Vedanta Limited (NYSE:VEDL) Q4 2019 Results Earnings Conference Call May 7, 2019 9:00 AM ET
Rashmi Mohanty - Head Group IR
Srinivasan Venkatakrishnan - CEO
Arun Kumar - CFO
Sunil Duggal - Zinc India
Ajay Dixit - Oil and Gas
Ajay Kapoor - Aluminium & Power
Deshnee Naidoo - Zinc International
Abhijeet Pati - CEO, Jharsuguda Center
Conference Call Participants
Vineet Maloo - Birla Sun Life
Indrajit Agarwal - Goldman Sachs
Abhishek Poddar - HDFC Mutual Fund
Good evening to all present here with us - joining us to the webcast and on the audio call. I’m Rashmi Mohanty, Head Group Investor Relations for Vedanta. Thanks for joining us today to discuss our fourth quarter and full year results for FY 2019.
We have here with us our Group CEO, Srinivasan Venkatakrishnan, Venkat; our Group CFO Arun Kumar; three of our Business CEOs, Sunil Duggal from Zinc India, Ajay Dixit Oil and Gas, and Ajay Kapoor from Aluminium & Power. On the call we are joined by Deshnee Naidoo from Zinc International and Abhijeet Pati, who is the CEO of Jharsuguda Center.
We will referring to presentation that's available on our website and for the audience here a copy is kept on the table. We'll begin with an update from Venkat and Arun on the operating and financial performance and then open it up for Q&A Venkat?
Thanks, Rashmi, Good evening, ladies and gentlemen. Very pleased to be here with all of you and particularly a formidable team of colleagues here to present Vedanta’s Limited fourth quarter and full year 2019 earnings. Before we go into the slide show, if I can start putting out some highlights. Safety is something which is very close to our heart. Very pleased to say that we had a fatality free fourth quarter across our businesses.
Our work in the area of environment, sustainability and community progressed further during the quarter and you will see that in some of the slides in the presentation. Our operating and financial performance was stronger in the fourth quarter when compared to the third quarter as guided on volume, costs, margins and even profit after tax.
Our zinc underground production went up 29%year-on-year at Hindustan Zinc and Lead went up by about 18 % and bear in mind Hindustan Zincs first year of full underground operations and having had some mining background myself that ramp up in underground has been truly spectacular.
We commissioned of Gamsberg Mine in South Africa, which just currently ramping up .Are not well appreciated commodity within our portfolio because we don't take credit for that in our cost is silver. We achieved record production and it was up 22 % year-on-year close to producing around 700 tons and that took us to being a top 10 global silver producer and with the growth trajectory we will be reaching top three silver producers in the world. And is the first time a company in India has reached the top 10 league of silver producers. Our oil and gas production was up 2%.
Turning to our aluminium business, our alumina production increased 24 % year-on-year, our aluminium production rose 17%, thanks to our interventions and the cost of production in the fourth quarter fell below a $1800 a tonne and I remember in the first two calls we had the debate was how soon can we get the costs below 2000. We had it below $1800 a tonne.
The turnaround in our electro steel business is evident by a 17% increase in steel production and more than doubling of EBITDA per ton when you compare it to last year. Profit after tax in the fourth quarter was up 6% as compared to the same quarter last year. Our growth projects in the key businesses are tracking very well and capital expenditure was within guided range showing the strict control we have in capital allocation.
It's all about land positions and resource. We grew our resource base across our key businesses. We continue to deliver industry leading dividends whilst maintaining a strong balance sheet thanks to our strict capital allocation. In fact businesses have to earn their money before they spend it. And there is more to come each of the businesses next year and beyond.
Now turning to the commodity markets, the commodity prices chart a downward trend in the first half of last year reflecting concerns around global growth, especially due to trade tensions between U.S. and China. But we saw a rebound in the first calendar quarter of 2019.
The rebound and the increased there in reflected supply concerns, progress in trade negotiations between the U.S. and China and the fiscal stimulus in China. We expect the prices to remain volatile but with an upside potential from the possibility of tighter than expected environmental policies slower than expected easing of commodity specific supply bottlenecks. Oil prices have also risen since the start of the year, amidst production cut by OPEC and other producers and supply disruptions elsewhere in the world.
With that overview, let me go into our performance for the year and starting with safety and sustainability. Whilst we heard a fatality free quarter. This unfortunately came on the back of nine previously reported accidents which is regrettable.
Zero harm for us was a continuous journey and we have embarked on further strengthening our safety processes and ensuring the safety of all of our employees and our business partners and contractors is the first priority above anything else. What we are targeting is safe production.
In this regard we are focusing on three specific catalyst in our commitment to zero harm. Firstly, visible first leadership, where the expectation is that leaders and support personnel spend quality time in the field performing safety interactions, workplace have our reviews making proactive hands on safety interventions to create a culture of care. Once you have a culture of care safety is automatic and a safe operation is the most productive operation.
Second, managed safety critical tasks well but the expectation is that the safety critical tasks are identified, critical competencies and controls are documented clearly in our statement of operating procedures and the task leaders verifies that these are in place every time before a work task is initiated.
And the third important catalyst given our outsourced model is our own business partner engagement. Ensure that our business partners from their CEO downwards are committed to zero harm and we treat them as employees for the purposes of safety.
Looking at our environment, energy and water management initiatives, savings and recycling all of which remain a focus area. We reduced our energy consumption by 1.3 million gigajoules and water consumption by 2.4 million cubic meters.
We are also happy with the progress we are making on the greenhouse gas emissions intensity which was lower by about 17% well ahead of our target of reaching 16% reduction by 2020 against a 2012 baseline.
Many sustainable initiatives are driven by our fundamental approach of converting wish to wealth. The company recycled 93% of high volume low effect waste. At Hindustan Zinc, we use 60% of our tailings as space fields for void replacement in our underground mines. We also used an old tailings dam and we expect to install 38-megawatts of solar farm energy.
Turning to corporate social responsibility, as a responsible corporate citizen besides the many environmental initiatives, we continue to positively impact the local communities we are connected with and here the focus is children and women.
We are happy to share that we opened the 500 Nandghar last quarter. Our sports initiatives including football academies are a great way to identify and develop young talent and in still a sense of discipline and self-worth in the youngsters we train.
We opened the 350 bed state of the art medical center in Raipur, the only specialty hospital in central India and it's treated more than 4000 patients to date. These are just a few illustrations. And for the year in question, our CSR spend on a consolidated basis was 309 crores, which is around 3 % of our profit after tax.
In the last few years, our businesses have been driving technology projects not only improve productivity and efficiency but also using it to develop safe and sustainable processes. And there are a number of examples of it.
For example at Gamsberg, I'm sure some of you have actually been to the site. The theme use a state-of-the-art Collision Awareness System to prevent accidents .Our S.K. mine the most advanced in our Hindustan Zinc portfolio. We are proud to have developed automated machines for continuous mining and remote control LHD allegedly for overhauling purposes. We have some of the most modern enhanced oil recovery programs being implemented or piloted at our oilfields at Barmer.
Let me take this opportunity to state again that Vedanta is uniquely positioned at one of the largest diversified natural resources businesses in the world. We are a significant player in the commodities that we are present in and each of the commodities have a leading global demand. Our businesses benefit from abundant mineral resources that India and Africa have to offer and this with pride we share that we are a significant contributor to some of these reserves. Of the zinc reserves our Zinc India business contributes to more than 70%.
Similarly we have a 25% share in our 4.5 barrels of oil reserves in India and you can imagine our contribution to the silver reserves of the country we account for virtually 95% to 98%. These are all set to grow over time. And so there's more no more exciting economy in the world than our own here in India. As the economy remains one of the fastest growing supported by strong macroeconomic fundamentals.
If we combine the enormous economic growth potential of our country together with vast untapped and under explored resources, this provides us with a massive opportunity. The substantially lower per capita consumption of key metals presence Vedanta with a unique opportunity to provide the vital commodities the country needs.
Against this backdrop, we are naturally pleased to see a renewed focus by the government on the mining sector as an engine of economic growth. Its national mining policy and NMP launched during the year aims to increase mineral production by over 200% and to reduce India’s trade deficit in minerals by 50% in the next seven years.
NMP introduces a more effective and meaningful policy with more transparency and better regulation enforcement. A pro inclusive growth ambition of any country needs to require requires as a pro-business environment and the NMP will encourage private sector participation in exploration, development and production.
We have offered our suggestions to the high level committee appointed by NITI Aayog in its deliberations on a new pathway for regulatory framework for mining. In a similar vein, we welcome the landmark policy reforms in the oil and gas sector and its raising domestic output, cutting imports whilst also providing a smooth transition to cleaner fuels. And therefore it is exciting to see that we have a strong pipeline across our businesses to capture the opportunities available to us.
All the projects are stress tested to deliver at least 20% plus returns of conservative commodity price assumptions. The medium term brownfields opportunities in our business are as follows. If you look at Hindustan Zinc we are expanding to reach target capacity of 1.2 million tonnes per annum this year moving to 1.35 million tonnes in the next phase and eventually to 1.5 million tonnes.
With Zinc International at Gamsberg, we target to achieve 250,000 tonnes capacity in the first phase moving up to 450 in the second phase and then eventually to 650. So you can imagine the scale of the Zinc International as a percentage of Hindustan Zinc’s production. It's close to 50% to 60% of it. Growth projects in oil and gas continue to progress well to enhance the production volumes in pursuit of our vision to contribute around 50% of India's crude oil production.
In aluminium the ramp up of our last line in Jharsuguda to take to production capacity to 2.3 million tonnes is in progress supported by ramp up of captive alumina production and that eventually wraps up 2.7 and then 4. With the final objective of 3 million tonnes integrated aluminium production for the business. On steel we are aiming to achieve hot metal production of 1.5 million tonnes this year rising to around 2.5 to 3 million tonnes per annum and we will cover this later on in the presentation.
Operations at our iron ore business in Goa remains suspended through the year. We stay continuously engaged with the central and the State Government, but importantly the people who are impacted by lack of mining in Goa to resume production given the benefit to all of the stakeholders. As sterlite copper we continue to engage with the government the relevant authorities, the courts and all stakeholders to enable a safe and supportive restart of our operations at Tuticorin.
Now let's come to a strategy I’ll summarized in this section reminding you of our five key strategic priorities to drive long-term value for our stakeholders. Firstly, ethics, governance and social license to operate that is the foundation of any business. We will continue our journey towards zero harm by ensuring greater levels of safety an ever gentler impact on the environment and resources and even greater inroads into delivering healthcare, education, skills and quality of life where it's needed in our communities.
Second it's all about ground positions and reserves and resources. With focused exploration to augment our long life low cost assets by improving our land positions growing our resources, converting resources to reserves in our business, thereby more than offsetting depletion and bringing on stream more discoveries to extend our already long mine lives. Third continued track of delivering value added growth. If you look at what the company has achieved in over a decade in terms of growth trajectory it is truly spectacular and here the focus is on the key three businesses which account for 90% of our EBITDA namely zinc, lead and silver, oil and gas and aluminium.
Four strict capital allocation and balance sheet focus. As managers of the business, we will follow ruthless and strict capital allocation whilst keeping the balance sheet in sharp focus. Balance sheet is proactively managed with the business having to earn their capital before spending Arun will articulate where our debt levels are relative to our EBITDA position which is very, very comfortable.
Finally it's all about delivering the best out of your assets based. With the best teams and the means to focus on operational delivery and having the right management and teams in place to deliver what we want asset planning execution, operational excellence, cost control and reduction, productivity enhancement, improving realizations, risk mitigation, use of technology innovation and digitization and most importantly constantly benchmarking ourselves against the best the best in class and trying to exceed that will enable us to sweat our assets better and deliver enhanced performance.
With that I will request Arun to cover the financial performance of the company.
Thanks Venkat and good evening everyone. I'll start by sort of repeating that this year has been a strong year for the company where all our business was delivered on the growth investments, Gamsberg zinc came on steam. Zinc India underground volumes ramped up more than making up for the open cast of last year. We entered the elite club of top floor silver producers in the world with records silver production. Robust turnaround of electro-steel post acquisition and constantly improving cost structure in the aluminum business.
Last but not the least 35 new wells hooked up in the oil and gas business as well as the gas bridge project just about coming on online anytime now. We also expect and hope the copper smelter to restart sometime during this year. These are fundamental building blocks for our growth in each of our businesses and that in place and I expect to see them contribute to the bottom line going forward.
Some key highlights of the quarter and the year EBITDA 330 crores which is about 6% up sequentially while over 4Q 2018 it was down 19% all of it is attributable to price the copper smelter shutdown or one-off accounting reversals in last year. Full year was around 24,000 crores flattish excluding copper and one-off of the base year yet a robust margin of 30%. Strong end to the year's cash with the free cash flow post CapEx of 11,550 crores up 47% and also strong closing balance of cash for 39,000 crores sort of liquidity as you can see.
Venkat alluded to this, net debt EBITDA continues to remain strong at around 1.1x, ROC is around 13%, we believe could strengthen further with the growth blocks in place that we just discussed.
Contribution for the year to the exchequer was significantly higher at about 42,500 crores last year it was about 33000 crores. With a strong close to Q4 we believe we are geared up to a strong volume growth and a competitive cost position looking ahead in FY 2020.
We have a detailed income statement in the appendix but a few key updates I might just cover out here. Depreciation charge are below EBITDA, for Q4 and also full year was driven by growth CapEx and yes higher this year thanks to the impairment reversal which happened at the end of last year in the oil and gas business.
For FY 2020 I see that continuing in the same run rate as the quarter four probably slightly elevated levels so as we keep capitalizing more and more of the growth spend. Investment income for Q4 and FY 2019 is higher mainly due to the mark to market gains of nearly about 715 crores net of Forex on treasury investment made by our overseas subsidiary in hydrocarbon CHL through a purchase of the economic interest in the structured investment in the underlying Anglo American shares we discussed quite in detail in the last quarter.
These are partially offset by lower investment Coppers post dividends in quarter three. Investment income should continue at current levels as for our guidance FY 2020, which is sort of 7% return on the cash portfolio of course, it will be subject to mark to mark on the entire portfolio wherever its underlying debt FMB or the structure that we have invested both will have mark to market, otherwise the general return is about 7%.
On the finance cost line in Q4, pretty much in line with the guidance. FY 2019 will largely be driven by a full year impact of the acquisition debt of electricity. In FY 2020,the average cost of the debt book will continue to be around 8.2% to 8.5% depending on where the yield curve is.
Objective will be to absolutely reduce the debt number as well the already low debt number with increasing surplus cash earnings from all three key businesses and I repeat, surplus earnings from all the three key businesses including aluminum, zinc and oil and gas all four funding the growth CapEx.
The fourth item would be tax. The last line below EBITDA. The tax rate before exceptional items and BDD for the year was around 28% but closer to 30% if you exclude the mark to market gains on the interest line.
As you know that’s which is entity and really not subject to tax broadly in line with the guidance that we had given at around 30% and next year FY 2020 we retain the same guidance of around 30% to 32% so it starts trending towards maximum marginal rate.
Moving on to the next page. From the EBITDA bridge, this sequential EBITDA walk as perhaps a relevant page time which sort of showcases the progress we made during the quarter. For in general the second half of the year.
The quarter three EBITDA adjusted to LME and currency is around 5600 crores, 5700 crores, [ph] compared to that we have delivered as you can see on the right side of this chart, volume as well as costs driving EBITDA by nearly 1000 crores to land around 6,330crores.
The cost drivers are primarily aluminium, I'm sure Ajay Kapoor will talk a lot about it in the Q&A session as well as some cost at Zinc India also got taken note as the underground started stabilizing the second half of the year, volume reflects increasing output in Zinc International, a full year stable sort of an output in steel or a full quarter output I will say. We cover this in detail on the previous page as well.
A strong close to quarter four across our businesses sort of August very well for a stronger FY 2020. If I could draw attention to page 30 of the guidance chart I mean, its there with you all presentations have been circulated, you'll notice that we've made some key guidance out here for your benefit.
Volume increase of nearly 12%at Zinc India, Sunil already spoke about it in the Hindustan Zinc results. So he’s indicated circa 1 million tonnes finished zinc, led. Zinc international up by nearly 2.5 times actually driven really by Gamsberg coming on Steam and also Skorpion as for the mine life.
I understand some of you here visited Gamsberg as part of our investor visit as well and saw for yourself the ramp up underway. Silver was significantly up to the other guidance that we had given closer to 750 to 800 tonnes for next year as against 670 this year. So that's another handsome increase of anywhere up to 15% to 20%.
Oil and Gas volumes again up 10% approximately. Steel volumes on a full year basis up 26% that’s because of the full year impact coming, as we've ramped up at the end of FY 2019 to 1.5 million tonnes and you get the full year benefit of it next year.
Important to remember in steel also the compounding effect of the EBITDA margin, right. Because if you see the margins also exited about 140, and if you do a full year guidance which is full year FY 2019 margin could also be up nearly 15% so it could have a compounding effect here. I know Karnataka sales should be up about 25% albeit on a small base in a FY 2020 that's the guidance that we have given.
On the cost side, importantly, aluminum hot material costs are guided down, almost 9% on an average versus FY 2019. That's again all that we do there is just maintain the quarter four run rate and I'm sure Ajay and the team can get better but from a guidance perspective pretty much maintaining the quarter four run rate that exited.
Zinc, Zinc India in the vicinity of about $1000 holding quite well out there. These are all EBITDA positive for the company and the focus of the management team will hence be on execution. While we don't guide on prices, we do expect the prices to be around the current levels. There will be ups and downs. State demand supply balance and zinc continues with low inventory,foil is supported by geopolitical dynamics and aluminum more or less led by China demand.
We go to the next page. On this EBITDA bridge which is pretty much for the full year EBITDA. As I mentioned FY 2019 was about 4%lower, grounded off to about 24,000 crores as compared to Slide 18.
As I mentioned earlier, excluding pretty much price, copper shutdown and one-off it was flattish. Much of the volume gains and there were volume gains were offset by structural cost inflation in aluminium. Thanks to alumina prices and some related to coal but all of which have been largely corrected as we exited quarter four. The guidance which I covered in detail should give us significant confidence and I hope reassurance as well as we start delivering FY 2020.
Moving on further to the next page on net debt. As you can see we've generated a cash of around 11,550 from operations, almost 50% of our EBITDA round about 45% to 50%, full year working capital was positive with good relief from tax balances both direct, indirect way we collected a lot of refunds.
Gross working capital initiatives we ran a company-wide working capital optimization program and further controls on the stock levels. We'll discuss on the CapEx bar here more on detail in the next page but important to mention that CapEx for the year was within the guidance. Broadly, one can conclude that the dividend payouts were funded by surplus cash flows CapEx requirements and the resulting increase in net debt is pretty much the acquisition debt.
And of course, the acquisition debt will in turn get supported by the expected increase in steel EBITDA in FY 2020. And we talked about the multiplier effect about volume and margin out there. Thus keeping track with its investment case as well as steel side.
Moving on, broadly displaying the fact that we have a strong financial returns profile, our focus on balance sheet management continues. We had refinanced our FY 2019 maturities well in advance in H1 itself. Also thanks to the global operational performance, cash flows are excellent banking relationships, we were able to effectively refinance and sort on navigate some of the choppy capital markets in the second half of last year.
The average majority of term debt consistently remains about three years on a rolling basis with our strategy in place to further improve it in the coming year in FY 2020. We’ve been able to hold our average borrowing costs at a little over 8% for the whole year. Our investments are also rated Tier 1 by CRISIL and with the evolving market situation the portfolio is being monitored tightly and on a continuous basis. As I mentioned our relationship with the banks and capital market participants remains strong and we continue to further widen and deepen our axis of debt.
Moving on to CapEx page, our capital allocation strategy is a disciplined distribution towards achieving the overall objective of maximizing shareholder returns, delevering the balance sheet and investing in the next phase of growth projects. Over the years we prudently allocated the capital as well basically in zinc ahead of the curve now giving strong returns as the prices are pretty good in the last 18 months and next 12 months outlook going forward with a Cairn merger we are being delevered as well and now we are investing back in the growth projects in the oil and gas sector which as you would observe on this page will be the biggest spend segment for FY 2020.
Iron and steel will also see some investments primarily at ElectroSteel when we start expanding. Our CapEx over years have been largely self-funded and we continue with that even during a FY 2019 and no reason to believe otherwise in FY 2020 everything will come from the cash flow that we generate.
All of the projects have hurdle rates of 15%/20% Venkat as well mentioned it. And next year just to call a number out the number is about $1.4 billion that’s the CapEx that we are guiding. Primarily again in oil and gas and zinc we also retain an optionality there within the 1.4 because there are a few projects that we're looking at in aluminum and bauxite as well.
With that I can just wrap up and say that we continue to allocate the capital prudently focus on cash flows through increasing volumes and lowering costs thus funding robust shareholder returns that's the bottom line.
That hand it over back to Venkat.
We saw three large businesses which represent 90% of the group's EBITDA achieve significant milestone which gives us a very strong foundation in terms of our near-term targets that we have set for these businesses starting with zinc, lead and silver. As I said, we are very pleased that the transition to underground mining has gone very well and production went up from an underground mining point of view by 29% and silver shot up by 22%.
And I'm very optimistic about our SK mine and the silver production coming out of SK mine which shot up 22% rising to around 800 tonnes next year and making its way towards 1,000 tonnes. What we are looking at building is on this success in 2020 to achieve mined metal design capacity of 1.2 million tonnes. And further ramp up in silver production that we outlined. As these volumes go up coupled with our own cost reduction efforts we expect the unit cost in the businesses to come down also.
Our growth projects are progressing well to achieve this and these include in very simple terms way as to mine more, shaft commissioning to haul and hoist more, refine more through additional mills, extract more silver through our Puma project and make our operations sustainable through peaceful plants. The Zinc India business is a great example of using innovation technology and planned execution to achieve sustainable growth. In fact most of these plants except where have been bought on stream in a pretty flawless manner.
Turning to Zinc India we’re equally pleased that we are replicating the success at our flagship Gamsberg project in South Africa which has a got an abundant resource. We achieved the milestone in December where we shipped the first parcel of concentrate and we are now ramping to its target MIC capacity of 250,000 tonnes. And as I said in the last call the focus here is to address all of the teasing [ph] issues so that once you’ve achieved the full ramp up then it starts to operate in a steady manner.
This new age fully automated digital line will be the catalyst for that region's development and a significant contributor to Vedanta’s earnings over the nine to 12 months. And certainly in 2019 going into 2020 when you take Zinc International, Hindustan Zinc together we are cementing ourselves to becoming the largest producer of zinc in the world with the lowest cost and a suite of long life assets.
Now moving to oil and gas, we have an optimum portfolio mix here across the oil and gas lifecycle. During the year, our production sharing contracts for Rajasthan and Ravva blocks have been extended for a period of 10 years subject to certain conditions. At the end of March we had ramped up the development rigs to 11 our early production facility to ramp up gas volumes by 90 million scuffs which is around 15,000 barrels of oil and gas equivalent per day is being commissioned and will be gradually be ramping up volumes from that source as well.
And in continuation of our efforts to enhance our resource base, we have issued a global tender inviting bids for end to end integrated contracts for the 41 blocks that we have been awarded under OALP and we were also awarded two development fields under the DSF Round II in Assam and the KG basin.
We continue to work on many growth projects across a rich set of opportunities covering enhanced oil recovery, tight oil, tight gas and exploration and appraisal project prospects. As part of the strategy we will continue to have an integrated model a partnership model with some other global oilfield service companies. The internal rate of return with each of these projects have to cross as 20% of a $40 per barrel price. With 11 rigs at site we are witnessing significant increased activity levels in the field which requires a fair amount of integration. The number of wells shall almost double from the current 500 to over 900 over the next two years.
Our disciplined low cost operating model with cutting edge technology adoption shall enable us to increase production and achieve world class recovery rates. Our exploration efforts are focused on adding to our resource base. The step change in production comes from new discoveries both the wells drilled in KG offshore block have been declared as discoveries. We are evaluating the data to plan the way forward in this block. In Rajasthan we have awarded integrated contract for drilling around seven to 18 exploration wells.
In Ravva, we have awarded the integrated contract for exploration and development for nine to 16 wells. The campaign in both these blocks is expected to start in the second quarter of the current fiscal year. Beyond this the acquisition of the 41 exploration blocks has made us the largest private acreage holder in India. In the current quarter we’ll evaluate the techno commercial bids to award exploration and appraisal contracts through as I said the integrated partnership model. And all of these projects are at the back of the world class resource base with gross 2P reserves and 2C resources of 1.2 billion barrels.
Our exploration and appraisal efforts are focused on adding to the resource base and all of our development efforts are focused on increasing production to the target level of around 270,000 to 300,000 barrels of oil and gas equivalent per day. As the Group CEO I tend to be the integrator, the businesses are very federal. So my job is to ensure that we keep our social license to operate and drive the ESG and also have visibility around long life and exploration efforts so these are two things which will be driving very, very hard.
Turning to aluminium we are very happy to report that we have proved some of the skeptics wrong and we achieved record metal production of 1.96 million tonnes. I remember doing the first set of calls and road shows. People said that they have heard the story before so many times are we going to get to below $2,000 dollars a tonne. Our alumina refinery ramped up strongly this year and achieved a peak run rate of 1.8 million tonnes per annum as local bauxite sourcing ramp up during the year. Half of our refineries bauxite requirement for Q4 was met from these local sources.
On costs, we faced some headwinds in the first half of 2019 as you're well aware, but we are encouraged as a result of many structural changes that we have put in place. In the business we have managed to reduce the overall costs. The cost of production in Q4 2019 for $1776 a tonne significantly lower compared to the previous quarters which was around $2,200 to $2,300 a tonne. Over the last year, we have shared with you our target to get the cost of production of $1,500 a tonne.
We are enthused to share that we have significant structural improvements in the aluminium business which makes me believe that this target is achievable. We will see volatility in the interim of course, but the trajectory for the cost reduction has been set. How do we achieve that the production volumes for aluminium has been enhanced to 2 million tones.
Let me take up each of our input commodities individually how to eliminate sourcing will be a mix of all alumina an important alumina, the refinery has been ramped up and achieving a peak exit rate of 1.8 million tonnes per annum. We plan to ramp this up further in stages to 2.7 million tonnes per annum with a further ramp up to 4 million tonnes per annum in the medium term.
This year we also started getting dispatches of local bauxite. We expect the local bauxite to meet a third of our requirements for the year. Further bauxite security has been ensured through a long term contract with EGA.
We saw repeated headwinds on coal supply during the first nine months of the year. However we ended the year successfully with coal inventory of more than 10 days at most of our plants. For this year, with 3.2 million tonnes of coal secured in transfer auction along with our previous linkages and our own captive Chotia mine we have increased our coal security to around 72%.
We have set Ajay Kapoor an ambitious target of increasing the security to 90% through participation in auctions of coal mines and more linkage options. Further initiates on logistics, long term contracts on carbon are also being worked upon.
On the market side, the focus remains to sell more domestically and increase the proportion of value added products thereby improving margins.
Turning to elector steel which is a successful turnaround story, production has ramped up to 1.2 million tonnes per year with an exit run rate of hot metal of 1.5 million tonnes and EBITDA margins of around $122 a tonne.
The business achieved record volumes, EBITDA and free cash flow with an industry leading margin of around 19%. The plan ahead is to ramp up eventually the design capacity of 2.5 million tonnes backed by iron ore mines in Jharkhand, and supported by a diversified value added portfolio at the front end.
To conclude, Vedanta remains a great investment case. Our large scale diversified portfolio with an attractive cost position in core businesses positions us very well to deliver strong margins and cash flows through the commodity cycle.
We have positioned ourselves in base metals and oils, make our commodity mix particularly attractive. India is Vedanta's core market and one which has huge growth potential. We are strongly and uniquely positioned to benefit from this growth.
With our earlier investment driving our cash flows, we have a strong pipeline of self funded high return growth projects to further solidify our premier position in our commodities. We are consistently striving to improve our operations, integrate our businesses and our value chain and optimize our performance through operational efficiencies and innovative technological solutions.
Our operational performance coupled with a strong focus on optimization of capital allocation and a sharp focus on returns have helped us strengthen our financial profile. We have a proven management team here with good bench strength with a diverse and extensive range of sector and global experience who will ensure that operations are run efficiently and responsibly. And beyond operating and financial metrics the two big purposes which we serve are giving back to the country the planet and the community and the country and importantly we are also in the task of producing business leaders we catch them young and develop and groom them.
With that, I'd like to thank everyone. Given that you hear me often in the conference calls and the quarterly results, I'm going to try and speak very little now in the Q&A and give you an opportunity to interact with the CEOs who are here and on the phone, and I will only supplement as and when needed.
So with those comments, hand-over to Rashmi.
A - Rashmi Mohanty
Thank you, Venkat. So we have audience on the audio call and on the webcast as well. But we’ll take a few questions in the live audience here. And then also switching to taking questions from the webcast audience. But any questions. Yes.
This is Anuj, from Bank of America. So my question is on oil and gas. As I mentioned the significant portion of the incremental capacity going down more than 50% last year as well and next year also we're targeting half. So this segment has actually disappointed on the ramp up consistently. So this year also we were targeting around 220 barrels and we ended by less 189 and the next year target is now 200 to 220 which is very subdued target versus the growth expectations were earlier.
So what has gone wrong there? Number one. Secondly what makes us or gives us the confidence that we will be able to achieve the 270 medium term target which we have and what happens to the half a billion target which we had committed - half a million target which you committed earlier.
I would say if we take from 180 for 185 where we are today, if you have the slide again on the oil and gas. In a very simple terms what you see is a bottom production. This is a simple one where additional wells are getting added to be hooked up.
So these are cases what you see while drilling in this exploration this time we had to go much deeper in terms of the depth as well as we have drilled now horizontal well is the first of its kind. Now this all has taken a certain amount of being the reinsurance to be done on what we are trying to do in the entire extraction of oil and going forward and these successes are now giving us confidence that this production what we are adding over here or adding more wells, will clearly give us and kick in over here for the - let's say from the second quarter we would get this close to about 20 what you’ll see at the bottom bucket.
Then the development part if you see, if you leave the ASP part, which is MBA ASP other than this the rest of it is either close to about 80 to 90, and these are kicking in quarter wise and phases the MBA ASP is your pure big target which is going to give us more than 90 a portion of it comes end of the year, so close to about 90 to 100 comes from this and these projects are in place.
For example if you take type gas which is another big number over here about 45, we will start getting close to about 15 to 20 sometime in the month of August, and the balance sometime in December, January. So, the progress of these projects are on schedule. So if you look at it this therefore a close number which we are seeing in guidance, exit rate of around 270 to 300 and an average of 200 to 220 is very clearly on track and visible projects which are running on ground and as per schedule what we have seen.
There has been rescheduling done based on the new type of wells, which we are now drilling more which are horizontal well which takes time, and therefore it takes time also on the integration and accordingly the surface facility coming up sometime in January and February. So therefore the confidence level is very high. And the numbers will be achieved.
Just in terms of the confidence to get to 270, 300 a high level of confidence largely because I look at it in a couple of buckets. The first bucket is existing production. And here is around how you actually manage your decline management and there if you go back and look at what forecast decline rates were compared to now we have done much better.
Secondly, in terms of well reservoir management and also bringing on stream additional liquid handling capacity and improving recoveries. That's one bucket. The second bucket is bringing on stream the various development projects whether it's in terms of additional wells hooking them on, then bringing on stream gas and also bringing on stream pipe oil and pipe gas projects as well, that's the second bucket.
The third bucket is ASP, which has been piloted and the recoveries will actually improve quite significantly, that's the third bucket. The fourth bucket in terms of step change is bringing on-stream new discoveries closer to the infrastructure so that they can be processed through the terminal and add to it your offshore kick are coming in as well.
All of these give us the comfort that 275 to 300 is within meeting range. You asked us about what went wrong. I think the question here to be - thing is we probably should have estimated our integration probably better and with these large projects you rather take your time to a proper allocation of the contract rather than Russian given contract and find that you have actually shot yourself in the foot. But now with those contracts going through the proper mechanism quite confident that getting through to 275,000 to 300,000 barrels of oil and gas equivalent is within shooting range.
So we'll just follow. What is the timeline? I mean, I'm not going to hold you to that but what is the timeline 275 to 300 is a three year plan.
That's what I just told you that we get close to about 210, 220 in the range at the start producing around 210 in the second quarter and around the third quarter, we go closer to exceeding around 250, 260 and then we come to the fourth quarter around 270 plus, the trick will be inaccurate. So the average,actually 200.
And again, if you look at the balance sheet over the last two years, the net debt has spiked up. And the main concern investors have is the leverage at the parent Vedanta resources. How should we look at dividend policy from here. It has been ad hoc. And to that extent would we increase the leverage and Hindustan Zinc and Vedanta Limited to payout higher dividend or will dividend be a function of only the free cash flow and nothing else?
I think our articulation of the capital allocation has been fairly consistent. I would say in the last two years far from it I think, we've always said, we are going for the operating asset. Get the volume up, get the cost down.
And of course, in the journey you would have a few bumps like the aluminium inflation et cetera but then that's also pretty much exited quite strongly if you see the quarter four. So you have a strong operating asset. We've always been self-funding our growth CapEx, even last year 24,000 crores roughly what about $3.5 billion in dollar terms. Right.
Even with that we've probably generated close to about $1.7 billion, $1.8 billion of free cash flow post CapEx, which is at 11,550 crores. If you see, the point I'm driving here is after funding for a growth plan, price is not in our control, some aspects of inflation not in our control, force that we said the next walks off capital allocation of shareholder return and we have been very consistent with the dividend also.
If you see the last three year, the average dividend per year would be in the range of 18.5 rupees or 20.25 I guess, which would give you pretty much consistently year-on-year but timing could vary between the year, but fundamentally it's been fairly consistent.
And the free cash flows are actually funded it thus taking out into another very attractive sort of an investment vehicle from equity point of view is the dividend yield. Our dividend yield has consistently been between 7% and 8% in the last three years and about the private sector either the first or second in the nifty50. And you know your nifty 50 yield is roughly about 1.8% on an average.
So we've earned the way through growth and earnings that we've had we've deployed probably in returning to the shareholders, and yes, we had a bolt-on acquisition, which came in around July and it took us about seven, eight months to have a nice sustained turnaround, it's a nice sweet story sweet success quarters you see in steel.
And we ramped up to 140, we still don't have iron ore mine that should come through and you can imagine competitor one is $184 exited. Competitor two $167, we’re almost at $140. So can be a small capacity but reaching that so that acquisition debt will start paying up in FY 2020.
So the debt has been a constant I will say subject to acquisition, capital allocation policy consistent. We are managing between the buckets of reduced gross debt for sure, manage CapEx and then return to the shareholders and the average dividend for the last three years has been almost in the range of plus minus 5%, 7%. So I hope that helped answer the question.
And the alumina expansion has been now optionality for two, three years. I mean what was holding back the project from getting throw, is it regulatory approval? Is it bauxite? Is it capital, I mean how should we look at. Will it expand in the future?
I think Ajay will handle, which is actually good news we are going ahead.
So first is you saw increase about one-fourth in the capacity. It comes because of our local bauxite sourcing to the government owned Odisha bauxite where they already have a run rate of 3 million.
We are confident that we will win some more mines in the vicinity and we have a very tight schedule to now look at immediately expanding about a million. The team is working on it and I can only tell you that the way we have expanded in the last year or so which should not be very long I think I am looking at 24 month on a horizon.
We will go from two to three?
Two to three and then go to four.
And the three to four really additional, it’s an additional CapEx. This is just the earlier CapEx which was half completed?
A – SrinivasanVenkatakrishnan
Absolutely. So we do it smart CapEx.
Amit Dixit from Edelweiss. My question pertains to the note number nine from the account regarding, sorry, note number eight regarding the debt instrument, that Voltan instrument, just if you could reconcile in the comments we have to pay how much we have already paid and how is it reconcile in balance sheet on the second liability side?
So I’ll just talk in dollar million, so its sort of easier. Just about $500 million was a total instrument that we had mentioned during the quarter three call. Out of which as of year ending FY 2020 2019 we have paid up approximately $270 million. We probably have another $250 million to be paid up over the next four to five quarters so to say.
And we didn’t go through in a lot of detail during the call in both the call last time and very happy to report that you’ve taken note of note number eight and I also covered it in my talk track that the underlying value did go up significantly and we have recorded mark to mark gains, a cumulative gain is roughly about $150 million odd net of FX 3 which is about 900 crores odd between quarter three and quarter four but finally in quarter four.
And on the balance sheet it is shown as cash on cash equivalence. So 39,000 crores includes this $270 million or roughly 2000 crores that has been paid out. Right. We do believe it’s a liquid but if you really want to strip it out then 37,000 crores of cash and 2000 crores roughly of structured investments is how you look at it as given in the appendix.
So just a follow up question on this note. You have said that total consideration is 3812 crore that you have paid in this year. Is it correct?
We said that total consideration is 3800 which is just above $500 million out of which about you should say 55% has been paid out and the balance 45% will make five quarters.
So when you say that fair value of investment is 4772 crores so what does that include? That include this 253, $270 million that we have paid plus MTN gains?
Correct. Under present value of the future payment. So it’s a valuation methodology. The broad way to look at it is 25 million shares multiplied by approximately every pound of moment multiplied by 1.3 will give you dollar and the rupee.
And secondly, your question - and because then we’re still have been really weary of what is rationale for acquiring this you can handle. What is the end game like? I mean we all know that this is going to -- the option is going to come for the maturity next year. So what will happen then?
I'll answer that question and we outlined very clearly the rationale behind why the investment went in, so purely because it was giving superior returns and with hindsight has shown that actually to deliver those returns here
As far as Vedanta is concerned and Vulcan has actually is still holding the ownership of the shares and the voting rights, it's got nothing to do with the Vedanta Group at all. So as far as we are concerned on April 20 and October 20, those structures will unwind and the money will come back to us. So that isn't a game plan which involves the underlying shares as far as Vedanta is concerned.
I will just take one question on the webcast audience and then come back here. The question is from Ritesh Shah from Investec. His first question is on electro steel 90% of the stake is with the Vedanta Limited. How do you look at the balance 10% residual stake, are we looking to delist or buy out the minority?
The delisting process is on actually – it's actually been delisted and now it's in the process of merger with Vedanta Star Limited and there will be a formal based payout which is not more than $30 million, $40 million approximately to the 10% of the shareholder. So it’s a pretty much a procedural thing. The most exciting thing about the Electrosteel and Vedanta Star really about the ability to expand the volumes there with very marginal CapEx and the multiplier effect I talked about in terms of base year volume versus next year stabilized volume and the ramped EBITDA at a full year level versus the average lower EBITDA of this year. So that should give a good EBITDA growth or growth block for Vedanta in FY 2020.
He has another question is there any scope of moving the Hamburg ore to feed the Indian Hindustan Zinc metal?
I think this question was already asked in the Zinc call we have no plan to move the concentrate to Hindustan Zinc because the smelter our located in the land locked area. So if we would have some smelter located at our port we would have taken that call number one. Number two we have a metal balance in Hindustan Zinc we have the expansion coming up from our mines and we balance with the smelter capacity. So we are debottlenecking the smelter as required to fill in the capacity coming from the expansion of the mines. But we definitely have a plan to put up a smelter at Gamsberg but we are evaluating that opportunity but we will come at the right time to say that when our work will start and not when we are ready to go.
There's one more question from Ashish Kejriwal from IDC. He's asked that the net debt has reduced significantly by INR 1.26 billion quarter on quarter to rupees 270 billion. The EBITDA in quarter four was just INR 63 billion. What could be the reason for the net debt reduction?
I think in the last quarter results we had guided that we will definitely have a good quarter four in terms of pulling back some of the working capital investments. We do see a lot of efficiency kick in, in the second half of the year as sales maximize and that is one prime reason why we've been able to achieve what we did. While the good news is that the full year number is around $1.7 billion or 11,500 crores of free cash flow both CapEx. Approximately about 45% to 50% of the EBITDA generation if you look at the last four years of trend you would find Vedanta consistently at that percentage. Whatever be the level of EBITDA given the tries up and down because we manage our whole cash flow that we leave enough on the table again to meet all the three requirements that I laid out earlier.
Yes, so I think it's a continuation of the previous question only which were asked. So just to go back to the promoter entity we are seeing almost $700 million of annual interest outgo is what they're faced with right now which translates to - it has to be matched with the dividend payment from India almost $1.6 billion, $1.7 billion. Given that they are 50% stake now the cash I think is sort of 16,000 crores. And then we have some 4,000 crores, 5,000 crores left with Cairn.
So we are approaching that level where even full cash out go housing [ph] is probably not enough to make this sort of commitment. So what are we looking at are we looking at some sort of take sale in Zinc or debt in zinc and something has to match up as to meet expectations at the promoter level that's point number one, point number two on the Cairn side 186 was total production for this year.
And if you can break it up between Rajasthan and the rest because what we are seeing is a natural decline in the Rajasthan fields. So this natural decline was supposed to be offset by the enhanced oil recovery towards certain extent which is not happening. So on what base are we adding the additional 90 KBOD [ph] and from the development projects and the best 40 from the new drilling projects if you can just break that part a bit over the next two or three years.
And the last question if I may just to refresh my memory I think there has been a bit of tone down for FY 2020 production as well as Zinc International is concerned. And FY 2021 guidance have been given but if you also give take us through the FY 2022 guidance or rather FY 2021 guidance because copper [ph] will run out FY 2021 the 112 KT that you were in Skorpion. So if you can also just briefly guide to the production that one should expect from Zinc International in FY 2021.
Why don't Arun take the first one, Ajay second and then Deshnee is on the call. She can take the third question.
Sure. I think fundamentally far from those thoughts that you thinking about. And again we have to ask the question in the first half in March 18 which go even back my cash balance has been more or less constant which really comes back to the point we had earlier that we are generate generating enough free cash flow for post our CapEx needs to do any shareholder rewards that we have to.
And this is Vedanta Limited so I'm not going into detailing in the - from the parent side but whatever little public information is available you would gather that. The annual servicing is around $350 million to $400 million right. So that's not much and plus there is a separate effort where we also have Zambian mines and copper which directly roll into the parent. But I don't want to get into that. They also generate cash flows and have good potential of there.
So multiple assets and it's a strong holding at that point of time and it enables us to access capital global capital. We just did a global bond issue and the biggest bond issuance by an Indian high yield name since August 2017. So that's the strength of Vedanta and Vedanta name globally between the parent and Vedanta Limited these isn’t a company which in the last 15 years has financed we financed nearly $40 billion of global debt raising capital markets.
So and also gives us access to so many bank relationships. Be it Far East, Mideast, Far West Indian banks, private banks et cetera. So I think we're in a good spot. The fundamental focus for us is really on those growth blocks on EBITDA right. We did mention Electrosteel we have big growth block even though a small volume but the effect is big. ZI as you rightly observed and I'm sure Rashmi will address it. Hamburg goes from zero to nothing and Sunil Zink India simply has to grow even a Hindu growth rate, Hindu rate of growth is enough for him to do generate big EBITDA.
If you see what I mean and he is already guided 12% up in volumes and with that kind of margins but first defile [ph] cost was positioning just look at the quality of those assets and more important than not is India needs a company like the natural resources company in the Indian subcontinent where one out of every four human beings live. There is no other company doing this kind of business. Yes there are some other company the power, the steel, there is automobile et cetera but natural resources play fundamental resources that grow into everything. These are basic need of all of us.
So I think that's what really drives us to deliver more and we have enough to building blocks on our EBITDA and I don't think we dip into our cash reserves that way I mean they're all there for the rainy day. But having almost 40,000 crores of cash reserve is fantastic I believe is probably the second biggest Treasury in the country as well. So that's another data point and this is after contributing nearly 43,000 crores to the exchequer Government of India whether revenue.
I mean whether set [ph] royalty tax, indirect tax, dividends et cetera which again places us either at number one or number two in the country. So I think all of us can feel good to have this kind of quality assets and that kind of cash flow speed to meet all natural resource ambition for the subcontinent.
Yeah so when we said about 200 to 220 the decline has been accounted for just I would reconcile again the number which I said in the beginning the bottom production is close to about 25 and the others and ASP I said is close to about 90 plus. So even if you consider another 20/25 decline and you add back you reach and exit rate of about 270 plus. So on an average therefore this number is including – considering the decline.
Thanks Ajay Deshnee from the call can you take up the third question guidance from ZI for FY 2020 and then if possible some insight as to the next plan.
Sure Rashmi am I audible. Hello Rashmi I am audible
Yes Deshnee thanks.
All right so in terms of how to look at the Zinc International over the next two to three years Black Mountain continues to be a stable producer around at odd 74,000 tonnes of MIC level. In terms of Skorpion you're absolutely right. Skorpion starts to ramp down in the next financial year. You will remember when we gave guidance on the put 1 1 2 pushback we indicated that we had some 250,000 to 270,000 tonnes of zinc metal that we could get out of it.
Last year production took around 60 odd thousand of that. So we are left with around 200,000 tonnes of zinc metal between this year and next year. Of course the plan is to accelerate that metal production this year. And then the balance try and shorten the life for next year. So we've guided more on the ore production leading into metal for a Skorpion this year. But between this year and next year we want to produce just under two 200,000 tonnes of zinc metal.
As it stands the plan with the Skorpion this year is around 120,000, 130,000 tonnes of zinc metal. And if you look at its Skorpion's performance over the last three years this will be one of its largest year or driven by the fact that we start to get into some double-digit grade pockets within the throughput [ph]. On Hamburg if you look at the entire project we kept on talking about an average grade of 6% to 6.5%. So I look at Hamburg in terms of how quickly I can ramp it up to 3 million to 4 million tonnes of ore from a run-up mine point of view as early on as possible.
In terms of how we planned this year we get too close to that ramp up of 330,000 tonnes of ore treatment by the end of quarter 1. But because we continue to be in a lower grade regime than the average grade from now to the end of this financial year we are therefore guiding around 180,000 tonnes to 200,000 tonnes of MIC. And then next year the grade does pick up but yet again we will be able to treat 4 million tonne but still not be for average grade.
And that is why next year we can look at maybe 220,000 to 230,000 tonnes of MIC for Hamburg. I trust that answers the question and gives enough insight in terms of how we are looking at planning.
Okay we have a question on the audience.
[indiscernible] if you can touch upon the additional resource potential in [indiscernible] and in terms of your phase 2 et cetera just to give a long-term trajectory will be good?
So okay the thing most exciting was international. And to the many analysts that visited us they saw this firsthand. Year on year our reserve and resource has grown by over 30%. So we now sitting at about 4 million tonnes more of zinc metal just under 30 million tonnes of zinc metal equivalent in our resource base. What we've done outside of proving up our resources in the last year we've also built confidence in terms of the project pipeline.
So the phase 2 projects, which many of you will remember on Hamburg is a doubling up of the puts. So we go from 4 million tonnes to 8 million tonnes of ore. And then another module of the plant is in feasibility and in the course of this financial year we'll be looking to approve that project and hopefully start. Venkat as well as Arun touched on the zinc refinery that's work that we want to complete this year because I mean if you're in a high PC [ph] market it's always best to be in an industry where you are getting all of the benefit on metal, so Sunil are myself are looking at that.
But as Venkat said we might be looking at ramping down the Skorpion mine and the plant in the neighborhood in the next 18 months. But there does remain a little bit of metal under put 1 1 2 we need to figure out how smartly and safely to get it out. And there is or there does remain [indiscernible] project which is a JV with the neighboring true value mine sulfide waste. So we are looking at how we can exploit that.
So I think as Venkat and the chairman like to say at Zinc International it continues to be sufficient water in the well and the task for the coming year is to look at how quickly we can get this into production into market. The thing as we are all seeing that that this business continues to be the highest potential in terms of step change for the group.
Thanks Deshnee we have one question on the audio that we will take now.
Thank you. That is from the line Vineet Maloo - Birla Sun Life. Please go head.
My question is related to aluminium segment on slides on aluminium profitability bridge that you've shown it seems that you know the EBITDA per ton is $131 per tonne and your realization is about $2010 or something. So I'm not able to get - it implies the cost of 1870 odd whereas in our cost numbers is showing a cost of 1770. So I'm seeing where is the difference, how do you reconcile this from the profitability bridge to that number that we have the actual number of 1770.
Audio line wasn't fully clear but are you referring to the bridge page or the general aluminum business model, I can throw little bit lights on the general.
I am on of the Slide 42 which shows aluminum profitability where your total realization is 2010 dollars per tonne and your EBITDA per ton is $131. And if I find the difference between them in implied cost which is about $1870 which is about $100 higher than our actual reported cost of 1776 odd. I just wanted to reconcile the difference about $100.
I think we do get your question but we can come back the IR team will come back to you offline on the exact reconciliation of the numbers. But broadly to make the point I think for at the end of this business is really about the guidance that we've given at 1725 odd hat I think is the guidance given in the appendix which typically is hot metal. We've been conservative there.
And we also understand that we always have a premium of about $200 increasing domestic share this year I think about three percentage points has gone up very much in the last two, three months actually as well as the fact the VAP percentage value added percentage is constantly going up. We exited last year at about 50% and we are already clocking 60 plus at this point of time. So that could another $30 or so more to be top line.
So any aluminum you take anywhere between 1750 to 1950 or an average in between, you add another 200 to 230 and reduce 1750, 1775 that should be a conservative margin. I would say can we get to 350, 400 would be a nice target. And what is the potential of that business, very easily 600 because as you've always been articulating and what Ajay and Venkat covered the bauxite supply, every tonne of aluminium produces bauxite uses a $300 benefit in the EBITDA.
So the more and more as we convert during the year the costs start gradually coming down. So on a lighter note, I do hope Ajay has kept a lot of bugger in his guidance and he's going to beat it it but that's the direction offer aluminum will say, anything want to add Ajay.
So I think you have almost stated everything. The building blocks of coal because last year we had to pay heavily when coal was not available, thankfully as well also mentioned by Venkat in his address, more than 10 days stock at all over sites, our linkage and our assured supplies along with our own Chotia block is now upwards of 70, we would target reaching closer to run rate of 80, 85 at the end of the year. So that solves a big part of our cost, second is alumina where I already spoke about 3 million run rate on the locally available bauxite and in addition with EGA we have a long term contract that should also further help us.
I think these are the two big building blocks. Marketing and sales is something what Arun already mentioned, we are wanting to increase our domestic which we can already say see the run rate is much better and also the value added products, so I think those are the building blocks.
Indrajit, you have question.
Hi, this is Indrajit from Goldman Sachs. I have two questions, first on aluminum what is that status of procuring alumina from Nelco any update on that?
So the matter is sub judice, High Court has appointed in our favor. It's under Appeal Act Supreme Court as of now.
And on steel despite benchmark prices going down sequentially, our realizations have risen sharply. So what has contributed to that?
Can you repeat the question.
On steel realization our realizations have increased sharply quarter over quarter despite benchmark prices going down. So what has contributed to that?
So obviously volume. Another is the IBRM material so input cost has gone down and coal prices also softened a bit. So if combination of the productivity product portfolio I would say has improved because over the time the driven percentage has gone down. So next year we have taken a - you know the smaller target so the product portfolio improvement, IBRM prices, internal efficiency, coal projects so a combination of that has improved demand.
Yes, this is Sumangal from Kotak. Two questions one on this $500 million investment in Volcan. Now we did this in search of better yields in case the yield appeared to still remain above market. Issue, are we open to increases investment beyond the current $500 million or we are done with this instrument?
I'll answer that question we're done with it and that's what we said last time, and it stays there.
A very quick clarification on the previous question, Page 25 the bars will talk about the hot metal costs in aluminum and exit [indiscernible] average for the quarter was 17.80ish. Page 42 would talk about including conversion costs of 103 that gives you reconciliation of 130 on EBITDA margin.
Just one small bookkeeping. We've discontinued giving the buyer's credit. So if we could disclose that.
We'll take your suggestion and we'll definitely put in our footnotes soon on that. I mentioned lifetime it's about a billion dollars so stays around that much, so there is no significant movement in the last almost four quarters I would say because just capital employed - working capital employed sort of.
And we have one more question on the audio line, you can take that.
That is from the line of Abhishek Poddar from HDFC Mutual Fund. Please go ahead.
First one is regarding the all cost in the aluminum segment. We are seeing a 20% decline, I think in 3Q you had reported a $793 per tonne in the all cost which has come down to 632. What has led to such a sharp decline in the dollar?
It's basically coming from over more imports. Earlier we didn't have coals so we had to import power, which was at INR 6 on average. So I think that's brings the key factor. And as I mentioned, our security from over linkage and other domestic sources and also own mine Chotia, which almost went up to close at 2.6 million this year, I think that added to the power cost.
So how do we see the sourcing in FY 2020?
FY 2020, I think the direction is what we did last quarter. We should actually do better than that.
So imports will be minimal and margins.
And if we can just help you with a couple of data points I think we exited the year with almost two-thirds of the linkage percentage. And thanks to the fourth round of call linkage auctions, which we started realizing in fourth quarter, plus the fact that you would remember we had bid in one of mine in BALCO Chotia that started producing.
So you'll have a full year impact of both of those, as well as a fifth round of auctions scheduled for August 19. So structurally coal three-fourth, perhaps linkage security as Ajay elucidated and the balance would be important required but then they become very small - BALCO has almost reached the design level of our own $565, $550 in quarter four as exited. So pretty much a nightstick for BALCO.
And the last question is regarding the needed breakup that you given in Slide 34 of the presentation. There's one item in Cairn India Holdings where the net cash has gone up from 38 billion in previous quarter to 57 billion. What has led to that increase?
Cairn India Holdings is the operating entity at the end of the day and half of the Cairn business you'll recollect sits in that so exactly constellation I'm sure the team can get back. But broadly I mean it's a nice question to have why is it going up, it will go up, the output is coming and the profit petroleum is going up there. So EBITDA has gone up in quarter four.
And as I mentioned earlier that includes the investment that we've made, which is roughly around 270 million or 2,000 crores approximately that included in cash and cash equals.
Thank you. I now hand the conference back to Ms. Rashmi Mohanty.
Thank you. And again you have a follow up question?
At the end of the day the linkage supply is dependent on Coal India basically meeting its commitment, right to that extent if we have a repeat of the first half of 2019 where the power demand shoots up in Coal India like, then the cost guidance would again come under stress, right. I mean the linkages wouldn't matter. That would be a fair assumption?
I think you have already said the answer in your question. This volatility is very, very severe. But then I meet the people and I talk to Coal India did a ever highest production this year at 7%. I think they’re also well geared to go ahead. If you see overall coal stocks in the country across sectors, I am coming from cement and we were suffering there as well but I hear now that there is a sufficient amount of coal available.
So the risk remains but I think it also happened because at one stage the government also went for domestic at the cost of imported. You know that whole story. Now I think that mistake for us will not be committed. So I'm more confident more bullish on coal supply.
So given your experience to cement, if PetCo consumption keeps on coming down and cement has been on PetCo for so many years and they're forced to go to coal, does that tighten the situation for this or –
Cement was very small - we buy in aluminum alone goes to 60,000 tons of coal every day. I mean that’s not the kind of a coal cement sector can buy.
Thank you everyone for joining us here in person, on the webcast and on the audio call as well. As always if there are any follow up questions, we are available the IR team is there, and you can reach out to us. Thank you so much.
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.