the Vedanta PLC levels and we see a long term basis the opportunity to continue to simplify the corporate structure and balance sheet with the merger between Cairn India and Vedanta Ltd which we provided a revised upward and final offer just last week. Thank you very much.

Operator

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

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