Vedanta's (VEDL) CEO Kuldip Kaura on Q2 2018 Results - Earnings Call Transcript
Vedanta Ltd (NYSE:VEDL) Q2 2018 Earnings Conference Call November 2, 2017 9:00 AM ET
Ashwin Bajaj - Director, IR
Kuldip Kaura - CEO
Arun Kumar - CFO and Whole-Time Director
Sudhir Mathur - Acting CEO and CFO, Cairn India Limited
Ajay Dixit - CEO, Power Business
Kishore Kumar - CEO, Iron Ore Business
Deshnee Naidoo - CEO, Zinc International and Copper Mines of Tasmania
Pinakin Parekh - JPMorgan
Rajesh Lachhani - HSBC
Amit Dixit - Edelweiss
Abhijit Mitra - ICICI Securities
Bhavin Chheda - Enam Holdings
Ritesh Shah - Investec
Sumangal Nevatia - Macquarie Research
Abhishek Poddar - Kotak Securities
Ladies and gentlemen, good day, and welcome to Vedanta Limited Q2 FY '18 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Ashwin Bajaj from Vedanta Limited. Thank you, and over to you, sir.
Yes, thank you, operator, and very good evening, ladies and gentlemen. This is Ashwin Bajaj, Head of Group Investor Relations for Vedanta. Thanks for joining us today to discuss our results for the second quarter and FY 2018.
We will be referring to the presentation that is available on our website today. From our management team, we have with us our CEO, Mr. Kuldip Kaura; our CFO, Mr. Arun Kumar. We also have several of our business leaders with us. We have Sudhir Mathur from Oil and Gas; Anita Gupta from Hindustan Zinc; Deshnee Naidoo from Zinc International; Sameer Piari, Ajay Dixit and Abhijit Pati from Aluminum and Power; Kishore Kumar from Iron Ore.
So, with that, let me hand it over to Mr. Kaura.
Thank you, Ashwin, and good evening, ladies and gentlemen. I'm very happy to be doing this call as CEO of Vedanta Limited. I mean I have that pleasure of interacting with some of you when I was CEO of the Group earlier. So, it is kind of like of homecoming of sought. I've been working very closely with our Chairman Emeritus, Mr. Anil Agarwal for the past year in the Chairman's office and have had the opportunity of getting side view of the growth. So, it's kind of hitting the road running.
Now to the operations we have had a very strong quarter and the EBITDA up 24% and the [patch] up 41% compared to last year. Consistent with our strategy to maintain a strong balance sheet, we also reduce debt by over INR11,000 crores since the start of this fiscal year.
In the commodity market side both zinc and aluminum elemi have had the strong performing quarter. For zinc global tightness in concentrated supplies coupled with mine supply cost in China have been driving the price early. In the case of aluminum successful implementation of standard reform to restrict excess capacities combined with improved demand outlook helping prices. We expect this momentum to continue for H2 of FY '18 as China implements with the production cuts.
Like we said in the past, we expect that FY 2018 will be both in supply and demand driven story in our sector. China's growth recovery and environmental reforms solution will be a major drivers of commodity prices.
With that let me take you through our quarter two performance. I'll start with safety and sustainability which is a fair amount important to us. Management is committed to delivering zero harm, zero waste, zero discharge and this will continue to be our real life at Vedanta. Regrettably I am deeply saddened to say that we have had two fatalities during quarter 2 from two unfortunate incidents. One at our RMO business and other at scope and zinc facility.
Fatalities are a set back to our collective hard work to deliver on zero harm. We are working to ensure better isolation protocols to avoid such incidence in future. This is also bit discussed at length in our executive committee. And we are collectively working to improve the adjusted environment in every business through leadership demonstrated visible leadership and also risk management as well as positive assurance measures in each of our businesses.
We also had incident regarding ash like bridge. We have an incident at [indiscernible] where the wall of one of the ash tags was breached spilling ash on at adjacent lands. Most of the land where this occurred belongs to the company. And there were no injuries from this incident. We have completed a further investigation with the help of agencies like Golden Associates, [indiscernible] and the immediate actions have been taken.
On the positive side our efforts of sustainability have been recognized and Vedanta has been ranked 15 in The Dow Jones sustainability index globally, while Hindustan Zinc has been ranked third in the environment category and 11th overall in the industry group of mining and metal.
Moving on to the next slide on operations. We delivered a strong volume with record production in many of our segments and continue with the production ramp up across our portfolio with production guidance of 2018 unchanged.
We had high labs in production and record silver volumes at Zinc India. The Gamsberg zinc project is object for its first production in which calendar year '18. At aluminum we had a record quarterly production and exited with the stabilized production on which of 1.6 million tons. TSPL power plug in Punjab is back in full swing and running at nearly 90% DLF levels.
Talking about the financial highlights I'm happy to report that quarter 2 EBITDA was near INR5800 crore, and debt was rupees INR2036 crores. We have had a strong free cash flow of nearly rupees INR3300 crores during this quarter. Vedanta is one of the largest contributors to the Indian [indiscernible] and our contribution to the [indiscernible] in the first half of this year was rupees INR13,000 130,000, crores.
Next, before we deep dive into results I would like to remind everyone about the strong investment case of Vedanta. Vedanta has a large diversified low-cost asset base geared towards base metal and oil and gas which has a highest global demand in the coming years among all commodities.
Nearly 90% of our commodities are expected to have the strongest demand growth for the next 15 years, our production growth from our well invested assets give us a clear edge compared to our industry peers. We had the strongest balance sheet as compared to our Indian peers and among the strongest as compared to the global peers with net debt to EBITDA ratio of 0.6 and gearing at 16%.
Moving to the next page, just to reiterate our capital allocation policy which is underpinned by our world class assets and operational excellence; this becomes more important as our assets ramp up and generates a healthy cash flow and gives us what -- like we like to call, a good problem to have on deciding how to deploy it. Shareholder return continues to be a clear focus area for the management and the Board. In terms of balance sheet management our focus will continue on improving our penetrating by [indiscernible] at Vedanta Limited from the current AA rating while continue to share down gross debt. We'll only invest in attractive return projects in our existing businesses at very conservative commodity price assumption.
I'll now hand over to Arun who will take you through the financials.
Thanks, Mr. Kaura, good evening everyone -- good morning everyone. We've continued to deliver yet another overall good quarter of growth with further progress on our financial operational and strategy goals. The quarter sequentially was stronger on volumes also had tailwinds from a strong commodity price environment. The zinc touched a 10 year high, aluminum a five year high, and brent just crossed $1.60 a two year high.
This resulted in better realizations but at the same time we also see input commodity, inflationary headwinds, especially aluminum and some in coal. Sequentially EBITDA was up 16%, to about 5,776 crores with margins continuing to be robust at 35%. This was driven by higher volume from zinc, recovery in the power business was a disruption, continued ramp up of capacities at aluminum.
Attributable PAT, before exceptional was at INR2,036 crores, up 41% year-on-year and 34% up on a sequential basis. While our net debt to EBITDA ratio as you all know continues to be robust at 0.6, last 12 months basis, the focus is on gross rate reduction. Since March '17 we've reduced gross debt by around 11,500 crores, of course including zinc India INR7,000 crores temporary borrowing repayment, the number is 19,000 crores approx. in the last six months.
Net debt reduced by about 3,400 crores, driven by strong free cash flow generation during the quarter. Improved EBITDA and lower net debt further of course put our net debt to EBITDA ratio at 0.6 as I mentioned earlier perhaps the lowest amongst Indian corporate and global peers, best in class balance sheet one can safely conclude. Of course, needless to reiterate that the same disciplined approach to capital allocation will continue and growth CapEx investments which have just picked up pace will be expected to generate handsome returns over and above our hurdle rates. Shareholder returns will continue to be an important objective too and all this can be well managed as I always say thanks to the strong operational focus and cash flows, so pretty much the same thing that Mr. Kaura alluded to just before I started by section.
Moving on to the next page, EBITDA bridge. During the quarter all our business delivered strong operational performance, we have record quarterly record production, highest quarterly production at Black Mountain, at Zinc International in the last four years, record single production at Zinc-India, Zinc-India of course as you’re aware delivered 50% up on integrated metal and 30% up on silver volumes in H1 and record aluminum productions benefiting from the continue ramp up.
TSPL availability at above 85% in the fourth reflecting the fact that it fully recovered following a fire incident in Q1.
Iron ore as is normal in quarter two did not export due to monsoon season, the oil and gas business too did well to strengthen its UR program helping mitigate the natural declines in its wealth quite strongly. This strong volume growth considered additional rupees 620 crore to EBITDA, the cost stayed constant bit of a watch between volume led efficiencies and cost savings program in one side and cost mix on the other hand. While LME brand and premier contributed about 700 crores yet uncontrollable in the form of market and regulatory methods like higher input commodity prices, CD coke, coal prices had adverse impact of 200 crores so net was about 500 crores on the non-controllable side.
Together the EBITDA increased to about 5800 crores as I've mentioned earlier. The impact of temporary one-off issues like import of power due to supply chain issues, aluminum [indiscernible] cost contributed to a negative 270 crores approximately hopefully should be mitigated around now.
Over to the next page on income statement. As always, the page is self-explanatory, some of the headline numbers have been covered in my earlier commentary of the two pages. On the finance cost side, it reduced sequentially as a result of e-payment of high cost borrowings and reduction in credit spread with an improving credit profile. The blender rate of borrowings continues to be well under 8% of target which was mentioned by me two quarters of calls, I mentioned we will get to it around mid of this year happy to report that we’re below 8%.
The blended rate of return on an investment portfolio for the quarter was around 6.7% same as quarter one reflecting the interest rate curve as well as lower mark to mark gains on the bonds with a flatter yield curve that was in quarter two.
Depreciation and amortization cost was marginally higher sequentially, FY18 depreciation likely to be marginally lower then FY17 pretty much the same guidance. Tax guidance, tax rate will be mid 20's to 30 range, again very similar to what I articulated earlier on the previous call still holds.
Attributable PAT as a percentage of total PAT just crossed 70% as you note, thanks to the strong overall performance across all businesses in our portfolio.
Our guidance on the volumes largely remains the same as given during May 17 results cost is expected to be at big higher in aluminum and Zinc-India against the earlier guidance, mostly driven by input commodity inflation, though price has more than offset the same.
On the next page on net debt again a very simple space with a ramp up of capacity, the higher production volume we generated strong free cash flow post CapEx nearly 3300 crores, healthy 57% of our EBITDA conversion you could say.
CapEx programs progressing well, which I’ll cover on the next page. We maintained our working capital position as well, while continuing to look for opportunities all the time to lean it. With that, maybe a few more details on CapEx, so I’ll move on to the next page.
During the first half, the total project CapEx kind of what 0.3 billion, $300 million. The spend pace will pick up in H2 though the overall CapEx guidance is marginally revised to a full year number of $1.1 billion, about 7,000 crores compared to the 1.2 billion, which we had given earlier, it’s just a question of a little timing here and there.
CapEx program at oil and gas, it’s just start with full swing in H2 and is expected to have a positive impact on volume towards the end of the fiscal, continuing into the next year. We talk about that more on the oil and gas pages to follow, Sudhir will cover them.
Our earlier guidance on optionality in CapEx expense for the 400ktpa copper smelter and Lanjigarh alumina refinery expansion continue. We’ve made further progress on the 400ktpa copper expansion project continue for it.
And it is currently under final evaluation stage. Lanjigarh refinery expansion is also under advanced pages of evaluation. The Zinc India continues to spend on track towards guidance to give the 1.2 million tons by FY2020. Gamsberg is progressing well and first production expected from mid-calendar 2018.
Moving onto the next page. The company continue to manage its debt book with trend objectives of de-levering, gross debt and reducing the costs of borrowing. Continuing with our focus on gross and reduction with company during the fiscal net till date repaid around 11,500 crores as I mentioned earlier mainly higher costs on loans thereby also reducing the interest burden on the company.
We will continue to delever our balance sheet during the year. And at the same time, we’ll evaluate opportunities to partly finance our outstanding debt portfolio for longer tenors to extend the maturity profile but at competitive interest rates. At this point of time, the maturity profile looks just fine to me.
Liquidity for the group remained strong with 40,200 crores of cash. The improving balance sheet and credit profile will further support our ratings, from the rating agencies. Just a couple of days ago India ratings changed the company’s outlook on its long-term AA from stable to positive again in the right direction.
With that I’m going to the last page in the section. Let me finish the financial update by summarizing our financial priorities, which largely continued to be consistent and quite very much focused. The company will continue to drive free cash flow generation across all the business through volume ramp ups, right control on costs and efficiencies.
It will allocate capital wisely to growth projects, while ensuring strong shareholder return. With the well managed balance sheet, the strong set of financials unique positioning as global India based emerging leader in the natural resources sector, the company remains a compelling investment proposition.
Thank you for all the investor and analyst support over the last six months. We continue to have a high-quality share register. Thank you all and back to Mr. Kaura for the business section.
Thank you, Arun. Moving on to Zinc-India, in Zinc-India we achieved mine metal production of 219,000 tons and Japan zinc less production of 250,000 ton in the quarter, which is also happens to be a highest number. Refine silver production was at the record high of 140 tons in line with the highest rates from the mine. Our cost of production for the quarter was $984 per ton, which was impacted by high commodity input prices. Looking at the strong elemi, we have partially had about the quarter of Zinc-India's annual production.
On our projects we are on ways to achieve 1.2 million tons of mine metal capacity in financial year 2020. Underground mining will contribute about 80% to the current years mining production, before we completely move to underground mining internationally in 2019. At Rampura Agucha underground mines ramp-up is progressing well. The main charts of this lines that was commissioned during the quarter and we expect to start oil production from the chart to start in quarter three FY '19 in line with our plan.
At SK mines third mill of 1.5-million-ton capacity is schedule for commissioning by quarter two FY '19 and it will take the total milling capacity at SK mines to 5.8 million ton per annum matching the oil production ramp-up.
Zawar mill debottlenecking has been completed and the upgraded capacity of 2.7 million ton was commissioned during in the last quarter.
We maintain our divest of FY 2018 refined zinc lead metal production of 950,000 ton. Silver production will be over 500,000 ton, on the cost of production we have done the significant increase in the input commodity prices as compared to the last year as a COP for FY '18 is likely to be in the range of $900 to $950 per ton.
Moving to zinc international, we had highest quarterly production volumes at BMM in the last four years. Scorpion has strong production enabled by its mobilization of mine outsourcing at Scorpion and metal grids and highly covering that BMM. Cost of production was $1,470 per ton lower than last quarter. At Scorpion the pit expansion project with an extend life mine to three years and increase results by 3 million ton is progressing well.
With mining that started in April has been at record levels in Q2 and has fully ramp-up. We expect oil traction from quarter four FY '18 onwards.
Our financial year 2018 production and cost of production guidance remains unchanged with production of around 160,000 tons and cost of production at $1,600 per ton.
Gamsberg project is on budget and on target, robust production by mid-look calendar year '18 with ramp-up to its full mining capacity in the next nine to 12 months.
We have made significant progress during the quarter by completing activation about 50% of waste stock of total fees shipping requirement till date for Gamsberg.
I'll now request Sudhir Mathur to speak about oil and gas.
Thank you Mr. Kaura and good evening to you all. In the oil and gas segment I would like to cover three elements which formed the integral part of our growth journey. Firstly, we are looking to generate our exploration portfolio through exploration and appraisal of our assets and the projects [farmers and KB] offshore basis and participation in the open A grades licensing round.
Secondly, we are embarking on execution of development projects with entailed growth investments of about $1 billion is expected ultimate recovery of over 200 million barrels of oil equivalent.
Lastly our core operations continue to provide stable volumes, low operating cost and global free cash flow and even planned CapEx investment.
As long as we begin with our operational performance during the quarter and then move on the growth projects. Our coal field continue to deliver long respected lines with growth production across assets for the quarter of 181,000 barrels oil equivalent per day. Rajasthan production was at 153,000 barrels of oil equivalent per day. Drilling all 15-infill growth at the prolific Mangala field commenced during the quarter and four wells are already online. At our Barmer Hill phase 1 has been approved and the production from existing wells also has commenced during the quarter.
Gas production from RDG, averaged 34 million scf per day in the second quarter of the fiscal 2018. the Rajasthan asset recorded an excellent uptime of over 99% during the quarter. The onshore assets produced 280,000 barrels of oil equivalent per day with rubber contributing 17,000 and [can be] 18,000 barrels. Effective management practices and production optimization measures have had contained the natural decline. Offshore assets also recorded an excellent up time of over 99%.
We have successfully kept the operating cost at the lower end even among our global peers. Rajasthan waterflood OpEx was in line with previous quarter at $4.4 per barrel. Blended operating cost for Rajasthan was also in line with the previous quarter at $6.3.
Moving on the Slide 2, exploration holds a key to ensure sustainable growth through additions to our perspective and condition to serve. Rajasthan block provides us with a unique proposition of singular actors through the full [indiscernible]. In this basin we have established discovery that multiple plays in the reservoir system with growth hydrocarbons in place of over $6.2 billion barrels of oil liquidity. In order to fully unlock the potential of the block we have engaged global partners to establish perspective resources to the tune of $1.5 billion of oil liquid. [indiscernible] underway for an integrated exploration and appraisal drilling campaign from the first half of the calendar year 2018.
At KG offshore seismic interpretation has resulted in identification of prospects and leads over different playback. We shall be commencing a two well exploration program from the fourth quarter of the current fiscal with a target to add $300 billion, of contingent resources.
Moving onto development projects, we've a rich set of opportunities in our portfolio. These range from [indiscernible] pipe oil, pipe gas and facility upgradation projects, as mentioned in the past our projects generate an IRR in excess of 20% an oil price of $40 per barrel and add incremental volumes around 80,000 to 100,000 barrels per day.
Moving onto individual projects, Rageshwari deep gas provides an opportunity to substantially increase our gas volumes. The expected ultimate recovery has further increased by 22% to $105 of oil equivalent. Phase 1 is on track to ramp up the gas production to 45 million tons per day and Phase 2 is expected to increase the overall gas production to over 150 million tons per day, and condensate production to about 5,000 barrels. Through pipe oil Aishwarya Barmer Hill project provides an estimated recovery of $32 million barrels. Range one production from appraisal wells has already commenced from the second quarter. We integrated contracts for RBG and Aishwarya Barmer Hill Phase 2 will be in place.
In our core NDA teams, we're focused on increasing recovery through infill wells at Mangala and enhanced oil recovery project at Bhagyam and Aishwarya. The integrated contract for Mangala infill, RGM, and Aishwarya EOR will be in place shortly. We're also working on upgrading our facilities at Mangala processing terminal in a phased manner to handle the increase crude oil production. We will continue to identify opportunities to increase production from our offshore blocks. In Cambay we're commencing a three well infill drilling program from the fourth quarter of the current fiscal.
For the fiscal year 2018 we expect to have steady production volume from Rajasthan and 165,000 barrels per day with a potential upside, from the execution of growth projects in the second half of current fiscal. The net CapEx is estimated at $250 million.
With that over to you, Mr. Kaura.
So, we come to alumina, we achieved record quarterly production of 200,000 tons during the quarter, the production exit transit for the quarter was thereby 1.6 million tons, we expect to exit FY'18 at the run rate of 2 million tons per annum, at 500,000 tons in Jharsuguda I center, we will achieve full ramp up by quarter three FY'18 post April outage.
On the Jharsuguda II while the second line has been fully ramped up, the first line should be fully ramped up by the end of the current year, and we expect full ramp up of line III by quarter four '18, due to slight delay caused by the incident.
We maintain our production guidance of 1.5 million to 1.6 million tons of alumina excluding trial run production in FY'18. We expect FY'18 alumina production in the range of 1.3 million to 1.4 million tons, just lower compared to our previous guidance mainly due to expected lower mine bauxite.
On allocation of bauxite we continue to work with Orissa state government.
Moving to realizations, we benefitted from higher aluminum prices during the quarter, our realized premiums where however lower than last quarter in line with the decline in headline premium.
On the hot metal cost, we benefited from lower alumina cost as alumina API has move from $303 in June $385 in September due to the benefit from the two months inventory that we hold up of alumina.
Other include commodities like [indiscernible] up 12% compared to the quarter one. On power cost we have been impacted on multiple cuts, low availability of domestic coal due to diversion of coal supply to IPP power plant by Coal India, at least four times during the past quarter. The quality of coal provided by our linkage has been low acting cost by GCP and finally, the brief shutdown of our power plant due to the incident, required us to import power for intervening two weeks.
The power import cost was lastly one-off cost not expected to incur going forward, as we’ve reported earlier three of the five power plants that were shut down due to this incident has restarted, inspection by the pollution board for the remaining two units have scheduled for this month as we expect to be able to restart them soon.
It may be noted that around $28 per tonne of the quarter two CFP increase over quarter one pertains to the port travel cost, combined with $40 per tonne of outage related cost that we reported in quarter one. The total revival is order of $68 a one-off cost which we should get rid of as soon as the cost are recommissioned most likely by end of quarter three.
We expect that challenges relating to coal and other input cost especially alumina and carbon will remain in quarter three and hence revised our COP guidance but quarter three in the range of $1850 to $1900 per ton.
We expect quarter four cost of production to be lower aided by the completion of port ramp up and, largely defined the scale up and improvement in coal situation and our aluminum team is extremely focused on bringing cost back to normal levels.
On power, staying on the topic of coal and moving to the next slide, obviously this is a situation that has been a key focus area for the aluminum management team, we’re engaging with the concern coal mines and government agencies, we expect the coal situation to improve in the current quarter as coal production ramps up post monsoon and demand open. In the mean while we're reporting full to adjust the current short fall, the third tranche of coal linkage option are also in progress.
Moving on to our IPP units, our 1.9-gigawatt, double power plant, full study start in June end has ramped up well and is running at high availability of nearly 90%. We had a record EBITDA of INR342 crores in GSPL this quarter and a targeting availability of 75% for the full year.
Full costs being a pass through for this plant did not suffer from the elevated domestic coal prices. The coal situation however adversely affected our IPP at BALCO and Jharsuguda leaving to low PLS.
Moving on to iron ore, we had sales of 5.7 million tons and production of 1.2 million tons. Lower volumes in an account of the monsoons. Going forward, our volumes Karnataka will achieve its 2.3 million tons cap in quarter three. In Goa, we have been busy during this monsoon season working on an upgraded product. We’ll be benefited our ore and targeting high realization in margins in H2. We expect to sell 3 million tons in H2 from Goa.
Realizations at Karnataka have been steady at $24 per ton. We are however working towards better realization in this market. We continue to engage with the respective state governments for increased mining allocation in both savings.
Copper India. Copper India production was record 106,000 tons in quarter four. Production was higher primarily due to operational efficiencies post the shutdown in quarter one. Our concentrated supply, global concentrated supply has recovered, the affected mines have begun to ramp up production. Many centers in Kerala, Philippines, China and Japan are also under maintenance shutdown in quarter two and quarter three.
Our net cost to conversion is lower quarter-on-quarter, mainly account of higher volume. We are expected to produce about 400,000 tons of [cathode] during fiscal year 2018. We are in the final stages of evaluating the expansion of Tuticorin smelter by further 400,000 tons per year and we should be able to provide further updates on this shortly.
Let me close with our strategic priority slides to reach company's focus area for financial year 2018. We aim to generate increasing free cash flow via our continued production ramp up. We are committed to maintaining a strong balance sheet and prudent capital allocation. We are committed to achieving zero harm and creating sustainable value for all of our stakeholders. We have intensified our exploration efforts to maintain long resource life and harness the resource potential of our assets.
With that, let me summarize while stating that our operation in all segment are progressing well and we are on track for the respective ramp up, which will lead to higher volumes. Commodity markets remain robust, I’d like to reiterate that our philosophy of low-cost at all of our assets remains strong and with a higher improved commodity prices, we are working relentlessly towards this end. All these sectors combined should help us deliver a stronger performance in the second half of this financial year.
Before I conclude, let me share that we are hosting a capital markets day in London on November 10th with the Vidanta PLC results. This event will be available on webcast and also conference call.
So, thank you Mr. Kaura, and operator we are ready to take questions now.
Thank you very much. [Operator Instructions] The first question is from the line of Pinakin Parekh from JPMorgan. Please go ahead.
My first question is on oil. The first half the guidance for oils in FY '18 is 165,000 barrels versus the first half of 156,000 which implies the second half run rate of openly $177. And now how should we look at the exit for Q4 will it be materially higher than 177 given the growth projects or that is still something which is more open FY '20 volume growth story for oil?
If I may just broadly cover and Sudhir can supplement I think this year's second half effort will be more in the nature of debottlenecking and some initiatives which can give a small delta. But the growth projects really will start contributing towards the later part of FY '19. So Sudhir you like to supplement please?
So as Mr. Kaura mentioned the debottlenecking through the infill well program at Mangala is something I talked about, as well as middle sort of debottlenecking at MPT which increases our fuel outlook and zinc capacity will you see and uptick in production on their declines. But really the growth projects that we mentioned we are almost close to contracting that now and by the time the rig would be mobilize their dark side which is two months process subsequent to contracting we should be in a position you would began to see the serious uptick in production from the next fiscal onwards.
Sure. So just two more follow-on questions one is where are on the PSC and secondly in aluminum the company has been evaluating the [Longiva] refinery expansion for some time now and the outside sourcing issue obviously is a key interim. However, given what means to be likely a structural change across the aluminum change in China would the company believe that conditions now justify the expansion of the refinery even without the bauxite security even there it's now 2 to 2.5 million tons shorter for alumina?
So Sudhir do you like to take that PSC question?
As you are aware that earlier on in the year the government came out with a guideline for extension of PSC which include Rajasthan block. I think there were two key elements to it one was that we need to apply it two years side prior to the existing contract term which ends in May 2020, and the second was they wanted to increase in the profits petroleum by about 10% over and above what would be the applicable rate at the PSC.
In terms of the PSC extension where we are at, we are working closely with ONGC our partners in the Rajasthan block to get all the FBTs in place, we are in advanced stage of closer then we will have the application ready approved by both the partners we as the operator to do some well in time.
Second on the increase in the profit petroleum we continue to work with the government, where various arms of the government and the CNG, BBH besides our partners to make sure that the 10% is quite owner and is certainly not in line with the efforts that the government is making to reduce imports by 10% it is increasing the cost of production.
We would be ready in time for the PSC extension as you are aware of adds 250 million barrels of results to our book. And the CapEx that we are incurring that we spoke about right through the call is very in line with increasing production and as we have the security of 2030 already.
Okay so that’s responding to your question on the alumina refinery I mean as you all are aware we have a 2.3-million-ton aluminum smelting facility and you will appreciate that the integrated nature of this facility with alumina and power being captive to us, is the most efficient way of producing a low-cost aluminum. And looking at the long-term economics so it will be better to have a fully integrated facility that is our view.
And as regard bauxite we are engaging with the government for the additional supply of bauxite and making good progress on that.
Also, just to clarify wouldn’t the company put on hold the refinery expansion till there is bauxite clarity visibility.
Right now, our refinery is producing or its capacity is around 2 million ton per annum and decision to expand being evaluated. And we will revert and inform you as and when we make those decisions.
Moving to next question from the line of Rajesh Lachhani from HSBC. Please go ahead.
If I look at the waterfall chart regarding why the cost of production has increased for aluminum so one off are around USD $75 per ton so if you remove it then the cost in Q3 of '18 would be around 1775. So is it due to the lag in the alumina cost that we have given a guidance of 1850 to 1900.
I think our guidance towards a slightly higher number is basically the continued uncertainty in the coal supply situation and the coal pricing. However, we see some signs of improvement in the coal supply from the last week of October but still we need to watch it over a longer period of time.
And then the other part is obviously the way for API for the alumina is moving today, and that's going to have impact. Arun you would like to supplement?
I think it's really the coal and the alumina inflation that one needs to keep an eye on, and we'll keep giving the guidance as we have more information at the end of next quarter.
And the others we have cut our alumina guidance about close 200 kt, so what is the reason for that?
Sudhir, would you like to respond please.
I think reduction of the guidance for alumina from our Lanjigarh refinery is not due to the plant, the plant is capable of reaching 2 million tonne but we ran into some problems of the quality of the bauxite which we're getting from Chhattisgarh, so that one was a scene that affected the production, but otherwise we've confident for maintaining the run rate of 2 million tons especially in coal as be able to obtain to the bauxite which we're working on 35 towards the end of this financial year, so that was I would say is a very technical issue due to the quality of bauxite which we ran into.
So, going forward we don't see this quality issue appearing again.
Because you have to remember that this refinery was made for a specific bauxite which was more the bauxite which comes from Orissa, so that bauxite quantity is increasing this problem we're not facing and also what we had taken steps to have a mining plant which is more robust and which remains a different kind of bauxite and to avoid difficulty. So of course, theirs is a stock deplete that’s why I am saying the guidance for the run rate of Q4 remains 2 million tons alumina production from the refinery however for the full year the average is coming out to [indiscernible].
Thank you. We've the next question from the line of Amit Dixit from Edelweiss. Please go ahead.
My question is with respect to slide number 11 wherein you have mentioned that [indiscernible]
We're not able to hear you properly, therefore please repeat your question again.
So, I was referring to slide number 11 wherein you've mentioned an impact of 80 crores due to regulatory issues, can you just brief what those regulatory issues might be?
So, this was a small -- I think on entry tax there were some judgment which said that on imports we're applicable etc., though that’s small little adjustments, and some duty rates also changed here and there, so it's nothing really significant but end of the day they're regulatory in nature.
And there was a write off of 109 crores in oil and gas business, exploratory assets largely, so is it like I mean can we expect further write-offs like this or I mean this is like a done case?
Maybe there's Arun here but I will request Sudhir to also come in. End of the day we've to realize that oil and gas business as Sudhir will explain is a significant investment business, there will be a lot of investment, lot of exploration and there will be growth in that business, so these are extremely small immaterial things in the scheme of things overall. Sudhir any comments.
The [indiscernible] we were taking more a wild card kind of decision to invest there, we thought we knew it along with our partners in [partners] with TATA as well as ONGC and it was a small amount of capital, it was taking the exploration this and therefore we drilled the well, so as student accounting policy and very conservative person that he is he's taken a write-off on that accounts.
And you see the bigger picture here is whenever oil and gas project is evaluated as Sudhir keeps repeating, we have plus 20% IRR in the given 40 brands and we're looking at really some exciting growth projects in the pipeline as he articulated earlier, those 20%, all of them take in to account a certain risk already in the project evaluation. So that’s the nature of the industry and that’s how you got to run the business and it’s a very, very immaterial amount not really worth bothering about here.
Just one last question if I may, is there any targeted deleveraging that you have in mind for FY 18, because you have been continuously deleveraging I have observed, so is there some target that you're seeking to achieve in FY18 or is it as the cash flow builds up, like that.
I think as we articulated earlier in the last few calls if you observe our mid, the questions that we been reached to us how much more leveraging are going to do given that you're already at below one, net debt to EBITDA, and all you have is to go on Bloomberg and Reuters and take the data and you will find it’s the strongest ratio amongst the Indian conglomerates or the global peers.
So, the question is really about how much cash you want to use reduce the loss and that’s really a very practice decision to your cost of borrowing and we feel very opportunistic about it, at end of the day. But the bigger picture you have for your consumption is 0.6 net debt to EBITDA and how many conglomerates of our size have a sub one ratio in capital intensive mining sector or this kind of sector that one is in. That’s where I leave it the debt management is in safe hands and you know if you notice the cost of debt has come down and our treasury team has done a wonderful job, I told you six months ago that we really bring it on below 8% and we're about 7.75% that’s hardly 100% basic points below GSEC, what more do we want from the company.
Is there any net debt to EBITDA that you have in mind?
That is excellent question that I like that question that you asked. And I go back to the chart that Mr. Kura has talked about our CEO, it's all about capital allocation, see at the end of the day fundamentally good operations, generating such health cash flow you saw 3400 crores in a quarter, this kind of EBITDA 6000 crores and still on a physically up given the volume ramp ups, very few balancing this kind of resources. So, when you have the focus on operations and the cash flows, then you manage the multiple objectives of growth CapEx, delever if you want more and ensure that fair returns are given the investor. So, it’s a question of ensuring a good balance between all the three objectives that we have been pursuing. And more marketed so in the last two, three years that you been observing, how we're balancing objectives and as you know we’ve also invested more in growth CapEx this year. So, with that perhaps it answers your question.
Next question is from the line of Abhijit Mitra from ICICI Securities. Please go ahead.
So, my first question is on Zinc. The divergence that we’ve been seeing in the COP between domestic, zinc and Zinc International operations, only because of domestic coal availability and how to look at it. Because both from a year wise, as well as on a Q-on-Q movement, the GAAP just keeps on increasing. So, to a large extent the domestic zinc operations con call explained as a commodity related move. But the same move is not observed in the international operation. So just curious is it a purely domestic core related move?
And the second quarter which I add on bring internationally is. Can you kindly fresh our memories on the progress of 112 extensions. So, I think the last update which we had is it was supposed to get commission in 20. And it was supposed to be one of the key levers along with Gamsberg to increase the concentrate capacity or the mind middle capacity results for around 40 to 460kt. And with the refinery conversion project would be completed by that time or would we have to stand concentrate outside in 20. So just two questions if you can answer it, it would be great. I have other questions. I will turn back.
To answer your first question, which is about of Zinc India and Zinc International operation, I think it's fair on your part to look at these two metrics. But I mean as you'll appreciate that costs are dependent upon the value chain and type of mines, which each operation have. Because as cost side dependent upon mining, the SIP ratios and various other factors. Plus, the value chain and Zinc share India is mining specific, whereas in the Zinc International, it is more like a refinery, type of operation with a very different kind of chemistry.
So, having said that we have also Deshnee Naidoo, who is CEO of Zinc International. So, I think she can put a little bit more color on this plus also your question on the Fit 112 positions as going forward how do we see that?
Thank you, Mr. Kaura and thank you for the question Abhijit. I think on costs Mr. Kaura has touched on it, these are different businesses. Zinc International is a combination of Black Mountain which is 90,000 tons on the capacity point of view of metal in concentrate. And then on the scorpion side, we do produce final metal, SSG plus 2A refinery. Both of these operations are extremely aged. In fact, with Anglo American they’ve already come to the end. so, they are both in an extension of life phase. Saying that the current Black Mountain mining is at extremely low-grade. In fact, our Zinc grade is just sub 2%, but because it is a polymetallic ore body the ore mining and overall grade of between 6.5% to 7% but at a depth of just close on to two kilometers.
The free deep very low grade and we can talk about productivity etcetera but under those conditions I think we still get to the our competitive on the cost structure under BMM side.
On the scorpion side again, this what would have comes to end 2014, 2015 and as you rightly said we then took the decision to do a further push back on what you call the put 122, so scorpion is also coming to the end of its life on the current put shelf also extremely lower grades. The plant itself was designed for 7.5% plus so now putting sub 6% to 6.5% material to this plant and because the push back decision was deferred and then when prices picked up we then tries to progress with this project we are now experiencing and ore gaps which we are supplementing to either external oxides and also treating some of the marginal ore.
So outside of the increasing commodity prices we are seeing in terms of price pressures structurally these businesses are at very different stage in the life cycle of the assets.
So that's what's driving the cost link that off to around put 122 we have started put 122 in fact if you look at scorpion's kind of quarter-on-quarter stripping is at all-time high. We are already at a run rate of over 3.3 million tons, we relate to ore I think sir Kaura mentioned it earlier in the fourth quarter of this year but the bulk of the all would only come in the following year and just to remind everyone in terms of the scope of put 122 it will extend the current life to just past 3.5 years we are mining about 18 million tons of waste to give us just about 2 million tons of ore to produce 200,000 tons of zinc metal. So that will help but that will only come out in the next 18 months or so.
In terms of the refinery conversions because we took -- so we just completed the project as we discussed to feasibility this is over a year ago. But given the fact that we were again now in the put 122 it always makes sense to treat scorpion's ore through scorpion so we deferred the project and so we can actually press the buttons once we finish the current 112 projects.
I think Abhijeet your question actually you asked a good question in the sense that irrespective of our cost customer bares the same price so we are also asking Deshnee to actually match-up her cost to the Zinc India level. So, I think we will strive to work towards that.
So that's very helpful. So just one final addition to that the extent of commodity inflation which is hitting Zinc International cost structure. Is it being largely made up by the efficiency improvement that is being carried out there how should one look at it? I mean just some color on that and then I'll be joining back the queue. Thanks.
Sure. Abhijeet on the Black Mountain side absolutely, where we are focusing on changing our above mining methods to more open stopping, so that is definitely helping and we are increasing our drilling activities, so we are actually getting better grade in addition so that we actually had all time high on the recoveries, so despite the grade we currently processing we are almost achieving plus 4% on our recoveries today. So that operation improvement is definitely offsetting some of the cost pressures we are seeing. [indiscernible] it's still going to be captive because the volumes are not [day] and there we are really focusing on getting more zinc into the front end. And we are looking at how we can high grade some of the low-grade stockpiles that we have discarded over the years to try and put it through our plant. So those are some of the initiatives but like Mr. Kaura said, right now keeping on the lowest end of the cost curve keeping our productivity up is where we are focusing.
Moving to next question from the line of Bhavin Chheda from Enam Holdings. Please go ahead.
Just a question on the iron ore if you can update on the Supreme Court is looking at increasing the mining capacity in Karnataka capacity in the mine from 30 ton to 35 million ton. So, if that happens in Karnataka produced from 3 million to 6 million tons which you were earlier doing it. Or it would be proportionately increased in line with supreme court.
This is Arun here. So, I think the supreme court process is on, we do see some favorable submissions and recommendations but as you all know the lesser we comment the better in the sense it’s a court process. So, we do expect to hear something this fiscal year. I hope that answers your question.
I mean then of course if the limits are increased then we will get our share out of it.
And regarding the Goa zinc how that mining goes up or what's the process there and any regulatory update there?
Kishor I think your voice is breaking lets an attempt an answer from here. So as far as the Goa is concerned again see the bright spot in Goa as you know last year also in quarter four given the fact that the mining from the other peers was a little slower, and additional tonnage of 3 million tons was allocated to Vedanta. So, we will have to wait and watch how it plays out this quarter four. We don’t include that in our guidance but I would not rollout those chances. But of course, the larger question of the mining cap is at the court as you rightly observed earlier and that process also, we hope should be a favorable outcome during this fiscal year. So, either way you look at it, it's probably an upside from the guidance if things turn out. But at this point of time for your modeling you should stick to the guidance given by us.
And one more question on the coal side, the presentation shows that we have close to 8 million ton of linkages but we have not received full quantities maybe because it was diverted other ICPs of the PSU power plant. So, what is the run rate now in October, November are we getting those quantities or still we're falling short of them?
Yes, we're falling short and it's too early to comment how the supply will build up, but obviously we're hoping for a positive trend.
Thank you. [Operator Instructions] Thank you, we've the next question from the line of Ritesh Shah from Investec. Please go ahead.
So, my first question is for Hindustan Zinc we had change in strategy wherein now we're actually doing some hedging, so just wanted to understand what is the thought process on the aluminum side specifically given the alumina's percentage of LME is moving up, so could you provide some outlook on why not for aluminum and some outlook on aluminum prices also, it would be helpful.
I think as far as hedging is concerned the group philosophy is very simple, we normally don't hedge, we believe in sales price of the day, as exchange of the day, the cost of the day, focus is always to be on the lowest quartile, so that you ride all the way, so there's no fundamental change in any philosophy thought process but yes from time to time when the situation offers a certain unique chance when you're facing a price which is highest in the last 10 years, as I articulated earlier, one did deliberate and the Board of Hindustan Zinc decided to take the call and went ahead to hedge a small quantity probably about 20%, 25% of the annual volume, and pretty decent price around 3,100 or so that we've hedged; now it's not a policy that it'll be executed across all sectors, aluminum price is certainly strong at the same time there are enough cost levers and we continue to stay focused on our philosophy of ensuring efficiency volume rather than focus on hedging. In the event we decide to take a call like this definitely we'll come out with a disclosure and let you all know but very clear that's not the policy nor are we getting into a hedging company here.
So, my second question is would you like to provide some color on locally the stress assets that we have on the steel side and there has been a news flow for us citing a MoU in Jharkhand state, so how are we looking at the scenario, specifically you get to detail about our balance sheet targets, so how should one approach this?
I think maybe I can have a go at that question as well. See, at the end of the day, we will look at what are the allied opportunities in and around our main mines and metals sector, every opportunity will be evaluated on its merits and will strictly fall under the capital allocation guidance and the policy of the group.
Having said that one must realize that we've a huge list of Brownfield projects and very exciting growth plans at this point of time, look at Hindustan Zinc, 1.2 million is on its way, FY '20 the management already talked about 1.5 million tons vision during the Zinc Day two months ago, many of you were there, so when the management is talking about it I'm sure it's starting to make certain roadmaps to get there.
Sudhir articulated the 300 [indiscernible] and we certainly want to see how we can be half India's oil producer at least 50% of India's oil producer, so oil and gas is actually working on several projects in the EUR infill surface facility, ASP high-tech projects, so there is an exciting list of brownfield growth, again Gamsberg is there and we all know Gamsberg is phase one, the reserve body is much bigger this probably a [burg] we been articulating that as well in the zinc day, definitely invited to the capital markets that I mentioned earlier I'm sure, we can discuss more in detail on our exciting growth plans. So, all these things again will be a combination of what opportunity comes up at what point of time, but fundamentally put your head down, focus on what you have on hand which is brownfield and ensure that you generate excellent free cash flow that you mentioned earlier.
You have a next question from the Sumangal Nevatia from Macquarie Research. Please go ahead.
Thanks, first question with respect to the aluminum division, if you could just share what is the spot carbon costing and alumina prices and what is being considered in the 3Q guidance or 1850 to 1900, also when you say focus should be significantly lower, what amount of cost deflation in these three raw materials is being considered.
First of all, I will say for prices, of course are on that run, but they are not very significant part of the overall cost, so the real differentiator will be the cost of power, which is depended on the coal and also the cost of alumina where makes that what is the API on the important alumina run. However, as you are looking for this information on this one, I'm sure our team can view this separately and tell you that.
So, second on the coal availability issue, is there any penalty being charged to coal India below any threshold level of supply, given we have linkage and also the shortage, is it being reflected in high premiums is the branch free and e-options prices.
As the shortage is fundamentally of materialization of your linkage level and so because that is the cheapest coal you have, so your materialization of linkage reduces as you buy and supplement that with the option and also to some extent coal and both those are overall burden of the cost.
Is there any penalty being charged to Coal India if they supply below the threshold?
I mean, I think you can check it out but I'm not very clear on this one but Sudhir if you have any inputs on that.
So that is the coal picture is below the 80% but actually that is the backlog, and what we want from Coal India is to clear the backlog because as you rightly mentioned the e-option and the import cost have higher than the linkage cost which we have. So instead of getting small penalty what we're doing is, we're working with them to clearly backlog of the linkages so that we get those quantities in the balance of the year.
That’s the better approach.
Just one last book keeping question, there is some 900-crore disputable receivable under TSPL, can you share some details what is that regarding?
I think the disputable receivable if at all, we called them disputable, because they are under some tariff commission process. So pretty much, there are some various deductions, which is to be expected in this sector that we operate in the power side at least where there are some differences in view and what is claimable and what is claimable. As far as the investors and the others are concerned. One has to be, well be assured that these are contingent liability. So, the auditors and all of us opportunities look at it in details. It’s very clear that it fit were a probable situation that we provided for and it isn't probable, hence it is a question of finding, when you get it, not if you get it.
The next question from the line of Abhishek Poddar from Kotak Securities. Please go ahead.
First question regarding the bauxite mines. Could you give some color on what is the progress with the State Government, which are the deposits that are relevant to us and any indication on the timeline?
Yes. So first of all, for sourcing of the bauxite. Yes, we are pursuing with the government. But we are not leaving other actions also left out. Because obviously there is one source, which is cost wise most viable and the government is also exploring certain options in which they would go for, I would say also with the latest policy which has come up that even the mines and even the linkages would be auctioned and we are waiting for this to happen. And we are very hopeful, because more and more mines are getting geared for being ready for being auctioned and we will soon see positive result on that side.
So, any indication on what quantity could come and any indicative timeline whether it can take one or two years or it could be early?
Well the process will take us on time. And I would say this is a question, which would not be denied on my part to answer as these things have to go through our process and clearances which have to be there in the government.
So, second question is regarding alumina market. As you said API is very high today at about 22% of LME and the margins for non-integrated names are really getting [indiscernible]. How do you read this market, external market and how do you see the alumina to alumina index behaving in the future? And how does it defect to you in terms of alumina costing, what will be the alumina cost in 3Q and 4Q. And yes, I would mean that what is impact of inventories that you’re carrying right now?
Yes. I think we have given some guidance on the aluminum cost and this question will asked earlier also that why they are slightly higher. And the reason was anticipated costs in terms of both coal and alumina. I mean if you are looking for what is our anticipation on the alumina prices. Ajay, do you have anything more to add?
Yes. What we have studied quite a lot basically the API index is short-up because of the Chinese situation. And as we go and know, what are the additional mines getting opened and additional smelters are high efficiency getting commissioned it will ease up in the quarter or Jan to March and we would see the reversal happening at that point of time.
So, there is last question that you mentioned that because of the production ramp-up there will be some cost decline in aluminum in the fourth quarter. Could you quantify how much quantity -- how much cost we can see?
Fundamentally ramp-up will take place as we should reach our full capacity in the quarter four and our cost in quarter four basically should reflect the softening of the cost of alumina and as well as the larger or increased availability of coal and cost thereof. That is what will drive the overall cost down because I mean the volume to fixed cost kind of arbitrage is not very significant.
Thank you. Ladies and gentlemen that was the last question. I now hand the conference over to the management for their closing comments. Thank you.
Yes, so as I mentioned earlier that all our operations in the various business segments are progressing well, and we are on track for the ramp-up of our volume. Commodity prices remain robust and we believe that we should be the lowest cost producers in each of the businesses we are and we continue to work on our costs. So, with these factors in mind we hope to deliver a stronger performance in the second half of this year.
So, with that thank you very much for being with us.
Thank you, Mr. Kaura and thank you all for joining us. please contact our us at IR if you have any other questions. Thank you.
Thank you very much. Ladies and gentlemen, on behalf of Vedanta Limited, that concludes today's conference. Thank you all for joining us and you may now disconnect your lines.
- Read more current VEDL analysis and news
- View all earnings call transcripts