Vedanta Limited
Q3 2019 Earnings Call Transcript

Published: 1 Feb 2019

[Operator:]

Ladies and gentlemen good day, and welcome to Vedanta Limited Q3 FY 2019 Results Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Rashmi Mohanty from Vedanta Limited. Thank you, and over to you, ma’am.

[Rashmi Mohanty:]

Thank you, operator, and a very good evening ladies and gentleman. I’m Rashmi Mohanty, Head Group Investor Relations Vedanta. Thank you for joining us to discuss our third quarter results for FY 2019. We will be referring to the presentation that is available on our website. The call will be led by our group CEO, Mr. Srinivasan Venkatakrishnan. I’m also very happy to share that in our board meeting held today, Venkat has been appointed as the whole time director and CEO of Vedanta Limited. On the call, we are also joined 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; Ajay Dixit from Aluminum and Power; Naveen Singhal from Iron Ore and Steel; P. Ramnath from Copper; and Phillip Turner, our Group Head, ESG practice. I now hand it over to Venkat for an update on the company’s operational performance.

[Srinivasan Venkatakrishnan:]

Thank you, Rashmi. Good evening, all and welcome to Vedanta Limited’s third quarter FY 2019. If I may start with a quick overview, we are very pleased with a strong operational and financial results for the third quarter. We achieved record zinc and lead MIT volumes and silver production at Hindustan Zinc. You would have seen this, Hindustan Zinc announced its results recently and the highest ever alumina production. We saw structural reductions in aluminum costs with increasing raw material linkages. You recall, we did say that our efforts are underway, and we have started to make good progress in that regard. The steel business achieved strong margins and recent developments in our copper business are also directionally positive. Our profitability and gearing metrics were strong. As compared to the second quarter of this year and I think that’s the right way to do the comparison because year-on-year there is a big gap in the aluminum prices. EBITDA rose 13% and net profit attributable rose by 39%. Our growth projects and ramp-up plans are all on track to set the next quarter as a base for a strong next year. Before we get into the highlights, if I can take a quick look at the markets, the commodity price saw some pull back last quarter on the back of speculation around global demand and the feared slowdown in China as well as continued U.S. China trade tensions. However, we believe that two of our key metals, zinc and aluminum, are best placed in the near term. On zinc in particular, inventory levels are the lowest they have seen since 2007, estimated that they are only four days stock of global consumption. While global zinc consumption is expected to grow at the rate of 1.8% annually, the refined market is expected to stay in deficit until 2020, thereby providing fundamental support to the prices. On aluminum, it tried to stay at the current level and input cost remain high, most smelters will cut production and new capacity will be slow to ramp up, thus providing support to aluminum prices. Crude oil prices were also volatile during the quarter, hitting a four-year high of $86 per barrel, briefly in October and then falling to a low of $50 a barrel in December. There has been a recovery in January, but prices holding at about $60 a barrel. Global supply will remain one of the main drivers of prices in 2019. The outlook for our business remains optimistic. We do have to navigate through this volatility. The underlying strength of our businesses, the quality of our efforts and our people, our disciplined approach to capital allocation and efficiently ramping up our volumes will be the key to achieve our targets. India remains the fastest growing major economy in the world and there’s an increasing level of confidence and expectation on growth. This growth will fuel consumption of commodities, and we are well placed to contribute and capitalize to India’s growth. Now turning to the results presentation. If I may start with our first value, namely safety. I’m deeply saddened to report that we had 2 fatal accidents this quarter, resulting in 3 fatalities in Zinc India. All other business units were fatality-free during the third quarter. Our analysis of these fatalities has revealed that there is still more work to be done in building competencies and bringing behavioral changes to our diverse workforce and business partners. With that objective in mind, we have engaged DuPont in Hindustan Zinc. They are a renowned global safety consultants, as you are aware, on improvements we can bring about in our safety processes at particular mines at Hindustan Zinc. This is an addition to the work that has already being undertaken in the form of visible felt leadership, standardized procedures updates, audit programs to ensure implementation and monthly reviews of progress by the executive committee. On critical operating aspects such as pit, stockpile, tailings and waste dumps stability and ground controls, we have conducted additional third-party assessments to review their implementation and effectiveness. Turning to energy and water management. We are committed to reduce our energy consumption by 2 million gigajoules and water consumption by 1.5 million cubic meters. To date, we have achieved 41% of the energy and 57% of the water target. Our work with the local communities continues to inspire and positively impact lives. To give you a few examples, I’m happy to report that the state of Rajasthan is now following the Open Defecation Free program and Cairn has played a significant role by constructing 20,000 toilets in support of this program. Both Cairn and Hindustan Zinc were commended for their significant achievement by CII-ITC sustainability awards. As you know, these awards follow an extensive six month long independent assessment on all aspects, such as climate change strategies, natural resource consumption, human resources development, social performance, stakeholder relations and corporate governance. Hindustan Zinc has recently also won the Golden Peacock award for 2018 for its CSR programs. Moving to the key highlight slide. Looking at the quarter’s results starting with Zinc India. To remind everyone, 100% of our mining here is now underground with volumes ramping up well by 38% year-on-year, in terms of underground volumes. We also had record silver and lead production this quarter. At Zinc International, Black Mountain and Skorpion did well compared to the previous two quarters, and we have successfully dispatched our first contracted shipment in December 2018 from our new Gamsberg mine. In our Oil and Gas business, our growth projects are progressing well and volumes will ramp up in the fourth quarter of this year. In our Aluminum segment, we had record alumina production this quarter, driven by improved bauxite supplies from OMC, and we are happy with the changes we are bringing about in the cost structure of the business. At our newly acquired steel plant, Electrosteel, production has been on the rise, and we exited the quarter with a run rate of 1.5 million tonnes per annum. At Tuticorin, it’s been a long journey but one that is finally beginning to be favorable for us with the Supreme Court upholding the NGT’s order. Our profitability metrics for the quarter were strong, driven by increased volumes and lower costs, despite the fall in LME during the quarter. EBITDA increased 13% quarter-on-quarter to INR 5,953 crores and attributable profit after tax before exceptional items and DDT was INR 1,574 crores, which was up 39% quarter-on-quarter. Turning to our operations. At Zinc India, we continue to ramp-up our underground production quarter-on-quarter. We had record production from our underground mines as well as record silver and lead production for the quarter. Mined metal production from our underground mine was 691,000 tonnes on a year-to-date basis, 31% higher from a year ago on account of higher ore production and grades, even as the closure of opencast operation caused total mine metal production to remain flat on year-on-year. And given my background in mining, this is a remarkable achievement to generate this level of productions when you’re transitioning from surface to entirely underground. The cost of production was lower quarter-on-quarter to $997 a tonne. Our growth projects are progressing well. At Rampura Agucha mine, full shaft commissioning is expected to happen in the second quarter of 2020 and will be synchronized with the completion of pressure and conveyor system. The ramp-up of mine will be as planed as we will continue to produce from both the decline and that midshaft loading system. The new 1.5 million tonnes per annum mill at SK mine was successfully commissioned and it produced first concentrate during the quarter. The production shaft work is reaching completion and the shaft commissioning is expected in the current quarter. At Zawar, completion of the new two million tonnes per annum mill is on track and expected to commission in the current quarter. At the Rajpura Dariba mine during the quarter, we placed the order for a new mill of 1.5 million tonne per annum capacity with projected commissioning in about 14 months. The Fuma project at Chanderiya is expected to complete in the current quarter. We expect further improvement in volume and cost of production in Q4 on the back of continued ramp-up from the mines. We are on track to reach design MIT capacity of 1.2 million tonnes per annum next year. Now turning to Zinc International. As stated last quarter, Skorpion and Black Mountain mines are poised for a better second half. Their Q3 performance at 38,000 tonnes is 34% higher quarter-on-quarter, driven by higher grades and ramp-up from 612. Cost of production $1,757 a tonne is 28% lower quarter-on-quarter on account of higher production, reduced topside consumption at Skorpion and improved copper grades [ph] at Black Mountain. At Gamsberg mine, we shipped our first parcel of concentrate in December 2018. However, the ramp up has been slower than our expectation due to feeding issues. The issues are being addressed currently, and our intention here is to address these as we start to ramp up. So that once this ramp up, the plant can operate smoothly. We are aiming towards are full ramp up by the fourth quarter to deliver the 250,000 tonnes per annum MIT capacity in FY’20, which is well within our original ramp up plan of between nine to twelve months. While some of this initial feeding delayed map slowed down the pace of our ramp up. Let me take a moment to remind you of the broader vision and potential at Gamsberg. We are following a model of project execution approach to enable efficient capital allocation. Phase I, which we are in currently, only uses one fourth of the total resource potential with a capacity of four million tonnes per annum of runoff mill production – runoff mine production at 6.5% zinc with a 250,000 tonnes per annum metal and concentrate capacity. We’re happy to state that this phase has been completed within the targeted capital of less than USD 400 million. The large resources and reserve base at Gamsberg can support 600,000 tonnes per annum zinc production; Phase II will see a larger open pit and can add 200,000 tonnes per annum in an advanced feasibility and design stage; and Phase III, which is underground, can add another 150,000 tonnes per annum. Turning to our Oil and Gas business, we are making substantial investments across our portfolio, comprising of enhanced oil recovery, tight oil, tight gas, liquid handling upgrade, exploration and operation. Our gross CapEx investment stands increased from USD 2.5 billion to USD 3.2 billion. This increase is primarily due to contracts being finalized for enhancement project, namely Mangala ASC, satellite field development and Rabba Development and exploration. Our CapEx share is around $2.3 billion. Investment of such large amounts in our oil and gas business which focus to ramp up volumes has happened after quite some time. We have hence taken comparatively longer for mobilizing – mobilizations and plans to ensure that we get it done correctly and safely. This has led to some delay in the production ramp up. Alongside this, we have also initiated steps to start exploration in the newly 141 blocks under the OALP. We hosted a series of global partnership meetings with Oil and Gas production, technology and service companies in Houston this quarter, seeking to establish mutually viable long-term partnerships to undertake these development projects. Let me move on to the next slide, which depicts our progress on our previously announced growth projects. We have commenced execution of a large part of these projects. We currently have eight drilling rigs and three completion rigs. We shall add two more rigs from Mangala ASP drilling in the fourth quarter. Turning to our key deliverables going forward, which will enable increase in production volumes. First, as mentioned in the previous quarter, we have brought forward the production from RDG, gas through the installation of early production facilities. These facilities shall be commissioned in March, and we shall see an increase in production once ramped up by around 15,000 barrels of oil equivalent per day. Secondly, we shall grew 48 more wells in the fourth quarter, taking the total wells drilled to over 100. We shall also start hooking up these wells for incremental production. Thirdly, we would have our first oil from Aishwarya Barmer Hill in the fourth quarter. This shall be a major milestone in our effort to monetize the Barmer Hills tight oil formation. Fourthly, our liquid handling project is progressing well. The intra-field pipeline is expected to be commissioned in the first quarter of next fiscal year. Next, we shall be awarding the contract for the ASP facility and development of 10 satellite fields in Rajasthan. Ravva block has been a global benchmark with recovery of around 50%, and we intend to continue our success story. We are targeting a five-well development program to add to 17 million barrels. The drilling program shall start from the second quarter of next year. Execution of all of these will lead to an additional 20,000 barrels of oil equivalent per day in volumes by March 2019. Moving to aluminum. I’m quite pleased with the progress we have made on the structurally reducing the cost of aluminum production. Our December cost of production was $1,909 per tonne and as you can see, the reduction is compared to what we clocked in the previous quarter, and we are well poised to move to a sustainable cost of $1,500 a tonne driven by efficient coal, alumina and bauxite sourcing. On coal, long-term coal linkages have improved from 49% in Q2 to 72% in Q3, taking into account our Tranche IV linkage and supplies from our Chotia mines. We will continue to work on improving materialization and increase linkage through participation in future tranches. We will also evaluate the coal block options for improving our full security to our target of 90%. Turning to Alumina. We had record production from Lanjigarh this quarter and are confident of achieving our guidance of 1.5 million to 1.6 million tonnes for the year. There have been a $50 per tonne reduction in our captive alumina cost to $308 per tonne, and this is significantly below current coal prices. On Bauxite, Arisa Bauxite delivery from Arisa Mining Corporation is progressing well. OMC Bauxite will meet one-third of our Bauxite requirements for the year. Other than these initiatives on the marketing side, the plans to achieve at least 50% EAP sales in the fourth quarter as compared to 45% that was achieved in the third quarter. Based on all of these improvements, we are confident of achieving our costs of production guidance, which we outlined earlier. Turning to some of our other businesses. Production at Electrosteel has been on the rise, owing to improved availability of raw material, enhanced plants availability, utilization and management interventions. Total production for the quarter was 325,000 tonnes, 14% higher quarter-on-quarter and in line with our own previously stated priorities as we achieved a run rate of 1.5 million tonnes in December 2018. Despite the challenging conditions in the steel market, we improved our per tonne margin from $90 a tonne in the second quarter of 2019 to $120 a tonne reported in the third quarter. The team is now focusing on its next phase of ramp up of up to 2.5 million tonnes per annum design capacity. Turning to iron ore. Our business in Goa continues to be impacted by the Supreme Court judgment on the suspension of industry-wide mining operations in Goa. Our team is continuously engaged with the state and central government with support of the people who are adversely impacted by the suspension for the earlier resumption of mining in Goa. In Karnataka, the saleable ore production was 0.7 dmt. At Copper India, the recent developments have been directionally positive with the Supreme Court upholding the NGTs order. We continue our efforts on the legal front and are working towards enhancing our public outreach even further. We have launched several development projects worth approximately INR 100 crores for the community of Tuticorin after consultations with them. These include an innovative Smart School, a world-class hospital, water supply for nearby villages, youth skilling program focused on employment, sports and entrepreneurship and a women development resource center. We’ve also committed to planting 1 million trees in and around Tuticorin towards enhancing the district’s green cup. These announcements were welcomed by the local community. We plan to engage the communities on an ongoing basis and relevant stakeholders to execute these projects in a timely manner. To summarize, if I can pass the call over to Arun first, before I come over to summary, Arun will walk you through the financial overview.

[Arun Kumar:]

Thanks, Venkat, and good evening, everyone. As outlined by Venkat, the December quarter that went by further consolidated well compared to the sequential September quarter with the investment in growth projects starting to show up in terms of higher productions from Zinc India especially at Rampura Agucha mines; direction of structural cost changes at Aluminum business being positive; sustained turnaround at our steel asset [indiscernible] Electrosteel with production hitting almost to capacity; and starting to get around initial feeding issues in its now-completed plant, and Oil and Gas starting to deliver increased narrow declines plus commencement of steps towards exploring all air blocks. Some key highlights that went by as our CEO already outlined. The EBITDA was higher 13% quarter-on-quarter with the robust margin of about 29% for all of the reasons mentioned above. ROCE continued to be strong mid-teens. Net debt, however, increased by INR 13,174 crores, mainly on account of dividend payout and temporary increase in working capital, which will be recouped in the upcoming March quarter. Net debt-to-EBITDA ratio will remain strong at 1.5 times. While we have a detailed income statement in the appendix, some key updates from there. Depreciation is up and in line with the higher production volume and capitalization in Oil and Gas and Aluminum businesses, all in line with our planned growth investments. The interest income line is higher this quarter sequentially, mainly on account of the mark-to-mark gains on the debt SMPs and other investments in our portfolio as compared to the mark-to-mark losses that we had in the sequential previous quarter. We continue to monitor all our surplus cash investment closely and they continue to be deployed in high-quality instruments, which we review periodically on an internal review, given the market environment that we are in. It’s useful to note, just as a reconciliation point, that the other income line in the published advertisement outside of these presentation pages will include the interest income and a few small items typically, but this quarter also includes a one-time liability write-back on account of settlement agreement with the contractor at BALCO of around INR 350 crores, which is also available in our notes to accounts in the Regulation 33 Act. There is no change in the full year tax rate guidance at around 30%. Between the quarters the effective tax rate swings will be more to do with timing, mix and deferred tax accounting, but I draw your attention back to the full year tax guidance at 30%, which remains unchanged. Finally, the notes to accounts in the just-released statutory results also cover an update around our oversea subsidiary CIH purchasing an economic interest in a structured investment in Anglo American PLC, held by the ultimate parent Voltan. This investment was made in December and has subsequently performed positively on an unrealized mark-to-mark basis. Moving on to the EBITDA bridge page; as you can see on the EBITDA bridge page, the sequential growth is being driven by cost and volumes. The others bar, of course, includes the one-time liability write-back, which I mentioned earlier, while covering the income statement. But broadly, the lower LME did impact earnings adversely as you can see on the left side of the chart, but thankfully made up by higher volumes and some help from currency. We do look forward to the operational factors of Oil and Gas volumes with additional wells starting to come online plus the gas bridge project. Zinc India getting stronger with the SK shaft commissioning and the Ravva mill commissioning, likely stabilization of Gamsberg in quarter four, better cost trend in aluminum to start all playing up in quarter four and a few more growth triggers as outlined by Venkat earlier for the broader FY2020. As normal, we will provide the guidance for FY2020 in the year-end call. Moving onto the next page on balance sheet, we stay focused on debt management. All the FY2019 maturities were refinanced at the beginning of the year itself, enabling us to efficiently navigate a choppy market with tighter liquidity situation and widening credit spreads. However, we continue to enjoy excellent relationship and credibility with the public sector and the private banking system who are keen to do business, given the balance sheet strength and growth projects pipeline. We will continue to manage the maturity profile proactively as well as stay ahead of the regulatory and market changes. While I covered the interest income lines earlier on the cost side, we continue to have a weighted average approximately 8% financing cost. Most of the INR borrowings continued to be at industry-leading spreads. The cash investments continue at robust levels. For dividend, we ended with about INR 30,000 crores, still one of the largest corporate treasuries in the country. With that, let me hand it back to Venkat for the summary.

[Srinivasan Venkatakrishnan:]

Thank you, Arun. If I can take you back to slide number 13, the summary slide. As we said, we have started the ramp up across all of the businesses, and we’re progressing very well and that would lead to better top line and bottom line growth in Q4. We should especially see a good quarter at our Zinc India business, which is poised for a record MIC and silver production in the fourth quarter and it remains on track for 1.2 million tonnes per annum MIC capacity for the year 2020. And Gamsberg, we’re looking forward to an accelerated ramp up in Q4, positioning us well for next year. In our aluminum business, we are on a favorable cost trend, and we expect the same to continue on the back of increasing coal linkage and alumina ramp up at Lanjigarh. In our Oil and Gas business, our growth projects are ramping up, the result in increased volumes in the fourth quarter. We’re also geared up to realize the full potential in OALP and the exploration blocks. At Copper India, post a favorable Supreme Court order we are working with the community and relevant stakeholders to expedite the reopening of the plant. In our steel business, we achieved our medium-term targets to ramp up to around 1.5 million tonnes per annum, and are focusing on the next stage of the expansion. Some of these may be the last few jigsaw pieces in our overall strategy that we’re putting in place for a stronger fourth quarter and full year 2020. I’ll now hand you back to Rashmi.

[Rashmi Mohanty:]

Yes. Operator, we can now take in questions.

[Operator:]

Sure, thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question is from the line of Anuj Singla from Bank of Merrill Lynch.

[Anuj Singla:]

Yes. Good evening, sir. Sir, I just have focus on investment that you have made in Anglo. So I have three key questions on that. Firstly, we have been emphasizing that our capital allocation is focused on either investment in the high IRR projects or deleveraging or shareholder returns. So just wanted to understand, how does this investment fit in with our overall capital allocation strategy?

[Arun Kumar:]

Yes. Thanks for the question, Anuj. This is part of our regular cash management at the subsidiary, which invested its surplus cash instead of parking in low return foreign currencies fixed deposits. It found an attractive return in this structured investment and that is where rationale for this transaction. It has nothing to do with the capital allocation or otherwise.

[Anuj Singla:]

Okay, so secondly sir, can you explain the structure a bit? Because on the press release also mentioned the ownership still – and you also mentioned the ownership still remains with Volcan? What is the structure like? And is there a lock in – inherent lock-in, in the structure?

[Arun Kumar:]

As we mentioned in the press release as well as the notes to the accounts, this is an economic interest purchased from the ultimate parent Volcan Investments. And it is the ownership of the underlying shares and the associated voting interest remains with Volcan, and investment of subsequently performed positively as well on an unrealized mark-to-mark basis, as I mentioned, during my talk track.

[Anuj Singla:]

Is there a lock-in, sir?

[Arun Kumar:]

Yes, there will be a period of about 20 months for this investment.

[Anuj Singla:]

Okay. And sir, lastly, there have been questions from some other investors that Volcan is already a shareholder in Anglo, and one of the significant shareholders. So does this investment imply some kind of further collaboration between Vedanta and Anglo going forward?

[Arun Kumar:]

As far as Vedanta subsidiary is concerned, CIHL has just made an economic investment. Ownership and all the voting rights on the stake, however, remain with Volcan.

[Anuj Singla:]

Sir we shouldn’t be extrapolating it to any kind of further – any kind of corporate action at all between Vedanta and Anglo? So understanding is correct, right?

[Arun Kumar:]

The CIHL is only focused on the economic interest as part of its overall cash management.

[Anuj Singla:]

Okay, sir. Thank you very much.

[Operator:]

Thank you. The next question is from the line of Sumangal Nevati from Macquarie. Please go ahead.

[Sumangal Nevati:]

Yes, good evening. Thanks for the chance. Just a follow-up question from Anuj’s question. Of this $200 million, how much have you invested so far? The note says we have partly invested currently. And the second is, I mean, how are the returns better, I mean, is it – are the returns linked to the equity returns or there are some bond proxy and fixed return guarantees by Volcan, if you can elaborate that.

[Arun Kumar:]

Yes, as we mentioned the investment has performed positively on an unrealized mark-to-mark basis, indicating that it is linked to the underlying share price of Anglo American PLC. And as regards to the payment made, as we mentioned in our notes to account, what we meant to say is that we have paid approximately USD 200 million or INR 1,431 crores out of the cash surplus, which was deferred from CIHL for this transaction during the month of December.

[Sumangal Nevati:]

I understand. Second question is with respect to Gamsberg. Now the slide say MIC shipped in December but commissioning is still underway. And also we’ve just guided 20 kt this year versus 75 kt in the previous quarter, which we were guiding. This implies only one month of commissioned volumes. So if you can just share an update on that and what are we looking for next year FY 2020, and the slide says more than 200. Is that FY 2020 guidance?

[Arun Kumar:]

In fact, with regards to Gamsberg, I will respond initially and then pass the phone across to Rashmi to cover. With regards to Gamsberg, as we said, the ramp up is in progress. There has being some teething issues in terms of plant, it’s completely natural for those sort of teething issues to happen. Our approach is, rather than fixing it on the go we’d rather pause, ensure that it’s completely aligned, we deal with all of the teething issues then we get a much steeper ramp up further down the line. So we’re still looking at 250,000 metal in concentrate production, capacity going into 2020. There might be some timing differences here and there, but that’s certainly where we want to get to in terms of Gamsberg production for 2020 calendar financial year. Rashmi, anything you want to add?

[Rashmi Mohanty:]

Yes, thank you, Venkat and thank you for the question. Just to recap, the delay we’re seeing is actually a deferment. We were hoping to start up in the middle of calendar year 2018. So we’ve been in trial production for the last quarter. So the 75,000 tonnes guidance relates to the quarter [indiscernible] originally. But since then, as Venkat has said, we are really looking at making sure that we can process as close to the 4 million tonnes that is mined through this plant. What we are targeting now is almost to reach about 80% of that. So that shipped under 260,000 tonnes of throughput through this plant by March. So rightly said, 20,000 tonnes on the full production will give you one month but this is actually the ramp up in terms of availability utilization and then the metal build up in this quarter that we are targeting. But key to note as a Venkat said, it does not make sense to run this plant on stop-start. We are targeting to get to a continuous operation where we complete maximum 80% of the throughput in March. And that’s ramp up from January up until March will give up that 20-plus thousand tonnes guidance for the rest of this year.

[Srinivasan Venkatakrishnan:]

And just to supplement Rashmi’s response, what we are also seeing is recoveries are basically as we have originally planned. So there’s good news as far as that is concerned. And also in terms of the metal content has been quite positive as well.

[Sumangal Nevati:]

Understand. One just last. Yes, please go ahead.

[Rashmi Mohanty:]

No, what I did to say to Venkat’s point, the shipment in December which was about 2,200 tonnes of MIC, to double that in terms of dmt concentrate with on specs. So we’re really encouraged with the initial results we’re getting in terms of recovery and on spec concentrate grade.

[Sumangal Nevati:]

Understood. Just one last small clarification with respect to Zinc India. Few days back, the company had maintained its guidance of slightly higher production where as we have now revised to slightly lower production. So if you can just clarify that, that will be my last question. Thanks.

[Srinivasan Venkatakrishnan:]

Yes, Sunil is on the line, he can clarify because we have not made any changes to the guidance. Sunil?

[Sunil Duggal:]

No, there is no change in the guidance. We said that the MIC production could be slightly higher than the last year but the finish good could be slightly lower than the last year. So, which is a resultant of what the MIC production would be there.

[Sumangal Nevati:]

Got it. Thank you and all the best.

[Operator:]

Thank you. The next question is from the line of Indrajit Agarwal from Goldman Sachs.

[Indrajit Agarwal:]

Hello, sir. Thank you for the opportunity. My first question is again relating to the advance that we have – investment that we have made in Volcan. Now you see that we still have surplus cash in K&N India holding. So is there a likelihood of further investment in the same entity?

[Arun Kumar:]

As I clarified earlier, the note also says that we have made the part payment and definitely there are further installments to be paid towards this investment and economic investment that we have made as part of the regular cash management activity there.

[Indrajit Agarwal:]

Can you quantify that, sir? Roughly how much?

[Arun Kumar:]

Yes, approximately around INR 2,000 crores will be paid over the period that I outlined earlier.

[Indrajit Agarwal:]

Okay, this is an addition to what we’ve already paid?

[Arun Kumar:]

Absolutely, right.

[Indrajit Agarwal:]

Okay. That clarifies. Sir, second question on your Slide 30 on aluminum cost – aluminum profitability bridge. If you look at the conversion and others, it’s a cost item but it’s a slight positive number. Can you explain how come this is a positive number?

[Arun Kumar:]

I think, Mr. Ajay Dixit can clarify the cost initiative that we are taking up in the aluminum site that broadly the conversion and other could be an outcome of increased efficiency primarily coming out of the Balco production line. So is there something that you want to update Ajay? And it’s also driven by the contractor – the liability write-back that we have mentioned here.

[Ajay Dixit:]

Yes, beside that, Arun, you’re very right, these two plus we had significantly controlled the fixed cost also. And this has also helped us, and we also have some scratch tail put all together has contributed to this.

[Srinivasan Venkatakrishnan:]

And to put in context that number is $11 per tonne out of 1,900 just to put in context.

[Ajay Dixit:]

Yes, yes.

[Indrajit Agarwal:]

It tells about 72 if you compare quarter-over-quarter. When in the benefit of lower benchmark alumina cost kick in, in our numbers?

[Arun Kumar:]

Can you repeat that?

[Indrajit Agarwal:]

The lower benchmark alumina cost. Alumina cost globally has fallen. Is that capital in this quarter cost, or we can see further reduction?

[Arun Kumar:]

Ajay, you want to take that?

[Ajay Dixit:]

Yes, so this is a very recent phenomenon as you see and normally it takes two months minimum to come to the books directly. So this recent cost reduction will come sometime end of March to the beginning of April.

[Indrajit Agarwal:]

Sure, thank you. And sir, my last question is one of the reasons for lower Zinc International cost of production was improved copper credits. How much of that is sustainable? And how much is one-off?

[Srinivasan Venkatakrishnan:]

Rashmi, do you want to pick that response.

[Rashmi Mohanty:]

Yes, Venkat. Certainly, it’s not sustainable. The cost is actually included in the ore body. This is a polymetallic ore body zinc, lead, copper as well as silver. So we have to schedule through our mines plan in terms of when we would get the stocks for a bit of a high copper. If you look at the first two quarter of the year, we are slightly behind, and to put that into dollar million would have been of an average of $8 million average in the first two quarters. This quarter is a one-off at approximately $11 million. So mine planning dependent and we obviously chase zinc and lead and the copper is actually a bi-product that we try and maximize. But it is absolutely a sweetener, so we have asked the team to relook if there is any optimization that we can do around it.

[Indrajit Agarwal:]

That answered my question.

[Operator:]

Thank you. The next question is from the line of Pinakin Parekh from JPMorgan. Please go ahead.

[Pinakin Parekh:]

My first question relates again back to Volcan investment. Historically, the predecessor company of Vedanta have made India group investments and equity investors had...

[Operator:]

Mr. Parekh, we are unable to hear you clearly?

[Pinakin Parekh:]

Have not appreciated the investment that were made in the group companies. In that background, how do we – is there a line on what – how much investments would be made by Vedanta into the structure investments or is this something, which would be reassessed every quarter, depending on what is the cash flow available to invest?

[Srinivasan Venkatakrishnan:]

Pinakin, thanks for your question. This is a one-time investment and the amount cannot really go up because it is the economic interest – there is a locked-in portion representing the share price movement of approximately 25 million shares, which is already the upside that the ultimate parent Volcan enjoys from this original instruments. So to that extent, it is a cash flow cash management decision taken to get superior returns compared to parking a USD denominator fixed deposit as you know will earn anywhere between 1% to 3% depending on tenor and bank. So it’s purely to get attractive returns. So there’s no concept of investing more if there is – between quarters if there is more cash flow. It’s a one-time thing.

[Pinakin Parekh:]

Okay. And sir basically if there is a higher economic interest opportunity Vedanta would not pursue beyond this, roughly $0.5 billion?

[Arun Kumar:]

That’s right, because that is the current structure and that is how the economic interests are shaped up. You not have the – the rest of the increase would actually come in Vedanta Limited book, which is exactly why the investment has been made. There is nothing else that is remaining further on it, which is the case management decision that have been taken.

[Pinakin Parekh:]

Sir my second question relates to copper smelter. Now we understand that the Supreme Court would at some point of time pass an order and the NGT order has been favorable. Now given that the Tamil Nadu Government has revoked the consent to operate and the land lease has also been canceled, can a favorable Supreme Court order allow the company to restart the smelter? Because without the land lease and without the CTE, I mean, can a restart happen or would the company have to go through each one of the regulatory requirements separately and the court route for those?

[Srinivasan Venkatakrishnan:]

Yes, it’s Venkat, let me pick it up. Firstly, as you have seen, the NGT order is pretty specific and pretty favorable as far as the company is concerned. And it did say come back to the court, to the NGT if certain things haven’t happened. Subsequently, the Supreme Court has also reaffirmed the position in that regard. So from our point of view, the matter is being heard by the court, the court is hearing all sides to the argument and so did the NGT and so did the Supreme Court in the first instance. So certainly, the relief we are seeking is specific, in terms of getting all the consents we need to be able to operate the plant. So that matter is being heard. We are without second guessing the outcome of the court, we are optimistic in that regard. And ultimately, the rule of law will prevail but certainly from our side, we have actually adhered to all of the requirements which were made of us, in terms of needing to open the plant. For us, it’s the bigger picture here to take as well. Because having visited Tuticorin and seeing what it looked like before, we are seeing the impact it’s having in the local community in terms of employment, in terms of what’s happening to fertilizer plants, what’s happening in terms of small and medium enterprises et cetera. So, I think it’s in the interest of everyone to have the plant reopened and that’s certainly the direction, in which we are actually taking this forward.

[Operator:]

Thank you. The next question is from the line of Tejas Pradhan from Citigroup. Please go ahead.

[Raashi Chopra:]

This is Raashi here. Just coming back to the question on the economic interest, just to understand this correctly, another INR 2,000 crores will be invested over the period of 20 months?

[Arun Kumar:]

Yes, absolutely right.

[Raashi Chopra:]

And on a realization basis, I understand that there is a mark-to-market gain that we can see, but what is the realized gain in the end? The realized gain is going to be what the eventual price of the annual share would be at the time if there’s a swap eventually or...

[Arun Kumar:]

That’s right. your understanding is right.

[Raashi Chopra:]

Okay. And you said the next charge of INR 2,000 crores, that will still go from the Cairn subsidiary or that will come from Vedanta Limited?

[Arun Kumar:]

You’re absolutely right, it will go from the CIHL.

[Raashi Chopra:]

Okay. Okay, thank you. And the other question that I had was on Cairn, what do you – I mean what do we look for in terms of the volume. I know you said that you give the guidance in the next quarter, but how does one think about Cairn’s volumes going forward into the next year?

[Srinivasan Venkatakrishnan:]

I think with regards to Cairn’s volume, next year, you will certainly see a step-up. We are in the process of finalizing our business plans and understandably, all of these projects in terms of improving production volumes, tight oil, tight gas and getting additional liquid handling capacity all kick in. I’d rather wait till we announce our result at the end of this year, but certainly you can effectively, in your assumptions, you can factor in a step-up in the Oil and Gas production coming from Cairn, but we’d rather not give the numbers out now, we’d rather give it as guidance for next year when we announce our results.

[Raashi Chopra:]

Okay. Thank you. That’s it from me.

[Operator:]

Thank you. [Operator Instructions]. The next question is from the line of Amit Dixit from Edelweiss. Please go ahead.

[Amit Dixit:]

Thanks for taking my question sir. Can we please go back to Slide 30, wherein you have included a note that cost or whatever – operating cost includes write-back of liability. So, is your conversion and other’s credit solely, because of write-back of liability?

[Arun Kumar:]

That’s right. as you rightly pointed out, it should have the asset mark out there. There are lot of good work that has happened in the efficiency side in the fixed cost control, but obviously, there will be a conversion cost, which in this quarter since it has conversion and others is offset by the liability write-back. So excellent observation and you’re absolutely right.

[Amit Dixit:]

So sir my follow-up question here is that, since it is announced almost $97 per tonne, so that means without it, the aluminum division EBITDA would actually have been negative this quarter?

[Arun Kumar:]

The Aluminum division EBITDA, as you rightly observed, will be almost flat without that because there are other negatives also, because the other lines we are only pointing one single item. So it would be almost even, and which is where maybe I will invite Ajay Dixit to brief you further. As earlier in the conversation, there were good observations on some of the trends that are happening on increased bauxite volume and reducing alumina cost as well as some of our coal leakage tranches coming in quarter four. Ajay, you want to just brief?

[Ajay Dixit:]

Yes. So, one thing important over here is that we have significantly improved on the power ore generation, which in earlier times to a certain extent we were importing power from the grid. So, there has been a significant improvement in the power on this side. And as you would have also seen in case of alumina, by increased proportion of the Orissa bauxite and improvement in the plant specifics, we have a $50 improvement in the alumina cost coming out of Lanjigarh. In case of what you’re mentioning is conversion and other cost, the other benefit, which I said that we have significant improvement even on the fixed cost, which has been reduced and as well as [indiscernible] this is also included. So all put together, I would say we have worked almost in every aspect of the overall operation in the alumina, but however, there has been a dip in the alumni so all put together has putting up a flat practically December this quarter, which we have seen we’re slightly positive but it is not that it would have been negative without this, the conversion what you just mentioned over here, the liability topic.

[Amit Dixit:]

Thank you so much for the elaborate explanation. My second question is with respect to Aluminum division again. Now you have guided that the ultimate aim is to see this cost of production goes down to $1,500 per tonne. So would it will be possible to give a time line? And secondly, how is it going to – Imean, how much alumina cost you were expecting, how much power cost there will build up, whatever initiated target.

[Srinivasan Venkatakrishnan:]

If I can pick that up and then pass it to Ajay. As we said, we do want to get to $1,500 per tonnes as quickly as we can; in fact tomorrow if we can do it. But in the last call, we did say it’s a journey. We’re going to move a number of levers to get there. Our ultimate objective is I have had to do the split of $1,500 it would be 600, 500 and 400 in simple terms. And certainly the journey from October 2018 to where we are now in December 2018 has seen a good reduction in terms of Aluminum cost, and we have actually started about roughly 17% of journey already in 1 quarter. We would like to see that progress steadily and get to $1,500 as quickly as we can. The levers are obviously getting increased bauxite, basically better linkages in terms of coal to get to 0 power import and having enough stockpile of coal and also sorting out all of the logistical issues and logistical bottlenecks in this regard. And getting maximum alumina production through Lanjigarh refinery but Ajay can elaborate more. Ajay?

[Ajay Dixit:]

Yes, so I would say, well summed up by Venkat, when we are saying coal initiatives the topic, which we are picking up is both the inventory and the coal cost. So initially we were operating at a very low inventory as you know that there was a strong direction from the government to transfer most of the coal to IPP and also the mine production was low. So this has picked up and so we have a good response from Coal India. And today we are running at a coal stock of 10 days and this is making up a good progress on the continuous learning of the power plant and also there is a significant portion of the coal which is coming out of our backlog of the Lincoln coal, which is flowing in now. We have also got Tranche IV and thereby increasing our coal security to 72%. So all this put together, we’re seeing a very positive traction coming out of the coal. Alumina, we have ramped up to, I would say production rate of close to 2 million tonnes and when this is factored by the bauxite sourcing the OMC is ramping up going to give us the full capacity what – which is committed out of the OMC mines. This year we would be getting close to about 1.7 million to 2 million tonnes. Next year, obviously a bit more. We also have a long-term tie up with EGA for a very high quality of a bauxite, which will give us a better yield, which starts flowing in, in this year and then from June, July, of this year. So all this will bring down also significantly the alumina cost, which is a significant factor in the overall. So in the journey what Venkat mentioned 600, 500, 400 is something like alumina cost around 600 and 500 is around power and 400 is around rest of the other topics all put together totaling up to 1500.

[Amit Dixit:]

Thanks. sir. Thanks again for the elaborate explanation. I have couple of more question, but I will back in the queue. Thank you.

[Operator:]

The next question is from the line of Abhishek Poddar from Kotak Securities. Please go ahead.

[Abhishek Poddar:]

Hi, sir. Thanks for taking my question. Sir on Anglo you did mention that the reason for investment is that it is better than the investment in foreign instruments. And you also mentioned that the share price movement of Anglo will command returns. So just wanted to understand is that a minimum return that has been granted on this and how should we thinking about it in the share price fall?

[Arun Kumar:]

I think, we should think about it as purely a mark-to-mark transaction. And as you can see it is already demonstrated with a positive unrealized gain since entry. So it’s a good investment for that CIHL has taken and is called on getting attractive return versus a benign FD return as proved positive so far.

[Abhishek Poddar:]

Right. So is there any minimum return, which has been guaranteed on this?

[Arun Kumar:]

I think there are a lot of commercial details in the investment, which is better not discuss on the broader call. But it will be a positive upside, it has been well considered while the investment has been taken by CIHL and should return it – should result an attractive returns.

[Abhishek Poddar:]

All right. So second question is on the Malco [ph] EBITDA that you had shown as Rs. 350 crores. So that includes the part of the liability that is return back?

[Srinivasan Venkatakrishnan:]

You’re absolutely right. It includes reliability that has been return back.

[Abhishek Poddar:]

Okay. Thanks a lot sir.

[Operator:]

Thank you. The next question is from the line of Stephanie Woo from HSBC. Please go ahead.

[Stephanie Woo:]

Hi, my question maybe to Ventak. Just enter the coin again in order to prevent future flare ups of this nature. I mean it probably outreach program that you aligned is very detailed and its great. But how we thought about investing and mitigating technology for example in this authorization unit, et cetera to kind of basically show future issues will not arise because we have invested in sort of mitigating the emissions of sulphur dioxide and also the – just the green house gases.

[Srinivasan Venkatakrishnan:]

Couple of comments here, firstly, in terms of the Tuticorin smelter is one of the best in the world when you compare its own track record in terms of the latest technologies had, and in terms of emission rates, et cetera. So it’s very well advanced. But having said that, we would want to rest on laurels when we did the benchmarking it came out very similar to the smelter, let’s say Hamburg for example in terms its emission rates and it’s track record. Having said that, we don’t want to rest on our laurels, we will continue to benchmark and if there are additional step we could think of to improve the environmental record of the plant even further, no hesitation naturally looking at those.

[Stephanie Woo:]

Okay, great. Did we actually publish all this data? Or is this publicly available for us to compare?

[Srinivasan Venkatakrishnan:]

Yes. There is a web page provided on our website and in addition to that, we can actually provide any additional information you need. It’s available.

[Stephanie Woo:]

Okay. Great. Thank you. And then on the aluminum side. I mean, thinking about the kind of press that the Elesis [ph] JV between Alcoa, Rio and Apple is obviously underwriting the commercialization of zero omission Aluminum production process. And like large MMCs like Nestlé have also committed to taking Aluminum from this new kind of production process and starting from 2024. What is Vedanta doing on this front to move towards this kind of new style of zero carbon emission Aluminum process?

[Srinivasan Venkatakrishnan:]

Ajay, do you want to pick this up?

[Ajay Dixit:]

Yes. So, I would say as far as the carbon intensity per metric ton is concerned, we intend to improve by 15% in coming three years time.

[Stephanie Woo:]

Okay. That’s using a traditional production process. But what I’m talking about is the investment that has been made by Alcoa and Rio Tinto together with Apple in the zero carbon Aluminum process and then I think they plan to commercialize from 2024. So obviously, granted it is still 5 years away. But it seems like maybe we’re going towards a kind of very different kind of disruptive technology in the Aluminum space. Are we also investing in a [indiscernible] and researching this process?

[Ajay Dixit:]

Yes, we are working on improved efficiencies of cell house and improved current operation in the cell. So with this, the power consumed for per metric ton of the Aluminum reduces and this is going to reduce the carbon footprint even on the per metric ton. In any case, what we are wanting to do as we ramp up, we don’t intend to ramp up the overall power installed capacity, and we want to rely on the internal efficiencies while we move up. And therefore, this will reduce. So we are more focused on the our type of power generation program and also on the efficiency improvement programs, which we are doing with the help of digital technology on our cell house as well as on the power plants.

[Srinivasan Venkatakrishnan:]

Stephanie, with regard to your point, certainly we will continue to look at alternative technologies that are available. One has to understand that in India, a developing economy is reliant on coal power energy sources but that doesn’t mean to say we can’t look at it. For example, at our zinc operations, we have got renewable power, which is powering around 250 megawatts. We’ll certainly look at it from the Aluminum point of view smelters are difficult to operate on renewable power but doesn’t need to say that it can’t be done. We will continue to look at it, and we will actually have the discussion with Rio and Alcoa as well to see what they have done and effectively see that’s applicable and it’s something we can actually do because nothing like preparing for substitution.

[Stephanie Woo:]

No, sure. But I think it’s not just about renewable energy in, but it’s also about emissions out. Basically they claim that their new technology will enable them to emit oxygen rather than greenhouse gases. It’s a very different proposition but granted we can look at that in the future. And one last question on the Anglo investment. I think at the time that Volcan made the investment they pledged the Vedanta PLC shares, the London listed ones when they underwrote that convertible bond. But now after the delisting of the PLC, is there any share pledged going on the Indian holding, on the LTD? Or what was that replaced with as collateral. that share collateral that was pledged in the process?

[Arun Kumar:]

Stephanie, this is a question relating to what Volcan has done, and I’m afraid, we are not in the know what is happening in Volcan as Vedanta Limited management.

[Stephanie Woo:]

I appreciate it, but I’m just worried about the overhang that might exist on our shares today.

[Arun Kumar:]

We can confirm that Vedanta limited shares have not been pledged anywhere.

[Stephanie Woo:]

Okay, great. That’s all I wanted to know, thank you very much all.

[Operator:]

Thank you. Ladies and gentlemen due to time constraints, we will be able to take our one last question that is from the line of Ashish Jain from Morgan Stanley.

[Ashish Jain:]

Hi sir good evening. Sir, my first question is again in going back to the investment, just to clarify you said that the balance INR 20 billion will be invested over the next 20 months. So the lock-in that you said is also 20 months, is it starting December or is it based upon when the each investment is done over the next 20 months?

[Arun Kumar:]

The investment that’s started in December, and for the period I mentioned earlier, there will be a schedule of paying what we call a deferred liability. And just to clarify, the number I could hear it will I had mentioned earlier just about INR 2,000 crores into those 20-odd months. So that’s the broad summary that I have recapped.

[Ashish Jain:]

No, sir, I’m still not sure when will these be redeemed? Is there a defined period on when it will be redeemed?

[Arun Kumar:]

So it will be at the end of 20-months and around you could say March 2020-ish and October 2020. So I’m just averaging the two and giving you a number.

[Ashish Jain:]

Okay. And sir, before that does Volcan – at that point of time, if you want to continue the investment – basically this is a pic which is already kind of a investment. Is that how we should think about it?

[Arun Kumar:]

You’re absolutely right.

[Ashish Jain:]

And sir, I think this question was asked earlier but let’s say because it’s appointed maturity, if Anglo shares are let’s say below our investment price, we will be booking losses or there is a way for us to be compensated on that?

[Arun Kumar:]

I think we do have the mark-to-market exposure, as I outlined earlier. And we are definitely hopeful that this will be a good return beyond what we have earned in regular products.

[Ashish Jain:]

No sir, I understand that but it’s a contingent thing. So I’m just trying to see is our downside protected in any form or it’s completely dependent on how the market does?

[Arun Kumar:]

In certain situations, the downside is protected. It is just not so prudent on our part to share all the commercial details. However, it is protected in certain situations, and we will keep giving the updates during the quarter ends.

[Ashish Jain:]

Okay. Sir, Just on the copper business now, can you put a timeline by when we should think it’s possible to restart the smelter? Is it is possible to share any timeline on that?

[Srinivasan Venkatakrishnan:]

I think we wouldn’t want to speculate what the court time line is that’s taking the courts for granted. I think it would be inappropriate. For us the bigger objective here is to reopen the smelter with full support of the local community and all of the stakeholders. If that takes an extra month or two, no issues on that regard. We’d rather have full support when we go in.

[Ashish Jain:]

Understood, sir. Thank you so much and best of luck.

[Srinivasan Venkatakrishnan:]

Thank you.

[Operator:]

Ladies and gentlemen, that will be the last question. I now hand the conference over to Mrs. Rashmi Mohanty for closing comments. Thank you and over to you ma’am.

[Rashmi Mohanty:]

Thank you, everyone, for joining us today for our results presentation for third quarter FY 2019. As always if there are any follow-up questions on the – you can reach out to the investor relations team. Thank you.

[Operator:]

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