Vedanta Resources' (VDNRF) CEO Thomas Albanese on Q1 2018 Results - Earnings Call Transcript

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About: Vedanta Resources plc. (VDNRF)
by: SA Transcripts

Vedanta Resources plc. (OTCPK:VDNRF) Q1 2018 Earnings Conference Call July 25, 2017 8:30 AM ET

Executives

Ashwin Bajaj - Director, Investor Relations

Thomas Albanese - Chief Executive Officer

Arun Kumar - Chief Financial Officer

Sudhir Mathur - Acting CEO and CFO, Cairn India Limited

Deshnee Naidoo - International Zinc

Ajay Kumar Dixit - Chief Executive Officer, Power

Kishore Kumar - CEO, Iron Ore Business

Abhijit Pati - Aluminum

Analysts

Sumangal Nevatia - Macquarie

Pinakin Parekh - JPMorgan

Abhishek Poddarat - Kotak Securities

Sanjay Jain - Motilal Oswal Securities

Rajesh Lachhani - HSBC

Ravi Shankar - Credit Suisse

Amit Dixit - Edelweiss

Anshuman Atri - Haitong Securities

Ashish Kejriwal - IDFC Securities

Dhawal Doshi - PhillipCapital

Operator

Ladies and gentlemen, good day and welcome to Vedanta Limited Q1 FY 2018 Results Conference Call. As a reminder, all participant lines will be in the listen only mode. And there will 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, Operator. Good evening, ladies and gentlemen. This is Ashwin Bajaj, Head of Investor Relations. Thanks for joining us today to discuss our results for first quarter of FY 2018. We will be referring to the presentation that is available on our website. Some of the information on today's call maybe forward-looking in nature and will be covered by the disclaimers on Page 2 of the presentation.

From our management team we have with us are CEO, Tom Albanese; our CFO, Arun Kumar. We also have several of our business leaders with us. We have Sudhir Mathur from Cairn India; Sunil Duggal from Hindustan Zinc; Deshnee Naidoo from Zinc International; Kishore Kumar from Iron Ore; Abhijit Pati from aluminum; and Ajay Dixit how in charge of Alumina vertical as well as TSPL Power.

So with that let me hand over to Tom. Tom?

Thomas Albanese

Thank you, Ashwin, and good evening, ladies and gentlemen. I am pleased to welcome you to Vedanta Limited's first quarter fiscal 2018 earnings call.

Starting with the commodity markets, our quarter-on-quarter basis, we've seen lower commodity prices during the quarter except for aluminum where Chinese efforts to restrict excess capacity in aluminum has been helping. During the last quarter, I was in China, I can witness the pragmatic steps of aluminum producers in order to control the pollution. So I think we will see probably steady tightening in China in terms of new supply.

Aluminum LME continues to shift the positive buyers for the first time in nearly a decade. Having said that we've also seen a small recovery in zinc prices recently, I'll speak about that in a little more detail later.

As I've said in the past couple of calls, we expect that the rest of fiscal 2018 will be more of its supply driven story in our sector barring any macro-shocks in the global economy. And in so we begin to see large capital inflows back into the sector, we're probably going to continue to see just progressively tightening markets and hopefully supporting prices.

Renewable energy and electric vehicles are evolving rapidly worldwide. And with each quarterly call, you hear more and more about us. However, in this strong demand growth for gasoline and diesel is continuing and likely to continue for the next several years. Over the longer term, surge electric vehicles remain strong demand for our base metals like copper, aluminum and led given their extensive usage in transportation system and also electric batteries. And of course Vedanta will strongly benefit from these new demands for metals.

Overall, our diversified portfolio metals plus oil is fundamentally strong and structurally low cost we should directly benefit from any of these emerging macro-trends.

So with that let me take you through the first quarter performance. As always I'll start with the slide on safety and sustainability. Continuing to build on a zero harm culture Vedanta, I am pleased to announce we've had no fatalities during the first quarter of 2018 nor have we had on a year-to-date basis. Outlining down, it's up to deliver zero harm in a continuous basis. And we'll continue to work to make ourselves a safer and better company.

Moving to operations. On the operations front the next slide, we continue with our production ramp up across our portfolio with production guidance for fiscal year 2018 largely unchanged. We had significantly higher production quarter-on-quarter at Zinc India. And for zinc project is on track for mid-calendar year 2018 production. At aluminum, we exceeded the quarter with a stabilized production run rate about 1.4 million tons per year.

And talking about the financial highlights, typically for Vedanta quarter one and fiscal year seem to be subdued as compared to the previous fourth quarter and typically the fourth quarter is typically the strongest month mainly driven by mine plants, seasonality and operational maintenance. Given that I'm happy to report the first quarter EBITDA at 4,965 crore, represented a 40% increase in year-on-year EBITDA.

Our first quarter fiscal year 2018 should be the profit after tax and INR 1,525 crore is more than doubled back of last year. And our cost savings, we've continued culture of cost control and has been required to assist in further savings. I'm now happy to save the delivery savings nearly 856 million over the last nine quarters. However saying that we are not pleased given that we have had the sharp uptick of aluminum cost, some of inflationary related, which I'll talk about later in my presentation.

Continuing on the path of deleveraging, we've reduced our gross debt by nearly INR 9,000 crore in the first four months of fiscal year 2018.

So we move over to our slide on delivering on strategic priorities. We really have this slide for now going on three plus years just to remind you of the strategic priorities, which have remained unchanged and our focus area for fiscal year 2018 remained the same as stated by us in the beginning of the year. We are generating increasing free cash flow via continued production ramp up and over the relentless focus on costs and managing working capital with levering our balance sheet.

Our new dividend policy demonstrates our commitment to providing strong returns to our shareholders. We have completed a merger of Cairn India, we're realizing the benefits of the merger. We continue to identify the next generation resources by leveraging the expertise of central mining exploration through. And of course, we're committed to achieving zero harm and creating sustainable value to our stakeholders.

So with that let me move on to capital allocation and the focus on shareholders' return. Just to reiterate, our capital allocation policy, which is underpinned by our world class assets and operational excellence delivered strong, stable and long life cash flows. As you know most of the investments are growth projects for these assets are nearing completion and will result in continued improvements in cash generation.

We have a diversified portfolio of businesses which continued to remain fundamentally strong and structurally low cost. We will continue to deliver superior value to all our stakeholders throughout the cycle.

And with that I'll now hand over to Arun Kumar, who will take you through the financials.

Arun Kumar

Thanks Tom. Good evening to all. I like to start off on a slightly different note. Just this morning, FTI Consulting Asia a global business advisory firm has released India Disclosure Index based on an annual report. And I'm glad to report that Vedanta Limited has come out as a role model in the mining sector.

Overall in India, only three companies are head on this course scoring a 10 on 10 and Vedanta as a joint second with few other companies at 9.1out of 10. We feel good of this fully global recognition and the comfort our investor and stakeholders draw from this recognition. As always, we reset our target now for a perfect 10 on 10 for next year.

Moving on the chart, as you can see in front of you, during the quarter, we delivered an EBITDA of 4,965 crore, 40% higher year-on-year basis with an EBITDA margin of 36% driven by strong operating performance i.e. volume and cost efficiency, while prices were off lows of last year. The sequential quarter numbers reflect the base effect of a secured mine plant especially at Zinc India which the management team covered in the H result earnings call last week and additionally marginally lower LMEs and Brent.

As communicated earlier, the power failure at Jharsuguda and the TSPL power plant impacted earnings by approximately 500 crores, but these are now behind us with a ramp up and commencement of operation respectively at the locations. We are on track to meet our full year volume and guidance across businesses.

Our gross debt excluding ZL temporary borrowings reduced by approximately 9,000 crores during the last four months since March 2017. Thanks to our 4Q cash earnings and opening cash balances. These are partly offset by issuance of preference shares on the Cairn merger for INR 3,000 crores.

I reiterate like I did in mid-May when we met for the annual results that the strong liquidity award 48,000 crores, low gearing and low net debt-to-EBITDA of 0.8X amongst the best-in-class in Indian conglomerates, strong operations, reducing loss debt trajectory, generally robust EBITDA cash convergent and strong management all continue to reiterate Vedanta's strong investment case.

Moving on to the next page on EBITDA Bridge. As seen on this page compared to the previous year, EBITDA is up by approximately INR 1,400 crores, 40% growth as mentioned earlier. Improvement in the commodity prices held through currency appreciation especially Indian rupee by 4.2% and the South African rand by 13%, an input commodity inflation impacted EBITDA adversely resulting into a net positive impact of 750 crore on the market factors. As well as volume and cost is concerned that is in out of control. And the contribution has been a good 550 crores approximately.

Zinc India has gone through a successful transition from open cars to underground mines in the last 12 months with significant increase in the current quarter volume, but aluminum business we have fully completed ramp up of smelter two at BALCO and Jharsuguda ramp up is progressing well after the earlier setbacks. TSPL back to around 90% availability as we speak.

The cost savings program continue to do well and on track for H1 FY 2019 target savings. Overall, the general trend in volume consolidation, ramping up of capacities, focus on cost efforts, all the assets back in operation, all of them being basic building blocks for a strong company and balance sheet is intact.

Next page on the income statement. While the page of self-exclamatory, I will draw your attention to the attributable pack before exceptional items, which 1,525 crores more than doubled over the previous year.

Depreciation and amortization has decreased mainly on account of change in depreciation methods consequent to the accounting guidance changes and India's oil and gas effectively 1st April and lower mine production at [indiscernible]. With this FY 2018 depreciation is likely to be marginally lower than FY 2017. I'm sure you absorb the account is given on this account.

Finance cost has marginally increased quarter-on-quarter due to capitalization of new capacities at aluminum, temporary borrowing at Zinc India offset by lower interest rate and gross rate reduction. Cost of borrowing for the quarter was below 8% at 7.9%, lower compared to 8.2% in quarter four of 5.17%.

With the reduction in interest rate for our term debt which was refinanced 80 basis points to 100 basis point overall cost of borrowing likely to be 20 basis points to 25 basis points lower than last year. Blended rate of return on investment for the quarter was around 6.7%, reflecting the interest rate curve as well as the mark-to-mark on the bond investments. The tax rate guidance for the year at mid-20s to 30% as articulated during the May 2017 meetings still holds.

As seen in the notes, in early July, the general gave unfavorable ruling regarding distributor on computation of tariff for the subsidiary TSPL around the area of coal sourcing. Based on the grounds of appeal and the external opinions, the group has reviewed that there is a high probability of success in these matters. Approximately 40 crores of EBITDA for the quarter is accounted on this note.

As you've noticed in the pack the guidance on volumes is largely unchanged, as I mentioned earlier. Cost is expected to be marginally improved aluminum driven by inflation though LME there continues to be stronger helping to mitigate the impact.

Moving on to the next page on net debt. During quarter four 2018 Vedanta and its subsidiaries Zinc India declared a record in Indian corporate to see special dividends rewarding the shareholders, which was subsequently paid out in April. Post these the preference shares issued to the Cairn shareholders pursuant to the merger is also reflected in the walk.

There is some unwinding of the working capital in Q1 as is normal, which is likely to come back in the following quarters. Our CapEx program is progressing well in line with our guidance given in the last results call.

The net cash from operations was around 4,100 crores, but as outline above was invested back in CapEx and working capital. Net debt post dividends and preference shares stated almost the same level more or less over the last quarter.

On the next page on the balance sheet, continuing with our focus on gross debt reduction while the net debt to EBITDA ratio remain strong as we discussed earlier, the company repaid 9000 crores of high cost term loans during the last four months, and has also been able to lower the costs on those outstanding debt portfolio during the quarter. The rate of interest on outstanding term loan portfolio was reduced by about 80 basis points to 100 basis points.

The improved credit profile also helped us compress our spreads on capital markets borrowings giving us access to competitively price points. Our access to debt markets and relationship banks continue to be comfortable. We look for opportunities to actively manage our balance sheet by extending our maturity profile and reducing our cost of borrowing. As usual the liquidity of the group remain strong with over 48,000 crore or $7.5 billion of cash and about $1.1 billion or undrawn lines credit.

Finally on the last page on financial priorities. Our financial positive priorities remain consistent. As Tom articulated earlier, we will continue to remain focus on cash generation from the business by running them efficiently, reduce gross debt while ensuring a robust shareholder return yet and all our CapEx requirements internally. In short, we aim to allocate capital wisely and appropriately.

Thank you all and over to Tom for the business section.

Thomas Albanese

Thank you, Arun. We'll now move over to zinc, and like to first start by talking about the zinc market fundamentals since that is our strongest business. I've been talking about the zinc fundamentals for quite some time as you know, and talk about the fact that we continue to see strength both on stable demand and again diminished supply and we continue to see these fundamentals on trend and its fundamentals intact.

For the past few months there were some doubts about refine market given the fall in zinc prices, but we were believer and again we've seen those markets recover and this smart recovery in the zinc LME justified the - what I will consider to be a fairly strong view we have on zinc.

The continued shortage of new supply and the continuous draw down of refined zinc inventories both LME and Chinese registered warehouses have led to multi-year low stock levels some of them going back no more than 10 years. The constrain market continues to be tight it's a fact that just now finally started reflecting in the refine market and the impact of this technique will getting accentuated in the coming months. TCRCs do remain low although even marginally up in the past few months. Just a reminder 60% of Zinc used in galvanizing.

The end use of zinc is largely driven by construction, transportation and infrastructure. And as you aware India is growing significantly in each of these sectors and surprisingly so India doesn't yet galvanize its vehicles and for most of the building construction would not be using galvanized rebar, so there are still I think quite a bit of upside in terms of future some demand increases just in the Indian market. Urbanization and industrialization will continue to drive demand in all of these sectors.

Moving on to the business itself for Hindustan Zinc. Starting with our Hindustan Zinc business we commence the year achieving mine metal production of 233,000 tons. Our cost and production for the quarter was higher mainly due to the sharp increase and input commodity prices and our asset realization was also lower.

On our projects we are on a way to achieving 1.2 million tons of mine metal capacity in fiscal year 2020 underground mining to move 80% in the current year before completely transitioning to underground mining in fiscal year 2019.

Our important future of mine the underground ramp up continues to proceed well and we expect to start ore production in the third quarter of fiscal year 2019. At SK mine we were at 1.5 million tons in new mill contracts to L&T which will take our mill capacity at SK up to 5.8 million tons per year.

We do believe this our group of mines have a potential far beyond existing resource and reserve and we're extremely focused through - continue to explore that full potential and critically adapt in the coming years.

We maintain our overall production guidance for fiscal year 2018 of refine zinc metal production of about 950,000 tons. Silver production is expected to be over 500,000 tons while our cost of production is expected to be marginally higher compared to fiscal year 2017.

Moving overseas, the Zinc International higher sales volume of Black Mountain helped us deliver a strong EBITDA despite a plant shut down at Scorpion and the asset plant during the quarter. As you recall sales were lower last quarter and some of those had been involved so pushed into the current quarter. Well cost of production for the quarter at 1,690 was high and it was largely driven by the shutdown at Scorpion.

Moving on to projects. The Gamsberg project is on budget and on target for first production by middle calendar year 2018 and we made significant progress during the quarter. The critical milestone and completing the north access ramp as part of the open pit development was achieved as per schedule. The north pit pre stripping is now fully ramped up in the quarter.

All major orders for the integrated process plant water and power, mining and other prestart activities have been placed and manufacturing critical machinery like mills, crusher and transformers are all progressing well.

At Scorpion as you know we announced last year a pit expansion project and that's proceeding well and we'll ultimately extend the mine by another three years. Our fiscal year 2018 production and cost of production guidance remain unchanged with production about 160,000 tons and cost of production at $1500 per ton.

I know that several days ago last - two weeks ago actually most of the sell side analysts were part of our Oil & Gas Day at our Gurgaon office. We got really good positive feedback from that and based on that five positive feedback and help you better appreciate our zinc business we are planning to host a Zinc Day very soon and we'll shortly follow up with details.

Now normally I would speak about the oil and gas business, but again post the merger and we in order to ensure our shareholders get as much information as they need on our Cairn Oil & Gas business it's appropriate that Sudhir Mathur the CEO speaks directly about the highlights of Cairn. Sudhir, over to you.

Sudhir Mathur

Thank you, Tom and good day to everyone. The Oil & Gas business continues to deliver stable production volume with higher fleet as flows and managing the field at a low operating cost. We have also commenced our growth journey on both exploration and development fronts.

Our co-fields continue deliver long expected lines with gross production across our three assets at 187,000 barrels of oil equivalent per day for the quarter. The Rajasthan production was around 160,000 barrels per day.

Mangla ER continues to deliver a strong performance with Q1 FY 2018 volumes at 56,000 barrels a day continued reservoir management and production optimization help deliver steady work production from water flood operations across the field. The Rajasthan asset recorded an excellent uptime of over 99% during the quarter.

Gas production from RDG increased to average of 35 million cuffs per day for the quarter. During the quarter we commence production from two more satellite fields Combay II and Guda in Rajasthan. The offshore asset production was at 28,000 barrels per day with Ravva contributing 18,000 barrels and Cambay 10,000 barrels. Respective reservoir management practices and production optimization help contained the natural decline. The offshore assets also recorded excellent uptime of over 99% for the quarter.

Our world class operational capabilities have kept the operating cost at the lower end among our global peers. Rajasthan water flood OpEx was at 5.5% lower than Q4 at $4.3 per barrel. Blended operating costs for Rajasthan was also lower by 1.2% at $6.2 per barrel with the polymerized liquid injection at 420,000 barrels per day in Q1.

Moving to the next slide, and looking ahead. As we have mentioned in the past, our projects delivery deliver healthy economics at $40 Brent. We have commenced our CapEx cycle.

Let me begin with the gas project. Raageshwari Gas project is progressing well as per plan. Phase 1 of the project is on track to complete in Q2, which would increase gas production to 40 million to 45 million cuffs per day. Well Phase 2 the trending activity for the new terminal is progressing well. The drilling rig compact has been awarded with mobilization by Q3. Phase 2 is expected to increase the gas production to over 100 million cuffs per day and condensate production to about 5000 barrels of oil equivalent per day by H1 calendar 2019.

Moving on to oil projects. Mangla has been our most prolific field over the years. We are commencing a 15 well infill drilling program at Mangla to monetize the results early. The rig has already arrived at the site and drilling shell comments from in a few days from now. We are upgrading the facilities at the Mangla processing terminal to facilitate increased oil production, liquid handling capacity will go up from 950,000 to 1200,000 barrels per day increasing water injection capacity from about 650,000 to 850,000 barrels per day and production enhancement to water treatment help services and facility modifications.

These are being implemented over a phase math. We look to leverage the learning from the excellent performance of Mangla ER to enhance production at Bhagyam and Aishwarya two polymer injection.

Bhagyam ER field development is under discussion with our J.V. partner point ONGC. We are continuing polymer injection in the select well for incremental volume. The injective retested Aishwarya has been successfully completed in three polymer injected wells. The field development plant for Aishwarya ER is under discussion with our J.V. partner. We are continuing polymer injection in the select wells for incremental volume.

The large hydro carbons in place 1.4 billion barrels of oil equivalent of Barmer Hill offer significant growth potential. Aishwarya Barmer Hill phase 1 has been approved and the production from the existing appraisal wells will commence from July 2017. The execution of Aishwarya Barmer Hill phase 2 is expected to begin in fiscal 2018.

Speaking for exploration activity, we continue to work towards enhancing our prospect portfolio of Rajasthan by high impact place. Prospect have been formed for exploration drilling within the current year. In addition to this the focus on enhancing prospect resource based service contracts has been awarded for shallow oil prospects and deep gas prospects in the Barmer basin.

We're also planning to drill two exploration wells in the KG Offshore block. For the fiscal 2018, we expect to have steady production volume from Rajasthan at 165,000 barrels per day with the potential upside from the execution of growth projects. The net CapEx is estimated to be $250 million with further optionality for growth project.

Following in on from earlier comments during the Oil & Gas Day many commencements of our investment in the exploration and development projects is a step towards realizing the full potential of our prolific Barmer basin. We are committed to our ultimate vision of receiving growth production levels of 500,000 barrels per day by contributing to 50% of India's domestic production.

With that back over to you Tom.

Thomas Albanese

Thank you. And again for those on the call I just want to reemphasize that post the Cairn merger we want you to make sure you get the same level of quality information from Sudhir the Cairn team that you would have had before the merger.

So with I'll now move on to aluminum. Out of the aluminum we continue to ramp up our operations, and I'm happy to share the BALCO 325,000 tons, smelter is now fully operational as well as capitalized. At a 500,000 tons Jharsuguda-I smelter as announced earlier we had an outage in April 2017. 28 parts of the total 608 parts were damaged. Rectification the damaged parts is in progress and as this date 35 parts have been restarted to be expect full ramp up by the third quarter fiscal year 2018.

Coming out of the progress of the ramp up at Jharsuguda-II, the second line has been fully ramped up and capitalized from the fourth quarter fiscal 2017. At the first line and third lines currently 187 and 152 parts respectively are operational, and we expect full ramp up by the third quarter of fiscal year 2018. We expect to produce between 1.5 and 1.6 tons of aluminum excluding trial run production in fiscal year 2018.

On realizations, as you know we benefited from higher aluminum prices during the quarter, our realized premiums were marginally higher than last quarter although significantly higher on a year-on-year basis.

Our hot metal cost for the quarter as I mentioned earlier were $1,727 per ton, mainly on higher import prices for alumina and Indian rupee appreciation increased input cost and some temporary costs pertaining to spot outages.

Obviously we're not happy with that sharp increase in the cost and our team are working hard in several operational and procurement initiatives including improvement at our Chhattisgarh bauxite quality, local procurement of coal, efficiencies in our power plants and we also expect to see Odisha bauxite allocation now sooner rather than later with some pretty good progress over the course of the past quarter.

Part rebuilt efforts are progressing well and within our budget, you may be noted that about $40 per ton of the reported first quarter cost of production pertains to part revival costs which we should get rid of as soon as the damaged parts are repaired, as I said most likely by the third quarter.

As we progressively ramp up, the aluminum cost production will also see a downward trend from the second half of the current financial - of the current fiscal year. And we estimate the hot metal cost production in the second half of the fiscal 2018 to be between $1,575 to $1,600 per ton.

We expect fiscal 2018 alumina production in the range of 1.5 million to 1.6 million tons - 1.5 metric to 1.6 metric tons implying about 50% of alumina requirement is met via captive production.

At our BALCO mines expect to mine 1.8 million to 2 million tons of bauxite in fiscal 2018 and again we continue to work with the Odisha government on the allocation of bauxite to drive a future expansion at Lanjigarh refinery.

Moving on to power, and the power slides, at TSPL all three units have restarted and the end of June and currently running availability about 90%. As announced earlier the plant without a production as we had a fire at the coal conveyor unit in April 2017. We expect availability of 70% for the full year.

At BALCO 600 megawatt and Jharsuguda 600 megawatt we saw sequentially lower off take in the first quarter. This remind you we've had long term power purchase agreements for about 60% of the 600 megawatt capacity of BALCO which are being substantially met and serviced.

The 100 megawatt NALCO power plant has been put under care and maintenance effective from the 26 May 2017 due to lower demand in southern India. The plant had been selling commercial power for the last eight years and had generated significant cumulative EBITDA of about $170 million over those eight years.

With respect to coal sourcing we've observed temporary disruptions in domestic coal supply, which meant some increased to power costs. And we have been reducing our dependence on imported coal of BALCO and Jharsuguda despite increasing coal requirements as we ramp the smelt is up. We did secure two million tons of coal linkages in July during the linkage auctions, this in an addition to the six million tons we secured a year ago. We believe options of coal linkages are beneficial for long term security of coal sourcing at competitive prices.

Moving on to the iron ore slide. We had sales of 2.28 million tons and production of 3.24 million tons. At Goa, production was lower primarily due to the early onset of the monsoon as well as a temporary halt in mining in some areas by the government, which expect to be resolved in this coming third quarter.

Sales were lower due to lower pricing environment and a widening of discount for a 56% grade as compared to the 62% iron grade, and this is result a negative EBITDA per ton. However we've been very busy during this monsoon season working on an upgraded product, we expect to come out of this monsoon season with a better material that were selling.

We're working on the beneficiation and blending with higher grades so that we increase our overall iron content to about the 57.7% grade as well of lowering the alumina content from 4.2% to 3.5%. We would expect that this will enable narrowing of current discounts and improve our realizations per ton.

At Karnataka, we've achieved 50% of our annual mining cap reproduction of 1.09 million tons during the quarter. Our sales were lower at 0.42 million tons due to muted e-auction sales. However, beneficiation of ore has resulted improved prices at $24 per ton compared to $18 per ton in the first quarter of fiscal 2017.

And we remain confident achieving our allocations of at least 5.5 million tons and 2.3 million tons at Goa and Karnataka respectively. Well ahead at the end of the fiscal year and we continue to engage with respective state governments from increase mining allocations in both states.

We'll talk about copper India. Copper India production was 90,000 tons of cathodes. Production was lower primarily due to plant shutdown for 11 days as well as an unplanned shutdown for four days due to a boil leakage at the smelter.

We advance the maintenance shutdown to the first quarter to coincide with global mining disruptions of seaborne concentrate. Global concentrate supply has since recovered as you're aware as the effective minds of ramped up have begun to ramp up production, which is now operating at a high efficiency following the shutdown and expected to produce a 400,000 tons of cathode during fiscal period 2018.

TCRCs have been lower for the quarter at $20.08 per pound. This decrease was an account of reduction of global benchmark to TCRC rates and lower spot TCRCs. 80% of our concentrate requirements are sourced through long term agreements.

Our net copper conversion was higher year-on-year mainly on account of higher coal and input commodity prices lower realized asset prices and lower volumes due to the maintenance shutdown I just mentioned.

We do continue to evaluate the expansion of the smelter by further 400,000 tons per year and we should be able to provide further updates on this progressively during the course of the year.

So now to close with our closing slide, like to remind everyone of the compelling investment case for Vedanta Limited. We've got a large diversified asset base geared toward base metals and oil producing sector-leading production growth.

As we talked about a low cost production profile in the lowest quartile many of our assets Asia company generating positive free cash flow even in some of the low commodity prices which we've seen in prior years.

One of the strongest balance sheets among India and global peers, with a net debt-to-EBITDA of 0.8X and gearing up 20%, and we remain committed to achieving our objectives as zero harm and creating sustainable value for all shareholders.

As this is our first quarterly reporting period for the newly merged Vedanta we're getting off too good start.

Now, operator over to you for questions.

Question-and-Answer Session

Operator

Thank you very much. Ladies and gentlemen, now begin with a question-and-answer session.

[Operator Instructions] We have the first question from the line of Sumangal Nevatia from Macquarie. Please go ahead.

Sumangal Nevatia

Yeah, thanks for the chance. First question on the zinc business that really look like the next big potential value unlocking division in the group and very encouraging to see that progressing well. Just want to understand once the production starts in - say mid 2018, how fast can ramp up happen to 250 KTPA and how will BMM the existing mine phase out in the next two years?

Thomas Albanese

So I'm sure maybe I'll start with some comments both on the Gamsberg, but also talk about BMM. And then maybe I'll ask Ashley to supplement those. And then thank you for your positive commentary about the Zinc International business I think that it's been a real home run for the company since its acquisition and with and Gamsberg coming on board is going to be delivering its next chapter. But we would expect that I've said that that Gamsberg should be completed and in production by the middle of next calendar year and realistically we're looking at 12 plus months to ramp it up aggressively as we go forward. And I think that will be something that will basically give us the 250,000 tons of zinc production as we previously advised.

I do want to clarify and actually correct one of the things with all due respect that you said about what are we going to do to replace Black Mountain, because we've been doing some good exploration in the Black Mountain area and we found a number of targets actually more targets that we have actually drill resource to go after now and what that gives us confidence is that as we begin to continue mining and Black Mountain over the next few years, I would expect the some of the nearby or bodies including smart which we have mined in the past would increasingly take up the slack as the Black Mountain resource begin to return resources begin to expire.

So actually I have a pretty positive perspective that Black Mountain it's going to be around for a good time going forward. With that, Deshnee is there anything further you'd like to add.

Deshnee Naidoo

Thank you, Tom. I'm assuming that I am order go.

Thomas Albanese

Yes. Yeah.

Deshnee Naidoo

Excellent. All right, thank you for the question. I think as Tom said it, Gamsberg project by the middle of next year we would have the first of feed into the plant give us nine to 12 months after that to ramp up to the for 250,000 tons of metal in concentrate. I think what's exciting about that resource is that that's just phase 1. So the team and I now need to make the call on when we want to press the button on the phase 2 part of this project and we have both the phase 1 project almost trying to factor in an incremental ramp up to phase 2 and phase 2 could be at the 180,000 tons to 200,000 tons of metal concentrate. That's still maybe in 18 months to two years away but I just want to put it up there that this resource has got another phase potential to it.

So from a complex point of view to obvious question as Tom said yes the deep shaft at Black Mountain will ramp down the next three to four years, but we have accelerated our exploration and we do believe that there is a future on the Swatberg resource which is predominantly a led and a resource of from a vision point of view. We foresee quite an attractive what we are calling a Black Mountain mining complex vision for the Gamsberg zinc on the one side and then the led silver deposit in the current mine. The team and I are now focused on how do we integrate this to make this a very competitive complex that in the first quarter of the cost curve for as Tom said for many years, but at least for the next 20 years we are quite clear on what the vision will look like.

Sumangal Nevatia

Understand. That's helpful. So just to from a broad perspective will the phase 2 will also have a similar CapEx intensity as phase 1?

Thomas Albanese

I think if someone can I just say some after that all we know now is that we're the current phase 1 gets as a four million ton per year mining rate we've got a total resource of 180 million tons and that's likely to expand. So I think we've got a lot of engineering to do before we get to a point of even seeing with the scale phase 2 would be over its capital cost.

Sumangal Nevatia

Understand. That's helpful. Just one last bookkeeping question, the oil business EBITDA looks very strong not able to reconcile any anyone off year which we should not?

Thomas Albanese

I think maybe we look forward and just start with that and Arun if you want to say anything else.

Arun Kumar

Right I think the oil and gas business normally goes to the typical for barrel EBITDA plus they would be in various quarters cost recoveries of plus minus because it's a standard practice in that business. And we do have a one-off cost recovery that is there in this quarter Sudhir will like to just spend very brief from moment on that but it's a very minor thing.

Sudhir Mathur

Yeah. Thank you, Arun. Cost recovery is something that often goes in a lag in the sense that we done in exploration like we do in Rajasthan at sole when we bring these fields into production we are able to recover. So they would be in sometimes these some of the project type talk about we would start incurring on behalf of ONGC as well to order these items and when the IPP gets approve we slow back, back in terms of ONGC share as well as the government share of market petroleum. So this quarter we had bit of higher entitlement interest.

Sumangal Nevatia

Is it possible to share it?

Thomas Albanese

Normally we do not share details of that, because it's between our partners and how we manage these issues.

Sumangal Nevatia

Understand.

Thomas Albanese

But as I mentioned our total cost of production is $6.2 a barrel and we should be able to derive reasonable number if you want to in the appropriate, but the cost structure is better half by 1.2% over the previous quarter.

Sumangal Nevatia

Understand. That's very helpful, thanks. And all the best Tom for your future endeavor.

Thomas Albanese

Thank you.

Operator

Thank you. We have the next question from the line of Pinakin Parekh from JPMorgan. Please go ahead.

Pinakin Parekh

Yeah, thank you very much. The first two questions on aluminum. The first question is that while we have been in discussions when the Orissa government regarding bauxite security obviously progress has been very slow when - would that company looking to go ahead with the expansion for the refinery even without captive bauxite given that the bauxite is still available regionally or would bauxite security still remain the key driver for any decision to expand the alumina refinery?

Thomas Albanese

So I guess from my own perspective we have think three steps ahead of us. The first is to ramp up our existing capacity to two million tons per year, and do that within the material that we have and that's currently the order of business. We have been working on the engineering for the Lanjigarh expansion also see if there are other technologies or other ways that we can do.

Now just moved on from five plus years is the original expansion to visit. So that's going to be looking at that and based upon that that's going to give us sort of breakevens for running rates et cetera that could cause us to say that's go ahead with it before the bauxite available.

But my own personal preference is to make sure we have that the burden the hand that is the bauxite and its allocation, so that we can then basically have the security of supply and security of the feedstock, so we can move forward with the expansion, of course these are parallel efforts they're not necessarily mutually exclusive.

Pinakin Parekh

Secondly on the aluminum cost of production from 2017 to guidance of $1,575 to $1,600 is it only the lower cost from year would only be driven by the normalization of production or is that company also looking at some benefits either on the import side or the process side?

Thomas Albanese

So I think it's a combination of the two, obviously moving away from some of the part repairs immediately takes the numbers down a bit. We are ramping up and increasing our procurement of our own and third party bauxite, which will allow us again to ramp up Lanjigarh and the produce cost of Lanjigarh alumina is much lower than the purchase cost of seaborne alumina. We are also looking at the alumina that we're procuring or hoping for proven in that area.

And then we continue to see areas for efficiencies, for example there will be one of the current phases of our efficiency improvement right now would be really looking hard of the supply chains and some logistics, and I think we're going to see some low hanging fruit still as we move forward in those areas.

Pinakin Parekh

Sure thank you. And my last question is in oil, I mean in that Oil Day which the company hosted last week it was obviously a very good presentation, we got a lot of insights. But one question is that at what point this year or next year can we get a more granular visibility on what kind of volume growth can we see across the Rajasthan basin, I mean is it a more long dated volume growth FY2021 or can we expect a substantial search starting as early as second half of 2019.

Thomas Albanese

So all these should here for that, but I'll just give you my layman's response and that is that there is going to be very much a correlation with the production growth lag there we have to kick off some of the big spending, so some of the projects that we've talked as we go there are going down there - as we moved down the spending profile in those projects that are certainly be the blueprint for the production expansions. But Sudhir you can probably give us more expert view.

Sudhir Mathur

Thank you, Tom. I think we would be able to give out more granular sort of guidance towards the end of the current fiscal. And we are working very closely with our partner ONGC as well as with DGH and you know making sure that all the FDP is get approve in the next two quarters, which would really trigger off you know from standstill investment, as I mentioned earlier we are making putting up some capital for long leads to ensure that we can expedite the capital investment. I didn't said all that we do expect second half of FY2019 to seen begin as the surge in production, but just bear with us couple of quarters at most on granular details of our production ramp up.

Pinakin Parekh

Understand, thank you very much.

Sudhir Mathur

Actually sooner than later.

Pinakin Parekh

Thank you.

Operator

Thank you. We have the next question from the line of Abhishek Poddarat from Kotak Securities. Please go ahead.

Abhishek Poddarat

Hi, thanks for taking my questions. I had certain more questions on the aluminum production cost. In Slide 22 you mentioned and there is around $45 per ton increase because of the operation issues. Could you give more color on what is that part into? I'm referring to Slide 22 where you have mentioned that sequentially the production cost have gone up which $45 per ton because of the operational issues?

Thomas Albanese

What I think we have a combination of factors there I think as we look at it, we've had some changes in the quality of some of the alumina that we've taken in which has had some affect probably about half of it. We have seen some of - we had that one point we ran short of alumina bauxite and we had to basically come to closer that there will be a one off that took place. We have some wage revisions, which are probably going to be go on a continuing basis, but that's a very small part of it, and some extra realigning costs.

Abhishek Poddarat

Okay. And I think on the power cost also we're seeing some increase you know from $548 to $609, but when I look at the power slide the glucose have actually declined. So could we have more color on how why that is going up?

Thomas Albanese

Well as I look at the numbers here, it's hard to say the coal cost declined, because the green bar has actually gone up quarter-on-quarter if I'm looking at the bottom right hand corner slide number 23. Imported coal cost have been declined, but domestic has gone up which is the green line.

Abhishek Poddarat

Okay, so that's mostly being from the domestic coal is it from the option side?

Thomas Albanese

And can I just add that one thing that we saw which we hope is a one off is that in this course of the past few months, well we've heard a lot about the surplus of coal at large in India what's actually taking place that there are local shortages that have been taking place, and within the Jharsuguda area what we've seen are actually some of the mines there not been producing to their expected levels.

And we've also seen a bias in terms of state policy and what I call central policy toward allocating the available coal in favor of the IPP's to keep power our rates down for consumers, but that's been at the expense of some of the CTPs. So this I have to say this has been profit as cause have to scramble bit particularly as we're ramping up our aluminum production and that's had some effect in terms of sometimes running shorter coal sometimes having to buy power and that's had probably a negative effect on our overall cost of power as converted to aluminum. Ajay Dixit if there's anything you'd want to add to that quickly.

Ajay Kumar Dixit

No.

Thomas Albanese

So I think we've lost Ajay, but I think I don't know if anything Arun did anything you want to add to that?

Arun Kumar

Well, I think this is just one off because of the party shoes otherwise these are temporary problems has been ramp up, so the guidance something that's been given and we should really the big picture here in aluminum is we have a good chance of exiting the year with two million ton run rate hundred and the aluminum price and the overall outlook continuous to remain strong seen after several years. So it offers well we have succeeded very well in the last two rounds of linkage options if you see Vedanta has got the maximum share with the linkage options and very competitive prices. Of course there will be few here and there when some of the coal mines of the government may shut down or may not operate very well, but overall the fundamental fabric is looking good in terms of volume, good EBITDA, good. So hopefully in the second half we should be able to live up to our guidance and stronger looking in story is what we are looking at it.

Ajay Kumar Dixit

Sorry Tom, the in between just there's any question where I got dropped except there.

Thomas Albanese

No. I think we got covered, Ajay. Thanks.

Ajay Kumar Dixit

Okay.

Abhishek Poddarat

And so there was there is a news on Odisha in giving the electricity due to duty rates. So will that impact our cost or that is already factored in when we're giving it out in the 15, 75 to 16 entrants so?

Thomas Albanese

So that is factored in these are all small things will happen plus, minus keeps happening. There are lots taxes and structures so I'm feeling that must it all factored in.

Abhishek Poddarat

Okay. So this does the last question. What was the buyers create amount in the June?

Thomas Albanese

As you played pushing around the same levels as the last quarter so. Not much of is always plus, minus $10 million, $20 million in between quarters.

Abhishek Poddarat

Okay. Thanks a lot, sir.

Thomas Albanese

Thank you.

Operator

Thank you. We the next question from the line of Sanjay Jain from Motilal Oswal Securities. Please go ahead.

Sanjay Jain

Thanks for taking my question. I have two questions one is on a, as you mentioned that we have a good chance of exiting FY18 with 2 million ton rate. What I want to understand is little bit more on the support. I mean and one of the call something back you had mentioned that grip transmission it's also an issue in ramping up in new in productions. So is that issue behind and it will not comment on tests again or still trying to manage it existing infrastructure?

Thomas Albanese

So if factor could maybe just take that a Sanjay and say that there are two quite separate questions and issues I think that the part values we have probably a combination of things that and post review reflection were related to original construction, some were related to the fact that we had basically facilities that had been idle quite a long time for the time of completion to the time they actually began ramping up which is some time in phase 4 plus years and in other cases there are operational issues and in many cases I think as we've brought in a number of new people and you probably didn't have the training at the level we wouldn't need to or the capabilities of all the skill operators.

So those it's all items that we've tackled and going for base that we would see those as one-off. The grid issues really were things we talked about last year as we were seeking power solutions and we saw a lot of those that we've as we've moved to recreate coming to a run rate of 2 million tons for years. We see ourselves confident of the 2 million tons per year run rate within the existing power plant configuration some of the conversions from see from IPP CPP and the transmission configuration between our and third party facilities.

As we however move to last up mine which is the - which would take us from 2.0 million tons per year to 2.3 million tons per year. We still have to solve both power generation and power transmission matters. Hopefully, we will be solving those over the course of the next several quarters so we could see that ramp up occurring in the next fiscal year but the days are not guiding to that.

Sanjay Jain

Great. One last question, what is the first come order advances [indiscernible].

Thomas Albanese

Again at customer advances just - and moves over often but there is nothing very significant movement there customer advances a part of normal business transaction so whatever the number is pretty much what it could have been in the last quarter are fundamentally the efforts are always that volume cost and efficiency is what drives or cash flows. And our cash flows should be able to fund the growth CapEx that we have in mind and do small capital allocation with projects that have high returns. So that really how we look at have no ideas what the capital I mean customer advance figure is but what it is sort of constant normally between quarters.

Sanjay Jain

Okay. Thank you.

Operator

Thank you. We have the next question from the line of Rajesh Lachhani from HSBC. Please go ahead.

Rajesh Lachhani

Taking my question. My question is on iron ore. We've seen some sharp cut in the profitability in iron ore with the discount increasing and iron ore pricing price just weakening. With beneficiation program I just wanted to understand at what benchmark iron ore prices this will be profitable given we'll also spend some additional amount as cost on beneficiation.

Thomas Albanese

Yes. So thank you we have what we have to say I mentioned in my earlier comments would be that on increasing the grade up since the 57 from the 56 and then taking down the room and content and it's also board remember as we do that we can't take the grade about 58% [ph] and we start incurring the export duty of 30% which would make it all an economics. So we've got a sort of the balancing on a pin here to increase trade but not over 58% and then everything we could bring down the. So we have and we have we had some wash plants that were previously being used in prior years as we've been basically we having a put back into place over this monsoon season and we are confident that will lead us with an NSR that will be above the OpEx some obviously Kishore has covered this a little bit we're focusing very much in this environment and what are additional cost improvements that we can make on our baseline cost. So that we can have these new washing cost but Kishore can you talk about that a little bit?

Kishore Kumar

Thank you, Tom and thank you, Rajesh. This question for the last quarter in terms of the performance and had two impact one of course is the price decline compared to the March quarter to June quarter that's quite steep fall of 30%. In addition, we had a mark-to-market adjustment of the previous quarter because of the QP. So that was up onetime adjustment period which came through in this quarter which may not happen going forward. Number two is that the quality aspect we are very clear that on the quality we are going to be benchmarking ourselves with that. So in terms of discounts which rose to a steep discount of 40 and odd percent during the quarter or one we are expecting to discounts of FMG, SSN going forward so that would means over and above the cost of production of beneficiation we could look at anywhere between $7 and $10 incremental margin.

Rajesh Lachhani

At what prices, that that's?

Thomas Albanese

Prices I'm leaving it that the market rate. I'm not trying to talk the prices beyond the June quarter prices.

Rajesh Lachhani

Okay. Thanks.

Thomas Albanese

Yeah.

Operator

Thank you. We have the next question from the line of Dhawal Doshi from PhillipCapital. Please go ahead.

Dhawal Doshi

Hello, sir. Sir, a couple of questions. First of all the linkage coal 2 million tonnes when is the supply expected to start?

Sudhir Mathur

Ajay?

Ajay Kumar Dixit

Yeah. This supply will start from August.

Dhawal Doshi

From August onwards? Okay. Second is been explanation given for $45 of increase in aluminum. Sir a good chunk of it could be some one-offs right. So short supply of alumina, additional relining costs secondly some power purchase that we had to do from the markets. So how much do you think is really going to be sustainable out of that and how much effort is one-off?

Ajay Kumar Dixit

I think this is come been on the management team aluminum to assure that they're one-offs so we get them recovered I think in what you would see as a best practice these are things that would not be planned for and would not be expected.

Dhawal Doshi

Right. But if I have to specifically look at for this quarter perspective again any numbers that we can look.

Ajay Kumar Dixit

I think it's fair to say that these were items we haven't seen in previous quarters so we wouldn't expect same continuing.

Dhawal Doshi

Okay. Thanks, thanks a lot.

Operator

Thank you. The next question is from the line of Ravi Shankar from Credit Suisse. Please go ahead.

Ravi Shankar

Yeah. Thank you. Just one question on the CapEx, so as we get around $170 million of CapEx this quarter. Does the full year guidance of a $1 billion of it and we had another 200 million of CapEx optionality on top of that number. So is that less likely are more likely now not at one quarter is behind us?

Sudhir Mathur

So I guess I'll start by just commenting that again said that there is optionality. Obviously the longer it takes for us to consider projects the less of that will come into this year probably would spill into next year, all the primary capital projects are pretty much going on as we schedule so those that are nondiscretionary we would expect to see the bulk of that actually take place as expected. And so I wouldn't necessarily model anything less than the guidance that we've been at this stage.

Ravi Shankar

Okay. Thank you. That's all from my side.

Operator

Thank you. We have the next question from the line of Amit Dixit from Edelweiss. Please go ahead.

Amit Dixit

Yeah, thanks for taking my question sir, and congratulations for a good set of numbers. Deleveraging that was demonstrated in this quarter was quite encouraging, I would just like to know because of the cash flow generation in the company. So in there some target deleveraging we have can we see further deleveraging here on?

Thomas Albanese

So I ask Arun to cover that, but I just want to really comment a bit on that, because I would actually had a media chorus and I got the same question, and from my own perspective we've done huge work over the past 18 months and deleveraging and we've taken the balance sheet that people all were sort of in your calls were saying well what are you going to do about it, we put in a position where we have some of the strongest balance sheet that you can see in the peer group whether it's in India or globally with the debt to EBITDA ratio is 0.8 to 1. And what that means is that we do intend to continue to de lever, but we what we have is, we can de lever on our own terms.

So we can ensure and do it on a way which makes the most commercial set take into account not only the debt, but also the equity markets in our shareholders as you know we've been looking forward to returning value to the shareholders we go forward. So these are all take into account as we go forward, but if it's a quality question, this is definitely a quality question that we have the strength of a strong balance sheet to work off, but Arun if you want to say anything further?

Arun Kumar

I think Tom articulated very well, it's a quality question as we put it for a strong balance sheet at 0.8 net debt to EBITDA and gearing less 20%, probably it's best in class amongst the conglomerates manufacturing, conglomerates in India. So now you know the focus is really on seeing that the gross debt also while we are cash flow and how to match it and see that it comes down and glad to report that we have reduced 9000 crores of gross rate in the last four months, which is a significant progress that's exactly what we said we'll do in our financial priorities and we have been demonstrating it.

So good problem to have and the most important thing is to get solid operations, solid cash flows as you observed and use those cash flows widely to reward investors to invest in capital projects, profitable capital projects that is and use some of it to reduce the gross debt while strengthening the balance sheet continuing to strengthen the balance sheet. Thanks.

Amit Dixit

So net cushion is that there are media report regarding Vedanta trying to put up Jharkhand plant, is there something on annual in near to medium term?

Thomas Albanese

So this is - I'll answer that and that's a key source to say a few more words about it, because I've been to Jharkhand twice so far this year. What we were talking about when Jharkhand government is the development of some mining leases which we've conducted some exploration on this year and then the match that with Goa like value add facility which should be producing iron those types of things which have low capital cost intensity, but are very much needed for future manufacturing in the in the Jharkhand and eastern Indian markets to match the type of product range that we set allow to go, and what we see is this something that it makes good business sense, it addresses what it call our local stakeholder issues are showing a value add, but also quite capital intensive - capital friendly. Kishore is anything else you want to say about that?

Kishore Kumar

Thank Tom and I think more except that this is we have signed MOU with the government of Jharkhand to build one million ton vinyl plant overall spent of maybe five to 10 years, but it starts with the basically the same concept that prime benefit iron ore that is produced in the state. So that is and we are doing the exploration on the mining lease because the work is under progress.

Amit Dixit

Thanks for taking my question and all the best Tom for your future endeavor.

Thomas Albanese

Thank you.

Operator

Thank you. We have the next question from the line of Anshuman Atri from Haitong Securities. Please go ahead.

Anshuman Atri

Thank you for the opportunity and congratulation on the performance. So my next question is regarding the aluminum segment. Are we seeing any disruption in the supply of carbon pitch and because of various production cuts which are done in China and during winters are we stock sufficiently so that we don't have face any disruptions?

Thomas Albanese

Okay I guess, I would say that we're seeing tightness in the market pricing not supply disruptions, but Abhijit if you want to just quickly answer that as you can.

Abhijit Pati

No I think we are going positive so far as those supplies concern. Yes there is a - there are some amount of that impact of the issue price of book, so far supplies concern we are extremely positive.

Anshuman Atri

Okay. Second is one steel again there was also few reports around Karnataka plant being explored by Vedanta over a longer period of time, so that will that have less opportunities about Jharkhand facility?

Thomas Albanese

Yeah I think that what we have talked about is we're working on our iron ore in Karnataka. Our iron ore with value add in Goa and visioning iron ore plus value add in Jharkhand and I think that gives on Kishore's plate in keep in pretty busy.

Anshuman Atri

Okay. Just one last question on Gain India is it possible to get the cost of production for the quarter?

Thomas Albanese

Sudhir?

Sudhir Mathur

Thank you, Tom. Our cost of production for the quarter for the whole of Rajasthan was at $6.2 and for just the water flood operation cost was $4.3 per barrel.

Anshuman Atri

Okay, thank you.

Thomas Albanese

You may refer to Page 20.

Anshuman Atri

Okay, thank you

Thomas Albanese

Okay, thank you.

Operator

Thank you. We have the next question from the line of Ashish Kejriwal from IDFC Securities. Please go ahead.

Ashish Kejriwal

Yeah, thanks a lot. Sir, my first question is related to your net debt, we have been hoping that we are going to deleverage our balance sheet significantly. But these are sense remaining the same when we look at net debt X Hindustan Zinc in the funding, because here we are seeing increases in your net debt obviously partly because of its increasing preference shares, but even the CapEx guidance which you' giving and are the kind of operational profits, which we are going to make, do you think that by the end of the year, we can see net debt X Hindustan Zinc declining from current levels.

Thomas Albanese

Yeah I think good question. This is the strength of the diversified company as you see, that there will be various business and various life cycle and as we said earlier matured business investing more in CapEx zinc story is great, you're putting money at 40% less IRR projects on the other hand you can't be in a better position in aluminum where you have already invested 95% of your capital and if you really see the marginal rate of return on what you're going to get when we - then the ramp up produces the EBITDA on a stabilize commercial production basis. We are very attractive return on marginal capital employee.

So I think we should feel good about the fact that you know it's developing into a good twin engine kind of situation, twin engine kind of a jet where you have the zinc businesses both international and domestic zinc business doing very well robust expansion plants, robust cash induction and other engine you have aluminum which has tremendous promise to deliver as I said good chance of exiting with a two million run rate, two million ton run rate and the oil and gas business doing pretty well lining up several projects which are at plus 20% IRR with $40 Brent.

So we don't see any reason why with or without zinc we should not be able to produce enough cash in the near future to de lever the gross debt whether continue to maintain the group us a whole as one of the best balance sheets in terms of consolidated net debt position, but good question and you know we'll do well to look afterwards.

Ashish Kejriwal

Thank you, sir. So any benchmark or any like in order net debt to EBITDA which we have in our mind while looking at standalone operation?

Thomas Albanese

So I usually say that any benchmarks we would have had a year ago we blew right through, so we're working rarefied air in terms of companies that have balance sheet as strong as ours.

Ashish Kejriwal

Because normally we compare Vedanta with Vedanta not with others, so that way I was looking at.

Thomas Albanese

We've provided you know I think we've seen from in our last results we provided a bench how we could benchmark our overall balance sheet compared to our sector peers.

Ashish Kejriwal

Fair enough. And second question is on alumina cost do you think that alumina cost in fees we have already taken into account while giving a guidance of our second half cost of production?

Thomas Albanese

Yes. What we have done is we recognize the fact that a large portion of our alumina is purchased on the market on indexes and send somebody to index the running in the range of 19% LME. So it's really driven all for what he LME prices. So we've taken that into consideration when given that guidance.

Ashish Kejriwal

Fair enough. Thanks, thanks a lot and all the best.

Operator

Thank you. Ladies and gentlemen, that was a last question. I now hand the conference so it will Ashwin Bajaj for closing comments.

Ashwin Bajaj

So I guess some, thank you. I just maybe for me to close and I think as you're aware this is my last earnings call but that limited it's been a truly exciting eventful journey. I think we have a little more price volatility than we would have ever imagined over the past four years and I have to say very cherished moments particularly with this team but then the people on this call right now.

I've enjoyed interacting with all of you over the past four years, I've only gratitude to offer to every one of you on the call on listening on today and certainly everyone on the grant team both in this call and also supporting this call and all those people working at the mines, at the factories, our board and all our stakeholders.

I will leave Vedanta with a clear view that I've had in the past which is that India will act as a powerful growth catalyst for a sluggish global economy and my years in India only reinforce that believe. So I continue to be very positive about both their main prospects for minerals in India, the supply prospects for minerals in India and very excited about plants of future. Thank you.

Arun Kumar

Thanks, Tom. And ladies and gentlemen, thanks for joining us. If you have any other questions do contact us. Thank you.

Operator

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