Vedanta Ltd (NYSE:VEDL) Q2 2019 Earnings Conference Call October 31, 2018 9:00 AM ET
Rashmi Mohanty - Head Group Investor Relations
Srinivasan Venkatakrishnan - Group CEO
Arun Kumar - CFO
Sudhir Mathur - CEO, Cairn Oil & Gas
Samir Cairae - CEO, Diversified Metals
Deshnee Naidoo - CEO, Zinc International and CMT
Ajay Dixit - CEO, Alumina and Power
Sumangal Nevatia - Macquarie
Indrajit Agarwal - Goldman Sachs
Rajesh Lachhani - HSBC
Anshuman Atri - Premji Invest
Pinakin Parekh - JPMorgan
Vineet Maloo - Birla Sun Life
Abhishek Poddar - Kotak Securities
Amit Dixit - Edelweiss
Ashish Jain - Morgan Stanley
Sanjay Jain - Motilal Oswal Securities
Good Day ladies and gentlemen, and welcome to the Vedanta Limited FY ’19 results conference call. As a reminder, all participant lines will be in the listen-only mode. [Operator Instructions]. Please note that this conference is being recorded.
I’ll now hand the conference over to Rashmi Mohanty from Vedanta Limited. Thank you. And over to you.
Thanks operator and a very good evening ladies and gentlemen. I’m Rashmi Mohanty, Head Group Invested Relations Vedanta joining us today to discuss our second quarter results for FY ‘19. We will be referring to the presentation that is available on our website. The call will be led by our Group CEO, Mr. Srinivasan Venkata Krishnan. Venkat as he's called was the CEO of Johannesburg-based AngloGold Ashanti Limited and has extensive experience across several markets in U.K., India, Africa, and South America. Under his leadership, AngloGold Ashanti achieved significant cost and debt reduction, saw successful completion of new mining projects, improved overall safety and sustainability performance and has 5 consecutive years of either meeting or beating the market guidance metrics. Welcome, Venkat.
We are also joined on this call by our Group CFO Arun Kumar, several of our business leaders, Sudhir Mathur from Oil & Gas, Sunil Duggal from Hindustan Zinc; Deshnee Naidoo from Zinc International; Samir Cairae and Ajay Dixit from Aluminium and Power; Naveen Singhal from Iron Ore and Steel; Sri Ramnath from the Copper Business and Philip Turner, Group Head, [indiscernible].
Let me now hand it over to Venkat to provide an update on the company’s operational performance.
Thank you, Rashmi. Good evening everyone, as this is my first results presentation since joining the group 2 months back, I'd like to share with you some of my initial impressions before we go into the detailed earnings presentation and apologies if this is a bit too long. It's been an exciting 2 months. I've been visiting some of the assets and I’ve met with the various business teams. At the outset, let me say I’m very impressed with Vedanta’s vision and resources. When I refer too resources, the company has the finest resources that the world and the country has to offer in the form of some world-class deposits on one hand and importantly people with entrepreneurship capability drive energy and commitment to get the most of these deposits on the other.
I've also seen strong technical expertise within the group with a keen focus on exploration. This is also evident by the fact that we are one of the largest employers of engineers and geologists in India. Our operating mantra remains safety, volume growth, and lowest cost of production. We are uniquely poised to grow in commodities that have a rising demand especially in India with an enviable growth pipeline which is being brought to fruition in a very disciplined manner.
At the core of this group, our long life, structurally low cost and diverse assets with excellent potential, and as we are market leaders in most of the commodities we produce. Strict discipline is inherent in our DNA. Any opportunity always gets evaluated through our values lens both in the form of financial value and returns mainly capital discipline and also whether it meets our principles as a company on sustainability and ethics.
In my years of experience in this industry, I've seen extractive companies generally offer either dividends as an annuity or growth, we offer both supported by our robust balance sheet. Beyond the business of mining, we are also engaged in truly important sustainability work across a broad front that is designed to improve with a tangible way the lives of the people particularly women and children in the communities which hosts our operations. We are always thriving to do better and to ensure that more people feel the positive effects of our work. We will work harder to share stories of this to ensure that our efforts are well understood.
Moving to this quarter’s results, I'd like to begin by saying that our operations generally did well resulting in revenue of 22,705 crores and EBITDA of 5,342 crores. Attributable profit after tax came in at $1,135 crores. Revenue for the 6 months rose some 10% as compared to the previous year. The second half of the year in particular the fourth quarter promises to be better in both top and bottom lines across the businesses as our growth projects in both oil and zinc ramp up.
At the meeting held today, the board has declared an interim dividend of 17 rupees a share or 6,320 crores which at current share price reflects a yield of about 8% which is industry leading. Now if I can turn to the results presentation and start with safety. It is with deep regrets that I share with you that we have three fatal accidents during the quarter, one life lost is one too many and we are learning from these accidents and as a result to further strengthen our initiatives around safety measures with an increased emphasis on the roles and responsibilities of our senior management, their safety support, frontline supervision, improved compliance to procedures and behavioral changes to name a few.
Moving to the broader area of ESG, it is pleasing that some of our initiatives on this front are being recognized. We're happy to announce that Hindustan Zinc was ranked number one in the environmental category globally by the Dow Jones Sustainability World Index in the metals and mining sector and fifth in overall sustainability sector within the mining sector as well. This stands as a testament to our commitment to zero harm, zero waste, zero discharge. Separately, Vedanta topped the Bloomberg rating for the CSR spend.
We are undertaking waste to wealth programs that are helping recycle large quantities of high volume, low effects wastes like fly-ash. As of the 2nd quarter, we have recycled all of the fly ash we have generated this year by operations, against 90% for the same period previous year. We have achieved this by transferring high volumes of fly ash to the cement industry in a remunerative manner.
Turing to water management. Savings and recycling both remained focus area. Our water risk mitigation measures to make the business water self-sufficient include a variety of steps. Hindustan Zinc has built a 20 million liters a day sewage treatment plant in Udaipur, where 30% of the city sewage is being treatment. Untreated water is prevented from entering the cities lakes and the treatment water is being used by our Rajpura Dariba Complex, reducing dependence on the local waterbody by about 85%.
Our IPP plant TSPL is working on efficiency improvement and on-site water storage increases. Our initiation for reducing our water consumption are progressing well, we've already met 40% of the savings target of 1.5 million cubic meters. Our focus on enhancing livelihood opportunities in the local communities continues. We believe that empowering women to be economically independent and self-reliance is vital for every society. Today over 32,000 women are part of more than 2600 health groups and related programs like Sakhi, Zinc India promoted by Vedanta.
Skill India is the government initiated to bridge the skilled manpower gap by providing training to all sections of the workforce and hence skill development of the youth in rural areas is important for us if we want to include them in the nation’s development. Through Vedanta’s various projects like Tamira Muthukkal at Tuticorin over 3,400 youths have been trained in different trades and we have recently awarded around 5,000 scholarships for education there.
Now moving to the business highlights, starting with Zinc India, with 100% of our mining now underground, our volume ramp up continued at a good pace and we delivered 121,000 tonnes of refined zinc and lead. Silver production at 172 tonnes was a record. The cost of production was impacted by lower volumes, higher mine development and increasing input commodity prices especially coal and diesel. We expect that as volume ramps up in the second half of the year, the costs will reduce. At Zinc International, Skorpion and Black Mountain mine are poised for a better second half. We are pleased to report that the trial production has commenced at Gamsberg at the end of September and we'll be ramping up. Gamsberg is another example of strict capital discipline as we are finishing the project within budget.
In our oil and gas business which delivered 186,000 barrels of oil equivalent per day. For the second quarter, our growth projects are progressing well and we will pick up steam in the second half. These include additional infrastructure to bring forward gas production, drilling and hooking additional wells, improving our liquid handling capacity in phased manner and polymer AFC, tight oil and gas interventions, to name few. We are excited with the opportunity offered by the 41 OALP blocks that we recently won, which together with our current production capabilities will take us a step closer to our aspiration of meeting 50% of the country’s crude oil demand.
Also pleasing is a recent grant of a 10-year extension to 14th May 2030 of the PSV contract for the Rajasthan block by the government of India. Sudhir will cover all of this in detail during his presentation. The aluminium business which produced 494,000 tonnes of aluminium during the quarter will continue to benefit from sourcing of bauxite from Odisha as OMC mine ramps up. On power cost this quarter it was no different for us as compared to our industry peers. We continue to work on our plan for a structural reduction in the cost by securing additional linkages and working towards till dependency on both purchase alumina and purchased power. The TSPL plant achieved high available of 94% during the quarter.
Moving to iron ore, post the Supreme Court judgement in March this year, mining operations in the state of [indiscernible] and that includes us. Given our commitment to the region and the considerable favorable impact on the economy which could have if this shutdown is removed, we are continuing to engage with the government for the resumption of the mining operations there.
On electro field, this is the first complete quarter of operations post the merger. We have made significant progress on improving efficiency at this efforts and I’m quite pleased that we exited the quarter with a monthly run rate of 1.3 million tonnes per annum. The EBITDA margins improved to $90 a tonne from $55 a tonne a year ago. We see scope for further improvement here as the business ramps up to 1.5 tonnes capacity in the near term. At Tuticorin, the company has made an appropriation with the National Green Tribunal, which is hearing the case on merits. The NGTF referred the matter to an independent committee to submit the report on the environmental compliances by the plant.
We expect the committee to take a decision in the current quarter. Meanwhile, we continue with our engagement with the local communities and stakeholders through various outreach and CSR projects and on the ground interactions. We are seeing more and more stakeholders supporting the appeal to reopen the plant given its compliance record and at a macro level, the wider social and economic impact in Tuticorin by the plant being shut. Tuticorin was one of the sites I've been to this month, I visited the plant and met all of our employees there and a wide cross-section of stakeholders who are all very supportive and keen to see the plant reopen. Our copper smelter is amongst the best copper smelters in the world in terms of environment practices and the plant uses best in class technologies to be a zero discharge plant.
I'll now hand you over to Arun for the financial update.
Thank you Venkat, and good evening everyone. As outlined by Venkat, we laid a solid foundation in the first half of this fiscal by consolidating underground volumes at Zinc India, commencing almost the entire $2.5 billion growth capex in oil and gas, executing as per plan on the Gamsberg mine, aluminium events on bauxite and poor linkage options and electricity up towards current rated capacity. I believe this sets up for a strong second half across the board in line with the growth playbook as we had laid out earlier this year.
Some key highlights of the quarter that went by on the page one of the financial section. Sequentially EBITDA maintained subject to price movements. Price was a negative. Strong delivery on free cash flow post Capex of nearly 3,500 crores. Continued delivery on ROP at 15% plus post tax, net debt to EBITDA continuing at 1x backed by strong performance with volume growth, robust margins and enhanced returns to shareholders. We have a detailed income statement in the appendix, some key updates on the income statement.
Under exceptional items, it is largely driven by an impairment reversal in oil and gas business stemming from commercial production of oil from the on floor KG block by the operator ONGC. On the depreciation line, it is up in line with the production volumes especially in Zinc India and there's no specific change in guidance. Impact is [indiscernible] evaluated in the subsequent quarter. Interest costs have inched up 22 basis points and just above 8% now compared to FY ’18. Again in line with our guidance as well as the market movement. On the interest income, we continue to invest safely our surpluses in AA plus high quality instruments and have a periodic internal revenue mechanic as well as key approvals in place.
No change in the tax rate guidance at around 30% plus minus 2% for the Fy ’19. Quarter two has come slightly below average, it is timing between the quarters as we know cost by deferred tax. The key highlight has been the declaration of the interim dividend of rupees 17 per share, this is in line with the dividend policy which has been in place for the last two years. And represents a third consecutive year of elevated interim dividend. It also represents a dividend yield of almost 8% at current market value.
The contribution to exchequer for the first half of the year as we define may just include the dividends that were declared at Hindustan Zinc as well, though outside of the first half was approximately 21,000 crores and continues to be one of the highest contributions in corporate India.
Moving to next page, on the EBITDA. As you can see on this page, the volume and costs were fairly similar to the previous quarter. As I said, the consolidation continued into quarter two. Given the full year and second half guidance, one should expect to see more movement in the second half, especially with the zinc coming up, as well coming on commercial production and oil service is driving the volume bar. And consequently lower costs. The cost bar should also get impacted positively with progressively higher levels of Odisha bauxite which will come into play in aluminium as well as the improving the whole security mix. However, on the market and regulatory side, you will notice that while the price of zinc and aluminium weakened during the quarter, the sharp depreciation in currency helped cut back the price losses. As you can see in the subsequent pages, given the impact of currency depreciation. At rupees 600 crores per annum EBITDA uplift for every rupee of depreciation. So theoretically, the rupee depreciates by six or seven rupees, then you can as well annualize it.
Moving onto the next page on the net debt walk. Happy to report that the net debt came down by approximately 3,500 crores, during the quarter which is primarily a reflection of the forced capex free cash flow that we generated. These were driven by a strong working capital performance which we had indicated last quarter that we would reverse some of the quarter one trend and that’s exactly what we’ve done in this quarter. The company has further rolled out a huge working capital reduction across the board and targets to reduce the level further during the year. Capex spend was broadly in line with the guidance, albeit will be heavier in the second half.
Moving onto the details further on this capex in the next page. Overall, capex guidance for the year is about $1.5 billion. This includes the optionality around the alumina refinery which is the final stages of feasibility valuation. The second half spend picks up as the oil projects progress, again to reiterate, capex funding will be out of this year’s cash flows and completely self-funded. We continue to deliver mixed teens overall ROC above 5%. These are driven by the ever-improving returns thanks to the zinc and the oil and gas sector which we have highlighted consistently at above 30% IRR at conservative LME price assumptions.
Moving onto the next page on the balance sheet. Given the current situation on the depreciation and liquidity, we thought it will be good to focus on these aspects. Just reiterating our strength and also the progress that we are making in these areas. Firstly, on the depreciating rupee, you will notice that we stand insulated on our debt portfolio given our policy of full hedge on any foreign currency loan and hence we are largely unimpacted. If at all we are impacted positively on the P&L as mentioned earlier, with rupee depreciation broadly worth 600 crores EBITDA per annum as I earlier laid out. Secondly, on liquidity, we continue to maintain nearly 49,000 crores of cash and cash equivalent, pre-dividend of course, post use of dividend we view some cash. Along with a good sum of undrawn lines as a headroom, while at the same time, all our FY ’19 term maturity are largely refinanced as required well in advance. Further, you would observe our constantly improving debt maturity with the average term debt maturity almost knocking at four years at this point of time, a good improvement from 12, 18 months ago.
As mentioned earlier, the interest costs have increased marginally by 22 basis from the last year and focus continues to invest the surplus safely. Moving onto my last page on capital allocation. Over the last two years, I’ve restated our commitment to a well-balanced capital and disciplined allocation framework. Venkat also alluded to this in his opening remarks. We have created value for our stakeholders and balanced out all the objectives. Most growth has been through brownfield capex leading to mid-teens ROCE and robust IRR from the project. Consistent returns to our shareholders, the dividend yield has been one of the highest amongst the private sector companies, yet we have managed consistently to leverage the issue of one or lower. We believe this approach further enhances the value for our stakeholders backed by a strong operational performance.
Vedanta continues to be an emerging leader in natural resources sector and a compelling investment proportion. With that, I will pass it back to Venkat. Thank you.
Thank you, Arun. If we can then start from the growth projects, I will cover zinc and aluminium and then hand you over to Sudhir in terms of oil and gas. As I mentioned we have an enviable growth pipeline and ramping up of these projects in the correct sequence on time within budget with the proper state getting process will remain a focus area for me.
Turning to Zinc. In Zinc India, we continue to ramp up our underground production as we expected to increase progressively every quarter as you will see in the chart before you. We remain on track to deliver our guidance this year of higher MIC production as compared to last year. Silver production will be in the range of 650 to 700 tonnes for the year. Our projects are progressing in line with the expectation of reaching 1.2 million tonnes per annum of MIC capacity next year. If I can touch on some of those building blocks, at our flagship Rampura Agucha mine, the midshaft was commissioned on the 20 September for man winding and haulage which will result an improved haulage capacity and manpower productivity.
Following commissioning of the loading system, we are hoisting waste through the shaft and it will facilitate higher volumes until the shaft is fully commissioned. The ramp up of the midshaft hoisting the full capacity, the second faithful prompt enhanced mine developments and improved ventilation are the other levers. Off-shaft development is on track and we should see commercial production from the main shaft from the fourth quarter of this financial year.
Turning to our SK mine, the production shaft work is progressing well and the material hoisting from the shaft is expected to start in the third quarter of this year. The new 1.5 million tonnes per annum mill is expected to be commissioned in the third quarter. At our Zawar mine, civil and election work on the 2 million tonne per annum mill is on track and expected to be commissioned by Q4 of this year. The full project in Chanderiya is expected to be commissioned in the current quarter. With these near-term milestones, we are simultaneously planning for the next phase of expansion to 1.35 million tonnes per annum as we reported earlier.
Turning to Zinc International, I’m happy to share with that Gamsberg we put the first ore piece to the mill and we have commenced trial production in September. We have been producing ore steadily to the required rate and have already stockpiled 750,000 tonnes of ore ahead of the plant. We have commissioned the plant and we have built enough crushed ore stockpile for the field. Based on the forecast mine ore grade, mine plant and the ramp up schedule, we are now forecasting around 75,000 tonnes of metal in constant phase. In the current financial year, slightly lower than our earlier guidance. However, lower production will be offset by lower cost, ranging from $800 to $1000 per annum. We will be moving to full ramp off of 250,000 tonnes by the early part of FY ‘20.
Our plans for operational readiness have been put in place and the operational teams already mobilized. The digitization project in mining will help in great management for better process control and quality. With the construction largely complete, we are also happy to share that this projects have been completed within the targeted capital of less than 400 million. In line with our modular approach of expansion and project execution, we have advanced the feasibility and design of Gamsberg phase two expansion. The phase two expansion of Gamsberg will increase the production to 450,000-500,000 per annum from phase one capacity of 250,000 tonnes which I mentioned earlier.
At our Skorpion mine, the waste stripping of pit 112 continues in the second year of the project. Over 65% of the waste stripping has been completed with full completion expected by the fourth quarter of this year. With the ore production fully ramped up and higher grades exposed, production in the second half of the year is forecast to increase. To sum up the zinc story, the outlook for zinc continues to remain robust on the back of low inventory levels, tightness in refined metal production, and higher demand growth projections especially in emerging markets. We expect significant increase in volume in the second half of the year and the coming year and therefore the cost per production to reduce is both our zinc business.
Moving onto aluminium, where I’m sure you have a lot of question. The volatility that we witnessed in Q1 with respect to input commodity prices continued for this quarter as well. We shared our plan with you last quarter to create supply sources for our raw materials to eliminate such volatility and drive structural reduction in our cost. Despite the progress we have made on our plant, our cost for the quarter were higher at $200 a tonne due to market forces. Our target eventually moved to a sustainable cost of $1500 a tonne will be driven by continuing to work on factors that we have mentioned earlier and if I can touch of each of those blocks.
Firstly on coal, we are undertaking measures to improve our coal linkage materialization, we have secured 3.2 million tonnes of additional linkages from transport coal options,, we have this week commenced mining at the [indiscernible] mine which has started to which have started to supply coal to BALCO. These are two positive developments which will improve our overall coal position. We will continue to work on improving materialization from the linkages. The increased linkage through participation in future tranches. We will also evaluate the coal block option as recently notified for the ministry of coal for improving our coal security. That is in respect to coal.
Now turning too bauxite and alumina. Launching a production was strong this quarter and following our debottlenecking initiative is expected to move from 1.3 million tonnes per annum exit rate, we add Q1 to an exit run rate of around 2 million tonnes per annum by the end of this year. Our cost of alumina production at Lanjigarh is significantly below the current import alumina prices. And we have significant value unlocking opportunity by expanding the alumina capacity. The first rates of the Lanjigarh refinery is sanctioned from the 2 million tonnes per annum to 4 million tonnes per annum is in the final stages of planning.
On bauxite, we are working on increasing captive alumina production and we are simultaneously working on tying up high quality bauxite feed. The key positive development for us this year has been the start of Odisha bauxite delivering from Odisha Mining Corporation. The mine is ramping up well and we are targeting 250,000 tonnes per month exit run rate this quarter in order to meet half of our Lanjigarh requirement. Other than the initiatives we are also working on a number of other matters including logistics, plan operating parameters, adding efficiency and achieving further cost savings. We are maximizing our inland movement by rail as opposed to road. Inside the plant, specific power consumption of smelters, power plant technical parameters and railroad turnaround times are important operational focus areas for us as well.
Simultaneously, on the marketing side, we continue to focus on improving set premium by progressively increasing value added production. The value added production is expected to grow by 25% in the second half from 432,000 tonnes which we saw in the first half driven by improved sales of wire rods in the domestic market as well as higher sales internationally. On account of some of these matters coming into fruition, in the second half of the year, we expect the full year cost of production to be in the region of $1,950 to $2,000 a tonne. Additionally, despite having sufficient domestic capacity, the Indian market is being flooded by imports on accounts of the US-China trade war. Total aluminium imports increased by over 20% in Q1 and Q2 with import of straps increasing by 25% year on year in Q1 and 19% year on year in Q2. Specifically, scrap imports from the United States have significantly increased by an astonishing 128% in the first quarter of this year and further 144% in our second quarter over the same period last year.
This is one of the areas we are taking some policy intervention and support from the government. We are especially committed on improving the overall profitability in the aluminium business and unlocking its true potential.
With that I hand you over to Sudhir to talk through the oil and gas projects.
As Venkat mentioned, we have secured the approval for the Rajasthan PFC. With this extension, our 2P reserves in Rajasthan have jumped more than four times from 138 million barrels to 596 million barrels. Given that this large reserve accretion as well as huge success in the acquisition of the 41 blocks in OOLP, let me first layout the strategic objectives of the oil and gas business. This is perhaps the first time we have a robust portfolio comprising a number of exploration blocks with promising prospects, large pool of development projects and prolific producing fields.
In the next few slides, I will cover the work we are doing in each one of these aspects in order to achieve our vision of contributing 50% to India’s domestic oil production. Our planning for future growth includes exploration which we will do in 41 blocks we have been awarded under OLT. These blocks are spread across major basins and provide us with a variety of exciting opportunities. We plan to carry outsizing survey of over 10,000 square kilometres and well over 150 wells to unlock this potential. We have already commenced global vendor outreach and planned to have vendor engagement need in India and Houston in the third quarter of this fiscal.
Moving onto the next slide, the next on exploration, our focus is to target high impact prospects across basins. In Rajasthan, we are deploying five rigs in the second half for exploration and appraisal. We shall drill seven to 18 exploration wells. We will also carry out exploration appraisal for four of our key fields with a potential of around 200 million barrels of resources. In KG offshore, first exploration has been a discovery. Multiple reservoir zones were encountered in the [indiscernible].
The second exploration well shall be drilled in the fourth quarter. Ravva block has been a global benchmark with recovery of around 50% and we continue our success story through exploration and development efforts to add incremental volumes and resources. The next slide, we plan to monetize our reserves through various projects across enhanced soil recovery, tight oil, tight gas and facility upgradation with a total capital investment of over 2.5 billion dollars. Although the closure of our contracts for the rest of world partnerships with global vendors took longer than initially envisioned impacting near-term volume we have locked world class recovery rates at very low capex costs.
With enhanced oil recovery technics we shall have ultimate recovery from coal fields to around 50% significantly higher than around 35% world average and around 40% in US and 45% in North Sea. Also our capital investment cost is around 5% per barrel which is much lower than the global average of around $7.5 for key projects. On the next slide has details of each one of the projects individually that we are working to boost production. The slides provide timelines for each projects on rig availability, well drilled and hooked.
Let me highlight a few things, second half of the year will be a fairly busy with increase in rig counts well drilling and hook ups. During the second half of the year, our drilling rig counts have jumped from 7 to 11. The number of wells drilled shall increase to 132 there by drilling 100 wells in H2. The numbers of wells hooked up shall increase to 56. The first tight oil well drilled in the second quarter was the longest horizontal section in India of 1294 meters. The second well surpasses this record with lateral length of 1315 meters. We are accelerating our tight gas project to bring incremental volumes in the near term. The [indiscernible] pipeline is nearing completion.
Facility debottlenecking at our end will lead to gas volumes by Q3 in addition we are building early production facilities to increase our production by around 90 million by the end of the fiscal. We are increasing our liquid handling capacity by around 30% in a phased manner to handle incremental volumes. To conclude, our growth prospects for oil and gas business with many opportunities we have are very promising. Our capex approach through unique integrated model did take up some additional time. However, the contracts are locked in around $5 per barrel for capex and world class recovery rates.
Our projects will generate superior returns. With a surge in drilling activity and hook ups in the second half we expect the average to be around 200,000 barrels per day.
Thank you and over to Venkat.
Thanks Sudhir. Before I wrap up, I’d be a miss not to mention thanking my predecessor Mr. Kuldip Kaura for an excellent period holding the fort and also in helping me transition into this new role in the last two months. So thank you Mr. Kaura. And let me wrap up by saying that our strategic priority remain unchanged. We are committed to achieving our objective of zero harm, zero wastage and discharge. That’s creating sustainable value for all for all of our stakeholders.
Growth with an eye on strict and disciplined capital allocation will remain a focus area once we continue to strive to improve our operations, sweat our efforts further, optimize cost and improve realization. With that, we will open the floor up for questions.
[Operator Instructions] Our first question from the line of Sumangal Nevatia from Macquarie. Go ahead.
Good evening everyone, thanks for the chance. First question is with respect to the oil division. Now we've got volume guidance by almost 10% midpoint to midpoint for this financial year. So if you could just elaborate the reason behind the delays and ramp up, number 1. And number 2, how are we now placed with the medium term target of 300 kilo barrels which we are looking to achieve in one or two years from now. Thanks.
Sudhir, you want to pick that up?
As I mentioned while I was talking earlier, the main reason for the delay was that as we went into contracting last year, we felt that the prices that we could get for all the contracts given that the activity had fallen when the -- service company activity has fallen when the low crude price regime, we were getting better -- significantly better contracting rates than we expected, both were drilling as well as EPC facilities. And our belief was that it was better for us to add certainty, we had committed to you that we would be doing IRRs in excess of 20% at $40 a barrel. But when we saw the capex rates that we could negotiate down, we felt that we could get IRRs, the same IRR even at $35 a barrel. And therefore we went into a situation where we would offer all our stakeholders - shareholders a sense greater certainty on the returns on these projects by being able to slice off from the capital expenditure cost, you know five to seven percent than what we had originally conceived off. So that let to you know the negotiations with the potential partners created a delay of about month, I’m sorry about quarter which has led to us revising the guidance. But the reserves are very much in place as I mentioned that there are almost 600 million barrels of reserves and you know on the medium term guidance of 300 I think very much there, I think when we gave our -- I'll lead back to Venkat and Arun, but I think normally we give out medium term guidance at the end. When we give out on the closure of the annual accounts.
Sudhir, if I can come in here. Really, in terms of our revisions of the guidance is really one around timing. We are excited about the reserve growth which we are seeing in oil and some of these delays when you are looking at one of the largest expansion and capital expenditure in the oil and gas sector, a few month delay in terms of project coming on stream is not the end of the world. So from that perspective, I’m still excited in terms of the oil and gas business, and we will update our medium term guidance in terms of when we announce our results at the end of this year. What for me is even more exciting is the award of the 41 blocks which we received in terms of OALP that’s got the potential to create another thing amongst itself and our focus here is to start to fast-track some of that exploration effort to bring more value to the table and quicker.
Alright, thank you. The second question is with respect to Capex. On this Lanjigarh refinery expansion phase two, I think this is the first time we are talking about this. Now, if I look at the current bauxite we are talking about 250 kt to meet around 50% of our existing requirement, so if you could share I mean what visibility do we have for this expansion, number one. And I mean since we've included this in FY ’20 guidance chart of around $600 million Capex for this. If you could share what exactly -- how much is for Lanjigarh and how much is for ElectroSteel and what is the timeline of this expansion. Thanks.
Unidentified Company Representative
Thanks, this is [indiscernible]. I think we have been plugging off for the last year or so that we have started looking at the Lanjigarh refinery expansion with the visibility we have on bauxite. And I will leave it to Ajay to talk more about this after I finish the numbers side. In terms of guidance for next year, we have built -- roughly you can say $200 million to $300 million guidance of optionality on that. The balance being [indiscernible] which is another story I will deal with it shortly. On Lanjigarh it should be read as about $250 million to $300 million for next year. And it should payback perhaps within 18 crores, 44 months given the potential for savings that we have there. In fact, every tonne of aluminium produced with Odisha bauxite which can be used in the expanding refinery capacity will give us a EBITDA advantage of $400 per tonne. So if you are able to cover 50% or 60% of our requirements, then to that extend $200 to $250 straightaway moves up in the EBITDA on a permanent basis because it reserves [indiscernible]. With that I will just hand over to Ajay if there is any quick comments on the plan for refinery expansion, it is in the final stages of drawing board. And when we requisite approvals from the board we will announce it. Ajay, any comments?
Completed by let’s say through December ’19, will go up for production and ramp up from there off. Bauxite is fully secured, so this is a ramp up after securing the bauxite.
So just to add, Sumangal, on the 250 that you mentioned. The 250 tonnes for month, KT for month bauxite means about 3 million tonne per annum run rate. And what Ajay and their team are doing is they are investing in some capex of the bauxite mine to take it up to 6 million tonnes. So that should probably coincide in terms of its output where we define the expansion. So it is all going as per a certain plan and ensuring that there is a structural way ahead in the aluminium business segment.
Just one quick question, I mean there are a lot of media reports with respect to us thinking of spending on the zinc smelter in Africa around $600 million, $700 million. Is there any plan on that front?
Let me fix it up here, it is certainly something in terms of our -- if you look at any company, particularly in the extractive industry, we do have a range of projects which are actually on the pipeline. It is in its initial stages, it will have to go through its full feasibility study analysis et cetera. So if you ask our immediate plan, probably not something which we can announce but it is something we will need to look at down the line.
The next question is from the line of Indrajit Agarwal from Goldman Sachs. Please go ahead.
Hello sir, thanks for the opportunity, two questions from my side. First on the aluminium, this first half we did a cost of production of about $1978 a tonne and for the full year we are guiding at $1950 to $2000, so in spite of the cost saving or cost control measures that you talked about like using more captive alumina more linkage coal, our guidance doesn’t change from what in the second half versus first half. So what exactly is our view over here, I mean where could we see more cost inflation compared to this half.
Let me just introduce the topic and leave to Samir to add any further comments. You know fundamentally, the potential in the aluminium business is that we are currently operating about 2 million tonnes and you are aware of capacity of about 2.3 million tonnes. The potential there, based on those building blocks that we are putting in place that you can also see that we have referred to on our pages on aluminium, where we are talking about three buckets of old initiatives, alumina, a ramp up, which we talked about as well as the bauxite sources and a few other things which are I would say more internal in terms of logistics. The broad design which we’ll take it to $1500 per tonne. This will be a medium term journey.
As I said some of the capex need to go into place to ramp up the bauxite from the mines and as well as we just completed a very successful fourth round of whole-block auction, the supplies will start in January. So you can imagine that from a short term perspective you know the thesis will not come through but from a medium term perspective they will come to meet in second half guidance is what it is. As the $1500per tonne, as you know we don’t give a specific guidance, but $1500 per tonne the business is nearly worth $1500 in terms of 2 million tonnes – $2 billion in terms of EBITDA if you add the surplus power that they can sell. I would say broadly the big picture in aluminium which is why you know all the four buckets of actions we’ve done and progressed. Our report card says at least two ticks or three ticks during the quarter and during the first half of the year.
So I think the comment that A, structurally actually we had made good progress. I think we had talked about bauxite, so that is a structural change in the cost structure of aluminium which is a very positive aspect. On the coal security, again two structural changes which happened in the last half which is additional linkages of 3.2 tonnes which was secured and additionally our own coal block in BALCO [indiscernible] which was started. And thirdly more an internal cost reduction which we did was DCV improvement. As I think if we add – then there was other improvements in logistics and carbon et cetera.
If I put all that actually in last half we have saved about $90 per tonne, was still $120 which we had guided. Now what we ran into was really the headwinds of which I think all of you are aware, the coal shortages and especially coal diversion through IPPs vs. CPP which hampered the cost. And of course the alumina which has been very volatile. But what I would say frankly that what Arun was saying structurally driving down the cost to 1500 there has been good progress made in last half on the bauxite on alumina production as well as on the coal security. Of course, but I think in the half and in the current quarter, why these coal shortages and alumina imported alumina price volatility, for me, those are timing issues, those are not structural thing. So that’s what I could just add to what Arun said.
I think Samir sums up very subtle cost pressure because of the coal situation and the global alumina supply situation whereas the medium-term structural signals well on time.
Thanks for the detailed answer. My second question is more like a housekeeping question. What is the current exit rate for our oil production, say maybe in September or in October currently?
I think the exit rate for oil production is somewhere between 190 to 200. And the guidance for the second half of the year is 200 to 220 average.
We would request participants to limit your question to two at a time. The next question is from the line of Rajesh Lachhani from HSBC. Please go ahead.
One question on Aluminium, so you were talking about certain policy measures that the government is planning to take against Aluminium imports. Sir, can you please you specify what are we seeking from the government?
See I was referring to the fact -- this is Venkat here. I was referring to the fact that the extent of scrap imports have increased. What we are really seeing is a level playing field, wherein the domestic industry is not negatively impacted because of the scrap being landed in India, effectively we are asking for potentially an increase in duty in terms of imported aluminium shaft, it is as simple as that. So that the domestic market gets a fair share of actually participating on a level playing field.
Yes, sir. Actually we have seen some media reports of raising the import barriers to 10%. So is this just an import duty that we are seeking from the government?
in fact the 10% import duty it would certainly go long way in terms of helping domestic sector growth because as I mentioned in the call, I was shocked to see the extent of the US scrap imports landing in India and the increase going up to around 128-145%. Just to give you an idea, in china, the extend of duty which is being imposed on scrap is around 25%. So just to give you a scale as to what the other countries are doing to protect their domestic industry.
The next question is from the line of Amit Dixit from Edelweiss. Please go ahead. Amit Dixit from Edelweiss, your line is in the talk mode, please go ahead with your question. Due to no response, we will move to the next question which is from the line of Anshuman Atri from Premji Invest. Please go ahead.
My question is regarding the oil ramp up. What are the challenges which have resulted in our production being in the range of 190 to 200, so in the past also? This is a range which has been difficult to cross and so -- and at what range -- again, we are expecting it to sustain today 220. Will it be able to sustain next 2 to 3 years? And how do we sort of save going forward?
In fact, Sudhir, you answered that question, but if you want to sort of cover it again in terms of the challenges which are there and also in terms of the new project coming on stream. But I think we actually did highlight it, it was a combination of the fact that some of these projects didn’t come on stream quicker is what we had wanted. We are still keeping our long-term targets and vision in mind. And certainly we will update you on the guidance in terms of next year and the medium term guidance when we announce our results at the end of this year. But with hindsight, if those projects had come on stream earlier, it would have actually helped us ramp up our oil production.
Yes, sir, but in the 2013 annual report, we had talked about a 300,000 barrel output in near term. But we have plateaued at 200,000 barrels, so that's something which probably if -- when we see the production then probably we will get more confident.
Yes, sure. Let me take that one Anshuman. In 2013, the oil prices were at about $100 plus, and we had a lot of projects online, which, when the crude prices fell to $40 or so, we had no option but to abort them and rework them because they were done at a viability level of $65. So, we went back to the drawing board, came back with the same projects and more, which is what has increase our -- the results from whatever, 138 million to 596 million barrels and made them viable at $40 a barrel, viable in the sense of ensuring a 20% IRR to all the stakeholders.
So, there was a gap in the investment period between 2014 to almost now, where we have just recently started that capital expenditure program. And that is what is led to -- oil production sort of declined because we invest behind a production profile, and if you go back into the history of each one of our investments, we have beaten each one of those production profiles. So, where we stand -- what led to the delay in just the recent past, as Venkat mentioned and I had mentioned earlier, was to be able to get some great contracting rate, which has made us a world-class development cost of $5 a barrel?
So that negotiation with some of the vendors took -- created a lag of about 3 months over than what we had talked earlier, but gave us IRR 20% at $35 a barrel adds to the certainty of and the robustness of the project. So now we have the momentum and, as you will see on the slide, the rigs are in place, the drilling has started. We have accelerated the drilling now. As the rigs have got used to the terrain, and you would see that bump up, that Arun spoke about, in the second half of the year of production.
Thank you for the very detailed answer. My second and last question is regarding organic versus the inorganic Capex. Given the strong organic Capex, so what kind of mix can we see in terms of the next end break towards this organic percentage approximately?
I think I can pick it actually, we are quite excited with the grow potential in our own backyard in terms of whether its Hindustan Zinc or whether it’s Zinc International, oil and gas whether it’s ElectroSteel whether it’s aluminium whether its copper, so from that perspective, it is meeting our investment hurdles we are quite happy investing in around our existing projects. You never say never in terms of effectively other opportunities, but at this stage the focus in getting the best out of our existing assets as we ramp up our volume and reduce cost in a safe manner.
Our next question from the line of Pinakin Parekh from JPMorgan.
Thank you very much. My question is on the recent production sharing contract extension that happened. Now, while we understand the press release mentioned that it is subcutaneous, but -- still the court order is out, could the company have to shell out an additional 10 percentage points of profit share to the government.
Sudhir, you want to pick that up.
Yes Venkat, thank you. If I see the 10% under the policy will be applicable when the current PSC term expires that would be May 18, 2020. The matter is our request for you know saying that the contractors will be given weightage because our belief is that our contract, the Rajasthan contract does not allow PP trans movement in the extended period. So, you know, we are working with the government and the matter is decisive, so that will continue. And there is enough time before 2020 May to resolve this issue amicably. In Ravva and CB, of course, you know we believe that the contract says change in terms and conditions, so we accept that policy that the government has come up with.
My second question is on aluminium, the production release which came out of few days back mentioned that given the description in domestic coal availability, there was power import in the aluminium segment. Can the company please explain what power import mean, will the company have to buy power externally?
The short answer is yes, but Samir can cover it.
No, I think it is enough as we covered the issue was what happened was there was sudden diversion of coal by Coal India, you must have seen in newspaper there was circular issued in the sense of saying that the coal should be diverted to ITT and no coal coming to CPPs. Now in aluminium, it is a continuous process industry, we cannot let our port to solidify because it takes us six months for the port to revise. To keep the plots of -- aluminium ports running, if there is sudden stoppage of coal, then the only request we have is to buy power in the grid and keep the plant running. Of course, it is not a long-term solution, but short term that’s the only solution and that’s worldwide how the aluminium industry works because that’s in the nature of the technology and the process. And it is same for [indiscernible].
So just to stress this point further, where was the power purchase in Jharsuguda or BALCO and at what rates and how much was this power purchase?
It was at Jharsuguda, I think the impact cost was around $50 to $60 a tonne. The rates will vary because these are IEX rates, so I will not be able to give you a precise rate because it depends on when the power was drawn et cetera. On the impact on us was what I indicated to you.
So, just lastly, what we understand from various players in the entire coal value chain is that, many of the other industries are saying that Coal India more or less would not be able to supply till the next elections and power demand will remain high. So in the case, if coal doesn’t -- coal supply does not improve seasonally from here, would we expect the power purchases to continue to keep on running the smelter?
One is that as I was telling you there are two changes which have happened to us, one is that we got additional linkages of 3.2 million tonnes which are going to come in the fourth quarter. Second is our own coal block in Chotia which is starting so that will alleviate some part which was being bought in the auctions. Well, primarily when there is a shortage of coal in Coal India first impact is on the e-auctions and ad-hoc auctions. There are no linkages for us, that was an impact. Secondarily is on materialization of the linkages itself, so that I think we have to wait and watch how the situation will evolve and of course as you say, if there is a view and it turns out this shortage are going to continue for a long term then for sure good option is to enter into a PPA at a reasonable rate with somebody who has coal. It will be primarily an ITP because CTPs are all in the same boat as us.
Just to supplement what Samir has said, couple of other items to bear in mind, the Chotia mine has already started supplying to BALCO that’s the first aspect. Secondly, as the coal auctions come online, we would start to increase our participation here. And the other thing we also picked up is that the coal situation is slowly easing and as I understand the 10% is actually been allocated in terms going to the private sector as well as our understanding from some of the news releases that have come out. So hopefully the situation will ease certainly pre the election period that’s what we are looking for. But certainly we are prepared in that regard. And also what we understand is that Coal India has ramped -- starting to ramp up production of coal given the impact that’s having across the country.
And if I may just add also one thing, that normally the quarter four is better quarter for coal production and dispatches because most of the coal because of the monsoons it gets affected quite strongly. So that will play a role and there are also now development that we understand that there is been a committee which has been formed into look into coal swaps of imported coal versus coal which is inland. So I think all will be government seems to us there is quite abreast of the situation and are looking into quite seriously to alleviate the situation. And we are quite hopeful that something should work out, but yes, we are ready for all eventuality as Venkat said.
And the problem is more [indiscernible] Jharsuguda versus BALCO, right?
Yes, because we are -- simply because BALCO has a linkages up to 75% whereas Jharsuguda has 42% which increase up to 52% with the new coal block. And I think you are also perhaps aware that new coal blocks have been put for auctions for which we of course will be participating.
We would request participants to please limit your questions two at a time. The next question is from the line of Vineet Maloo from Birla Sun Life. Please go ahead.
My question is related to the previous one. I just want to know in Jharsuguda what is the quantum of external purchases currently into coal. How much tonnage are we buying from open-market?
I think broadly as Samir summed up, Vineet, I think with the fourth round of successful completion of the linkage option, the linkage goes up to cross the 50% which is a significant milestone. And the business has also done very well sourcing imported coal. So lastly it takes care of nearly 70%, 75% of the [indiscernible]. The balance you depend on e-auctions, spot auctions and perhaps aggregator sales. So that’s broadly the split at this point of time and it is much better in terms of coal security than what it was six months ago, year ago, [indiscernible] we’ve been large beneficiary from central position. I hope that answers your question.
Just to understand, I mean, so 52% is including linkage plus the mine which going to start right, which has just started?
The Chotia mine is BALCO, which is why I didn’t mention it. Jharsuguda or Vedanta Limited is the legal entity and does not own any coal mine that is in BALCO.
For Vedanta Limited for Jharsuguda unit, I mean what is the situation if you can just talk about that?
Right, let me just re-summarize, so I will just summarize the Jharsuguda situation. About 52% would be linkage, about 20% plus would be import and broadly one-fourth would be squad options and other resources.
On the imports, do we have any long-term management or we buy on treatment duration basis?
I think import we have four options on import including miner as well as from the import, but at the same time I will request Samir to add anything if he likes to here.
I think imports are long term in the sense, I don’t know what you consider long term but at present contract is what maximum we’ll try to…
I mean, whenever you can lock in some kind of price, that’s what I mean -- quantitative commitment is not good enough, right.
I can give prices of course as you say, as soon as we come up with any price, we would try to. But same time I think as a policy in Vedanta, we don’t like to sort of hedge anything in the sense but unless our price because I don’t know whether this price is going to be highest price or the lowest price at which I will lock in. so we have to be careful in saying that we should lock in at every price. Three months for sure we lock in everything so that we have a clear visibility and predictability of the cost over the next three months, it goes for all commodities. Beyond that is not something which we do automatically that is because something might be available on market that we will lock it, no, that is not what we try to do.
From our perspective, what we don’t want to do is end up locking in prices for a period just because there is a current potential shortage temporarily and then find that we are actually caught the wrong side of the bus.
Last question is, what are your thoughts on you know one-time capital return to shareholders. I understand you are giving out dividends of -- maintaining a certain pay-out which is pretty good. Just want to understand, you know that takes care of the basically cash coming from current earnings. But I want to know your thoughts on one-time cash return to shareholders.
Those are really decisions of the board. But broadly if you look at the capital allocation that I’ve covered earlier, third year in a row we are having nearly 7%, 8% dividend yield. And broadly from a nitty-gritty perspective, I can -- if you look out the data will be probably amongst the top three companies as we understand both from a pay-out ratio as well as dividend yield. So balancing that with our own requirements of Capex and cash and any dividend is a return of capital, isn’t, whether it’s a buyback or dividend and in fact Vedanta Limited when we pass it on the Hindustan Zinc it is coming -- we did dividend distribution that set off, so there is no leakage either. So that’s broadly our play at this point of time from a capital allocation point of view. Venkat, you’d like to add something?
Typically, a company goes and returns capital to shareholders when it has run out of ideas and it can’t generate growth opportunities which gives you 20%, 30% return. In our case, we have got growth, very good returns, so the money is better put into play in the project which will then give you a further pick up and an annuity income of dividends going forward.
The next question is from the line of Abhishek Poddar from Kotak Securities. Please go ahead.
The first is regarding the Zinc International, we saw one question was about 50 KT and the production cost was in the range of $2300 to $2400 per tonne. We are guiding for 100 KT in 2H with a production cost of probably 1600 to 1700 per tonne? Could you give more color, what is changing there?
In fact Deshnee can come in, but it’s really around where the mines are in their stripping pattern and where the second half is going to be a more promising period and in addition to that, it is Gamsberg mine but I’ll pass the microphone to Deshnee. Deshnee?
Yes, thank you Venkat. So Venkat, on the Black Mountain we did plan a four equal quarter year. And we did have some setbacks on development as well as on getting copper because we get a copper credit at Black Mountain. So that explains Black Mountain volume as well as the cost. The bigger one for us was Skorpion but Skorpion as you know is busy waste stripping on put 112. So the first half of the year by design was actually planned to be a highest tripping half of the year. What we can tell you is that we are almost on target to the waste that we wanted to strip. So the ore that we are planning to expose to give us the second half tonnage is actually on plan. So yes, it does seem like a very steep second half of the year, but it was planned this way based on where we are in the shaft at Black Mountain and based on where we are in terms of the put stripping at Skorpion.
This guidance of 150 excludes Gamsberg which we have guided at $75,000 tonnes of MIC for the rest of the year. In terms of cost, one of the bigger drivers for us in the first half was related to volume of cost, but when we couldn't get the volume off ore that we needed at Skorpion for the first half instead of shutting part of the plant which might have been an option, we didn't really have the time, so we ran blending in a bit of oxide, external oxide that we purchase across these prices that oxide did come at a cost. So that's the reason why the first half looks the way it looks and that's the reason why we are confident that we can deliver a second half against the guideline volume and cost.
The second question is regarding Gamsberg, early the cost guidance was about $1,000 to $1,100 per tonne, this time we are seeing it is $800 to $1000, so what is changed there?
So, I mean that’s guidance, the original guidance came with the investment proposal of cost in parallel as we have done more work on the execution side. The team has also done more work on the costing side. So this will be a fully outsourced operation, so we'll have one contract, one business partner for mining and then one for the plant as well as the plant operations and maintenance. So it will only be in a maybe 6 or 7 business partners at most. So what has changed for us is probably the operating philosophy that has allowed us to actually now cost a much lower rate. But in addition to that I mean this is a starting, this is a plant that is in start-up, so the mining is so still quite shallow and although we have stripped more than $90 million tonnes now of waste.
And additionally Gamsberg has been built to be one of the most technologically advanced plant. So, from a labor point of view, very low numbers as well as from a maintenance point of view at least for the first 2 to 3 years, we are forecasting minimal maintenance in terms of replacement et cetera. So, we are now more confident with this guideline given the work that we've done since.
So basically on this, the cost should go up in FY ’20, is that so when you are more in the deeper part of the mine?
I think we will provide the guidance for FY ’20 Deshnee when we release our results.
But actually, I was just going to say, I mean what’s exciting about the outsource model is that this almost the entire cost base, more than 80% it is actually done on a variable cost basis, so when you pay for the volume that we get on both the mine and the plant.
And the last question on the aluminium side, I just want to understand the bauxite sourcing, we are targeting the 4 million tonnes of alumina, which would probably require about 11 to 12 million tonnes of bauxite, could you give a color that what will the broad sourcing arrangement for that 12 million tonnes.
Ajay, you want to pick that up?
So, let me give you a little bit of detail what we are doing today. We are already sourcing around 5 million tonnes of bauxite. We are already now ramped up Lanjigarh for another 3 million that makes it about. That makes it about 8. And I think you would have read some of our previous news articles that we signed MOU with EGA for Guinea oxide for 4 million tonnes. So this in any case secures 4 million tonnes and our strategy is as more and more our own linkages of bauxite increases, so we could substitute some of the existing arrangements. So already we have this firmly in our hand. And as we continue, we would only improve on quality and cost.
What would be the cost differences getting bauxite from Guinea versus the local sourcing.
You should practically say that it should be the freight forwarding charges.
Any ballpark number incremental cost per tonne of bauxite?
That I would not like to give at the moment.
Thank you. Again, we would advise participants please limit your question to two at a time. The next question is from the line of Meera Midha from Edelweiss. Please go ahead.
This is Amit here. So, the first question is regarding our aspirations in the steel space. So, in case of SR, we ran very close but you know finally well, somebody else in the deal. But SR was a sizeable plant, of 10 million tonnes. So, do we have further aspirations in steel space, we can see the company going out for acquisition of balance plants outside or within India?
This is Venkat here, we are quite comfortable with what we have in ElectroSteel, it was a very good purchase. And as I said, we are looking at the current exit spaces around 1.3 million tonnes per annum, the EBITDA is more than doubled already since the merger. In addition to that we are looking at getting it to 1.5 million tonnes per annum without any capital expenditure. The next stage in the expansion is 2.5 million tonnes and that comes with not just the volume growth going from the current level to 2.5 but it also comes with improvements in margin as well. So to be a very good cash generator and income generator from the business. So from that point of view we are quite comfortable in terms of having ElectroSteel in the family and quite content at that.
The second question is on ElectroSteel itself. Yesterday ElectroSteel declared its results and there is an apparent you know disconnect between EBITDA they reported and EBITDA that you have reported. So EBITDA that they have reported is 65.5 crores, while you have reported 168 crores for this quarter. So just wanted to tie the numbers up.
I think the IRT can tell you as reconciliation off line because there are ways of defining it as legal entity which could be [indiscernible]. I will take the bigger picture in ElectroSteel for us is as far as the volume is concerned, close to 1.5 tonnes run rate. And the current EBITDA is around $125 and our target or vision, it is not a guidance is to get to at least 200 by the end of the fiscal year. So that it is a good $300 million kind of EBITDA tool for next year as we ramp it up to 2.5. So these are not guidance but these are the broad design there. Now the difference in the legal entity, could be -- there could be pre-acquisition adjustment in the legal entity statement which is more accounting which typically was the result of the timing to take over which is what the consolidated accounts could be. So that could be one reason but the specific reconciliation I would request our IR team to send it across to you if it is okay with you Amit.
The next question is from the line of Ashish Jain from Morgan Stanley. Please go ahead.
My question again pertains to bauxite, I’m sorry but I didn’t get the -- that the 3 million tonne bauxite number that you said we are sourcing for Lanjigarh.
That is from the Odisha mines where we have the linkage with Odisha. So, if you remember, Venkat said 250,000 tonnes.
But I thought that would replace the existing bauxite that we are using. So that remains plus 3 plus 4 is how we should see eventually when we touch 4 million turnover.
As we ramp up, you see our priority of using the bauxite is first usage is Odisha. So, the question is the security. So if you say how do I secure 12 -- that is a number which adds up 12? But as we get 3, we will - since as long as the project ramp up doesn’t go through to the complete commissioning stage, we can always substitute the current one with this whatever we are having.
So there are flexibility on the different bauxite source agreements where we can pull up and down. So, therefore, I said that if you look at only the 12, our ability to source five now, three from Odisha, four EVA, it totals up to this. We are expecting more bauxite mines and linkages coming also additionally from Odisha. So our positive side for having more Odisha that would forty-five as the auctioning happens and as they come up for auctioning, but we are not only let’s say waiting for that and not taking any other parallel action to cut down the rest of the resources. We have agreements in place with flexibilities which we can plug in and out.
The next question is from the line of Ritesh Shah from Investec Capital. Please go ahead. Ritesh Shah from Investec Capital, your line has been unmuted, you may go ahead with your question. With no response, we’ll move to our next question which is from the line of Sanjay Jain from Motilal Oswal Securities. Please go ahead. Sanjay Jain your line has been unmuted, you may go ahead with your question please.
I have two questions, my first question is on aluminium scrap. Could you give us some sense, what’s happening in the aluminium scrap market? I mean couple of years back, this market was pretty tight but suddenly like in the last one, one and a half year, the scrap has become oversupplied especially in the western hemisphere. If you have any thoughts on this, it will be really great.
I think there are two things happening here, this is Venkat, I’ll pick it up and then pass it across to Samir. Firstly obviously with the trade wars which are taking place between the US and China take that into account. So people are looking for dumping ground in terms of scrap, in terms of aluminium, and certainly when you look at the duty structure, it is very low on scrap aluminium inputs, so when you take the combination of these two. No wonder that the scrap imports have actually been going up in India. And Samir can comment on this further. But those are the two major things which have changed. And unless we actually have a shift in the duty, you are going to see the domestic producers being impacted. Samir?
So I think two parts to the answer, one is, what’s happening in India and which Venkat has covered that is primarily the trade wars and the imposition of 25% duty by China. Or primarily the scrap coming from US and that scrap to find its way into India either directly or through whichever route. B is when you can say okay globally why is the delta between let’s say primary and scrap and as you say why suddenly more scrap is becoming available and the delta is decreasing. I think scrap like primary is a cyclical market and to understand that you will have to look into the supply and demand of scrap in the developed markets of EU and US and realize that as the delta increases the price rise, it becomes more economical to collect and to increase the supply of scrap which in terms increases with supply and again depresses the market and that’s the cycle. And that’s the cycle globally has been followed by the scrap which might be different from actually the primary metal cycle. But that to understand in details you will have to look at the American and the EU scrap market. But for India for sure it can say what Venkat said. On the other part, I agree with you that’s happening now what are the exact causes is actually simple but the details you will have to look into those markets.
Second question is on Gamsberg, this is -- first part of the question is, when are we looking forward to the commercial production. You did give guidance, but I don’t know if the 75 KT will come in fourth quarter or commercial production will start sometime during the third quarter. And secondly, it is a repetition of question that we had asked about a year back when we had Zinc Day in Udaipur regarding the grade of the ore. Now we are more close to the market and you would have checked the final output, what kind of discounts to alumina or the premium that you are looking forward to.
It is Venkat here, let me just kick off by saying, certainly we are expecting commercial productions to start towards the end of this month. So you will start to you production come through in this quarter with the chuck coming through in Q4. In terms of grade again, let me pass it across to Deshnee. Deshnee, do you want comment on the two questions?
Firstly, in terms of tonnage, yes, we will be ramping up from now. So commercial production will -- in fact has started now. And what I'm measuring the team on is not necessarily metal in concentrate, is how much of ore we can push to the front end. So if you look at you know 4 million tonnes and of mine to give us 250,000 tonnes of metal in concentrate. I’ll be looking at how quickly we can ramp up to that 300, 330 mark level. By next quarter, quarter 4 of this year, we should be touching the 300 or tonne level. So that's on ramp up and in terms of metal which together with your question on grade will give us the guided 75,000 tonnes that we have guided for the year.
That's actually a much better ramp up than we had anticipated you know a couple of months back and that's simply because you know with the slight delay that we've had on start-up we've managed, as Venkat said earlier to build both -- and ore stockpile as well as crushed ore stockpile, so that is why we are confident now that we've constructed the plant, commissioned it, we've proven that it can work that we will be able to accelerate the ramp up that we had originally focused. On grade, I am seeing grades on the ground of over 5% as a start which was the original plan.
So we had guided 6% to 6.5% off an average grade over the life of mine, they're already in this almost now 1 million tonnes are sitting on ground with an average grade of about 5.5%, but the biggest question I suppose you were asking there is what are we seeing about the manganese and in the areas that we've already exposed ore, the manganese grade is still what we had planned in all, but what I'm what I'm quite liking and I hope this trend continues as we seeing good concentrate grades in zinc over that 24% to 48% and the manganese for now is behaving the way it was predicted. So we are cautiously optimistic that the plant will deliver the grades that we had anticipated, so for now, no discount. We are not anticipating any discount to LME on the ethylene concentration.
Thank you very much.
Thank you. Ladies and gentlemen, due to time constrains that was the last question. I now hand the conference over to Ms. Rashmi Mohanty for closing comments.
Thank you operator, as always the IR team is available if you have any further questions on the financials or any other information you would like about the company. Thank you very much for joining us today.
On behalf of Vedanta Limited that concludes this conference, thank you for joining us and you may now disconnect your lines.