Vedanta Limited
Q2 2015 Earnings Call Transcript

Published: 2 Aug 2015

[Operator:]

Ladies and Gentlemen, good day and welcome to Vedanta Limited Q1 FY 2016 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 Mr. Ashwin Bajaj, Director of Investor Relations. Thank you, and over to you, sir.

[Ashwin Bajaj:]

Thank you, operator. Hello, ladies and gentlemen. This is Ashwin Bajaj, Director of Investor Relations for Vedanta Limited. Thank you for joining us today to discuss our results for the first quarter of FY 2016. On this call, we will be referring to the presentation that is available on our website. Some of the information on today’s call may be forward-looking in nature and will be covered by the Safe Harbor language on Page 2 of the presentation. From our management team we have with us our CEO, Mr. Tom Albanese; our CFO, Mr. DD Jalan; we also have Mr. Mayank Ashar and Sudhir Mathur from Cairn India; Mr. Abhijit Pati from our Aluminium business; Mr. Kishore Kumar from our Iron Ore business; and Mr. Ajay Dixit who recently joined us to head our Power business. So with that, I’ll hand it over to Tom.

[Tom Albanese:]

Thank you, Ashwin. Thank you, operator, and good evening, ladies and gentlemen. I’m pleased to welcome you to Vedanta Limited’s first quarter of fiscal 2016 earnings call. As all of you know, I don’t need to tell you, the resource sector has been witnessing a challenging period due to the decline in commodity prices. We’ve seen a fall in demand from China and new supply additions in some of our products. This has been reflected in the performance of the mining and the oil equities over the last year. And I think that even more important than that right now would be the macro effect of confidence. So while the macro risks of supply-demand and commodities from the U.S. dollar strengthening are important, the other things that have been weighing on confidence include the recent challenges in Greece, the Chinese Shanghai Exchange recent equity sell-off, additional oil supplies anticipated to come into market as a consequence of lifting of Iran sanctions, and of course, the overall sentiment and uncertainty that comes about from all of these various items. All these leading to continued uncertainty. So we have a difficult market environment. In many ways, I think this is as difficult a commodity space we would have seen back in 2009. So it reinforces the importance of what we’ve been saying, which is following a disciplined approach to capital spending. Looking for efficiencies in our operations will certainly be the key to managing this period of volatility. At Vedanta Limited, we’ve been implementing a series of initiatives to reduce capital expenditure and operating costs while maintaining financial strength during this period of weaker commodity prices and ultimately preserving the strong resource position and the optionality around our portfolio of high-quality assets with attractive long-term growth prospects. So maybe let me start the review of first quarter performance with Slide #4 on safety and sustainability. On safety it’s certainly with my own personal deepest regret that we had to report the loss of four of our colleagues in the last quarter. Now, this is a deep disappointment for the organization particularly since we’ve been seeing so much improvement during fiscal year 2015, which had been one of the safest years in our history, so we do have certainly work that needs to be done. And I just want to reinforce to all of you, analysts and shareholders alike, we are redoubling our efforts to improve and achieve our objective of zero-harm. And I think from a sustainability standpoint, a notable development this quarter was, we published our first Tax Transparency Report in line with our commitment to increase our communication with all our stakeholders including our host governments. Moving on to Slide #5, operationally we’ve had a good quarter with higher production in Zinc-India, Copper India, and Aluminium and Power compared to last year; and stable production over the period in oil and gas. We also started pre-stripping at the Zinc Gamsberg Project and in iron ore, we started sales from Karnataka and we’re well positioned to start mining in Goa after our monsoon season. Financially, the EBITDA was flat quarter-on-quarter in spite of an adverse impact of Rs. 414 crores due to the provisions in the renewable power obligation from the previous year. I would like to draw your attention to the increase in the contribution of zinc to our EBITDA, now accounting 47% of our group total, up from 27% in the first quarter of last year. As you know, the zinc fundamentals are quite strong as almost 5% of future zinc supply is going to be coming out of the market over the next six months with the closure of the Century and our own Lisheen mine. This strong performance of zinc during the period of commodity price pressure for other divisions of the group underlines our rationale for investing behind a well-diversified set of Tier 1 assets. In line with our stated strategic priority in simplifying the group structure, we also during the quarter announced the merger of Cairn India Limited and Vedanta Limited, of course, subject to the approval of the minority shareholders in both companies. So with that, let me move on to Slide #6 and talk about the merger. I do believe the merger is a win-win situation for all shareholders in both Vedanta Limited and Cairn India Limited. With this transaction, we’ll reinforce our position as the only large diversified Indian natural resources major with a suite of Tier 1 assets across a number of commodities. The scale and diversity of the asset base will reduce earnings volatility and increase the stability of cash flows through the cycle. Recently we’ve seen a downward price movement in oil to $52 a barrel for Brent, and that only reinforces the value of this merger to Cairn India shareholders. So we’ll focus on delivering long-term value to all shareholders by continuing to allocate capital with this merger, the most compelling growth opportunities across commodities and across geographies. This transaction will provide the group with significant financial flexibility to distribute strong sustainable dividend to all our shareholders. Cairn India minority shareholders will all have the opportunity to obtain exposure to the significant upside of Vedanta Limited, which I’ll summarize in three key points. First, from the strong growth pipeline that’s in the inflection point of delivering significant value without much additional capital investments. Second, Cairn India shareholders will see an increased share of the benefits of our $1.3 billion cost improvement program, which is primarily from the reduction in the hard costs such as procurement and marketing savings from the metals businesses. And third, there will also be the beneficiaries of any further upside from the potential re-rating of the group going forward. All along with all of this, while continuing to retain the upside to a recovery in oil prices. This will be a large company, will have the stronger financial and credit profile leading to lower funding costs and a lower cost of capital. Let me emphasize that Cairn’s growth strategy will not change post the merger. We’ll continue to operate our assets efficiently and execute our strong pipeline of projects with the same rigor. We will retain the proven management team and the strong brand. As you can see from the timetable at the bottom left hand side of the slide, the process is a marathon, not a sprint. Laying media speculation to one side, we will maintain an ongoing dialog with all shareholders until voting takes place in the second-half of the calendar year. And we remain confident the transaction will be completed successfully in the first quarter of calendar year 2016. So I’ll now hand over to our CFO, Mr. DD Jalan, to go through the financial updates.

[DD Jalan:]

Thanks, Tom. And good evening to you, ladies and gentlemen. The commodity environment continues to be subdued and volatile as Tom also mentioned. As you all know, most commodities have fallen 6% to 8% in just last two weeks. Against this backdrop, I’m happy to say that we have delivered a stable set of numbers for quarter one, reflecting the high-quality and diversity of our assets. We have achieved EBITDA of Rs. 4,039 crores, marginally higher sequentially, albeit significantly lower over the corresponding previous quarter. While commodity prices helped marginally, premia and regulatory headwinds have offset some of the base year effects, thus delivering a steady quarter sequentially. EBITDA was affected by a one-off provision of Rs. 414 crores for renewable power obligations on captive consumption in previous years following the Supreme Court order in this matter. The current quarter effect of this being Rs. 36 crores, which is part of the cost. Profit petroleum cost recovery timing amounted to another Rs. 177 crores. The margin at 31% reflects the combined impact of these one-offs as offset by better commodity prices in the quarter. If we knock off one-time effect of RPO then the margin remains 32.5% and aluminium margin also shows a healthy 10% though lower as compared to the previous quarter. Compared to Q1 of previous year while we saw good volume gains in zinc, copper, aluminium, and power; the significant decline in the Brent price and the aluminium premia more than exceeded the operational gains leading to a significant margin contraction. However, for the rest of the year, we expect volume ramp-up through the resumption of iron ore, higher zinc volumes as per the mine plan, aluminium part ramp-up at Jharsuguda, inventory liquidation, and cost savings as key drivers for higher EBITDA. Nevertheless, a continued involvement of weak commodity prices may offset expected gains from these initiatives. We remain focused on debt reduction. Gross debt did increase by Rs. 1,800 crores due to timing of funding for TSPL, aluminium projects, and temporary working capital requirements of around Rs. 1,400 crores, which we are confident, will unwind in coming quarters. Further, with continued focus on reducing our gearing and continued strong cash generation at our Cairn and Zinc-India businesses, the gross debt and net debt is expected to decrease during the year. Moving to Slide 9, on this chart we can see several items in the market and regulatory group which largely impacts EBITDA by around Rs. 320 crores. Slightly improved Brent prices and rupee depreciation of around 2%, which normally impacts our business favorably, were largely offset by the lower premia, higher profit petroleum and RPO provision for previous years as discussed on the preceding slide. Of the operational segment, lower volumes and higher COP had an impact of over Rs. 380 crores. Of the total volume loss, around Rs. 200 crores was timing-related mainly due to lower integrated production in the zinc business due to some local logistical challenges, though the mine production was in line. This will be made up in the coming quarter. Cost was impacted by around Rs. 250 crores due to the newly introduced contribution to District Mineral Foundation, Renewable Purchase Obligations, electricity duty in Rajasthan and water cess, which were mostly offset with the lower operating costs and improved efficiencies. We continue to focus on improving efficiency, costs and increasing capacity utilization across our well invested asset base. Moving to Slide 10. Efforts to refinance loans at a more optimum cost level continue to bear results as shown by lower finance costs when compared to quarter one FY 2015. However, the temporary increase in borrowings to meet project fundings and short-term working capital requirements has resulted in a marginal increase in finance cost as compared to quarter four FY 2015. We hope to pull back these. The cost of borrowing in quarter one is around 7.9% and is trending lower than FY 2015, average of 8.2%. During the year we aim to lower the exit borrowing cost by about 50 basis points on an average. Other income decreased by Rs. 317 crores compared to quarter one FY 2015 largely due to timing differences in the maturity of our investments, given that income under IGAAP is recognized only in the quarter of maturity of investment. As mentioned at quarter four 2015, the other income line was exceptionally low given the investment in certain classes of instruments where the income is deferred by a couple of years. Hence the numbers are strictly not comparable quarter-on-quarter. The underlying portfolio did well with the average post-tax return of around 7.7%, but as mentioned the quarterly income will depend on the maturity profile of the investment. Depreciation and amortization was lower by Rs. 347 crores over Q1 FY 2015 mainly on account of lower goodwill amortization by Rs. 230 crores due to lower base following the impairment of goodwill in oil and gas business in quarter four of 2015. The marginally lower depreciation is the result of reduction of Rs. 220 crores approximately the impact of changes in useful life of assets affected in quarter four of 2015. This impact largely offset by additional depreciation on capitalization of assets in the quarter largely in oil and gas business. Full-year depreciation will increase gradually with capitalization of pot lines and units in aluminium and power, TSPL, and Cairn India. The tax rate at 17% was broadly in line with our full year expectation of 15%. This is also similar to the tax rate in FY 2015. For the quarter, the rate is higher than quarter one FY 2015, mainly due to the profit mix of taxable and non-taxable incomes. However, sequentially the rate is lower as the Q4 tax rate was driven higher on account of deferred tax recognized on exploration and development spend at Cairn India. As a result of all the above, both the PAT and attributable PAT for the quarter were sequentially higher at Rs. 1,712 crores and Rs. 866 crores respectively. Moving to the next slide. As we have been discussing for a while, we continue to make progress against our dual objective of refinancing at a lower cost, as well as extending the tenure of our loan maturity profile which is evenly distributed. Of the immediate FY 2016 maturities of $1.8 billion, $0.4 billion has been refinanced and balance $1.4 billion of short-term debt will be rolled over or refinanced with longer-term debt over a period of time. We are actively involved in discussions with various banks on refinancing and are in advanced stage of negotiations. With the lower interest rate expectation scenario in India, we are also actively evaluating different structures and options for future maturities. Our strong balance sheet reflects $7.4 billion of cash and cash equivalent. We continue to focus on improving our cash flow by actions around better working capital control, continuous review and control of our CapEx expense, as well as improving efficiencies. Thank you. And with this, let me hand back to Tom.

[Tom Albanese:]

Thank you, DD. I’ll start now with Slide #13, and let’s talk about oil and gas. For our Cairn business, Rajasthan production was relatively flat quarter-on-quarter and averaged 172,000 barrels of oil equivalent per day. And I’m happy to share that gas production has grown by 20% quarter-on-quarter averaging 19 million standard cubic feet per day in the first quarter, as we had foreshadowed in the last quarterly report. On the cost side, substantial savings were attained in key high value contracts through negotiations, optimization of field operations, and improvements in well drilling time. The average water flood OpEx at Rajasthan was down to $5.2 per barrel equivalent compared to $5.8 per barrel of oil equivalent in fiscal year 2015. We do, as we said, continue to invest in our core field to drive through the projects. The polymer injection rate at Mangala has been ramped up and progressive production impact has begun to show up. We would expect it to show up later this year. We’ve ramped up our gas production, as I said, by 20% quarter-on-quarter with the existing infrastructure in the Raageshwari Gas Terminal. And we’re now preparing for further growth in the Raageshwari Deep Gas field via new terminal and pipeline, work of which is progressing well. The capital investments requirement for Bhagyam EOR have been substantially optimized over the last few months through value engineering by our teams. Now based upon the success, we have submitted a revised field development plan to our joint venture partner, ONGC. Lower capital costs enabled this project to cross our threshold returns stress tested to a $55 oil price assumption. We expect Bhagyam EOR to have a CapEx of approximately $250 million. At Barmer Hill, we’ve taken our first step with the finalization of the development concept for the Aishwariya Barmer Hill well in the Barmer Hill field. This field would be in the Barmer Hill formation overlying our existing Aishwariya operations. Initial well productivity rates are promising and lie in the region of 800 barrels to 1,000 barrels per well. We do expect the Aishwariya Barmer Hill to have a CapEx of approximately $300 million. And finally, we’ve embarked on a 20 well infill program at Aishwariya to ramp up production volumes. So I’d like to emphasize that our priority in the oil and gas business remains to be free cash flow positive, even in this low crude oil price environment. Over 90% of our production volumes are from the core fields of MBA, Ravva, and Cambay. These fields are resilient to volatility in oil prices due to the low operating cost and high margins. Moving on to Slide #14, I’d like to talk about Hindustan Zinc. The first quarter was a very good quarter for Zinc-India as metal mined increased, driven primarily by higher ore production from Rampura Agucha, Kayad, and the SK mines. We lowered our cost of production to $802 per tonne in spite of higher power and fuel costs on account of water cess and electricity duties, and renewable energy purchase obligations, on captive power consumption; which together had an additional government imposed impact of $48 per tonne on the cost of production. The Rampura Agucha and SK shaft projects are progressing well with no further delay in the former. Pre-stripping is – for the further deepening of the open pit at Rampur Agucha is under progress. With the planned extension of the open cast mine the overall production work at Rampura Agucha will be on track. The shaft project at SK meanwhile remains ahead of schedule and internal infrastructure works, development through shaft, and ventilation works have been initiated. Our Zinc-India business is well positioned due to strong fundamentals of zinc metal, two major mines representing about 5% of the world’s zinc production coming out of production in the next six months, and LME stocks’ refined zinc metal being close to historic lows. Thus, we believe creating a strong momentum for zinc prices to outperform other base metals over the next few years. Staying on zinc, I’d like to move on to Slide #15. At Zinc international, production was affected by lower grades at Skorpion and ramping up production at Lisheen, which will now end production in November 2015. Overall, we are on track to produce about 220,000 tonnes, 230,000 tonnes in fiscal year 2016. Cost of production in the first quarter was at $1,409 per tonne and for the full year cost of production is expected to be approximately between $1,450 and $1,500 per tonne as volumes from Lisheen ramped up – or, excuse me, as volumes from Lisheen ramp down. At Skorpion push-back is in the progress for the extension of the pit from fiscal year 2017 to fiscal year 2019. And in Gamsberg the pre-stripping has commenced, we had our first blast just earlier this week, I was in Johannesburg and Northern Cape just on Monday of this week, and we’d expect to see first ore production in fiscal year 2018. This project is being developed using a modular approach with the current focus being on mining, and we would intend initially to produce and commingle or blend in with our existing Black Mountain ores and this allows us flexibility to adapt the CapEx to the zinc price environment. Moving across the ferrite table to aluminium, Slide #6. In aluminium, production at 500,000 tonne Jharsuguda-I and 245,000 tonne Korba-I smelters was stable and we continued to operate the Lanjigarh refinery at a high utilization rate. The Korba-II smelter produced 18,000 tonnes while the Jharsuguda-II smelter produced 20,000 tonnes during the quarter. Aluminium prices and premiums have witnessed a steep decline in the last quarter as you know, whereby our EBITDA margin has declined from $419 per tonne in the fourth quarter of fiscal year 2015 to $177 per metric tonne in the first quarter of fiscal year 2016. And you can – rest assured, we’re not standing by and just watching these prices decline. We put in place several measures to deal in this challenging backdrop. The cost of production currently at $1,689 per tonne is being optimized by reviewing higher cost operations, higher cost pots, improving the domestic sourcing of bauxite, and reducing specific consumption of inputs. We certainly would look forward to ramping up the alumina refinery to 2 million tonnes upon receipt of approvals from the State Government, as the Central Government has already approved the expansion of 4 million tonnes in Phase 1. And I think it’s important to recognize for Lanjigarh, if we don’t increase the expansion of it to 2 million tonnes per year, in this environment, it’s a very challenging environment as we watch alumina prices beginning to drop across the board. We’re also looking to increase proportion evaluated products in our sales and we’ve been in discussion with the government to control the dumping of Chinese aluminium and scrap into the Indian markets. In terms of the further ramp-up of aluminium smelters, we will follow a disciplined approach and ramp up only if there is a positive cash generation. Accordingly due to high costs, further ramp-up of pots above for two smelters have been temporarily put on hold. Meanwhile, at Jharsuguda-II smelter, we are in discussions with the government authorities for using power in the 24 megawatt power plant, which we already had approved to start earlier this year, and expect to start ramp-up for the remaining pots for the first line of 312,000 tonnes in the third quarter of fiscal year 2016. Notwithstanding these above measures, we are very mindful of weak aluminium prices and now – alumina prices and aluminium premiums. So at this moment we are looking at all parts of our refining and smelting business. We are prepared to make those necessary difficult decisions, even reducing production if necessary to protect our cash flow. Moving on to Slide #17 in Power. In order to create synergies among the portfolio of 9,000 megawatts power assets, we have as we’ve foreshadowed created a power vertical, and appointed Ajay Dixit, as you know is on this call, a seasoned professional in the power industry, as CEO of Power. He’s now responsible for all our power plant operations as well as coal purchases and power sales. And I have to say, I have been very impressed with just the short time he’s been in the role. During the quarter PLF at the 2,400 megawatt Jharsuguda power plant was at 47% due to continued lower demand and evacuation constraints from Odisha. We expect the PLF to increase gradually in the second-half of fiscal 2016 as we start ramping up the pots in the Jharsuguda-II smelter line. At TSPL the first 660 megawatt unit is operational, but the PLF and availability was impacted due to a temporary shutdown. We are compensated by the Punjab State Electricity Board on the basis of availabilities to the plant, and we had 56% availability in the first unit during the quarter. This unit is expected to operate at above 80% availability in the second quarter of fiscal year 2016. The second 660 megawatt unit of the TSPL power plant will be synchronized by the end of the second quarter of fiscal year 2016, and the third unit is expected to be commissioned in the second-half of fiscal year 2016. The first 300 megawatt power plant IPP unit of the 1,200 megawatt Korba power plant has been commissioned in July, and the second unit is expected to start trial runs by the end of the second quarter of fiscal year 2016. Moving on to coal sourcing. The group consumed about 6 million tonnes of coal in the first quarter, 47% of which came from linkage and 35% came from e-auction, with the rest being imported. While the imported coal prices have declined in the last quarter, the linkage and e-auction prices continued to be high due to deallocation of coal blocks and production not starting in new allocated mines. This is further accentuated due to very limited coal being available in e-auction for the industry and CPPs, in particular. While the government is trying to increase domestic coal production and streamline the policy, the scenario is not good for the cost added risk for the domestic industry, which is already battling a surge of aluminium imports into India. And I would say that this not only affects the aluminium sector, but also the Indian steel sectors and the Indian cement sectors. We’ve made substantial progress at the Chotia coal block approvals and expect to start production in the second quarter of fiscal year 2016. We remain in discussion with the government on the Gare Palma IV/1 coal block and are – excuse me, Gare Palma IV/1 coal block and are confident that our bid will be accepted by the government, and we are participating in the third round of coal block auctions, which are currently scheduled in August. Moving on to Slide 18, I would like to speak a bit about iron ore. At Karnataka, ore sales commenced during the quarter. Production was 200,000 tonnes, constrained by existing ore stockpiles, which will be liquidated by the second quarter of fiscal year 2016. Currently, there is a production cap of 2.3 million tonnes per annum and we remain engaged with the authorities to relax the cap. At Goa, the remaining approvals are expected in early August and mining is expected to resume post monsoons. Moving on to Copper India. In the first quarter, copper cathode production at Tuticorin smelter was stable and near its capacity. The smelter continued to maintain strong operational efficiency taking full advantage of higher TCRCs and higher sulfuric acid prices. Copper prices have been falling, however TCRCs are expected to remain strong in the near-term. So, again, I would like to close now before we go to questions with strategic priorities. And these strategic priorities remain unchanged and we’re working toward making significant progress on them during this year. We are on track to achieve record high zinc, lead, aluminium, alumina, and copper production, and we will be restarting iron ore operations soon. We continue to be focused on disciplined capital allocation, ramping up free cash flows, deleveraging, and refinancing our maturities to maintain the strength of the balance sheet. We will take the necessary steps to complete the merger of Cairn India and Vedanta Limited to simplify the Group structure. Zero-Harm, continued community engagement, and transparency in communication will continue to be pillars to sustain our license to operate. And with the continued focus and momentum on improving production costs, we aim to keep delivering superior returns to our shareholders. So with that I’ll now, operator, open the floor for questions. And as before, I will probably take the lead on these answers and then I will direct those questions particularly to individual business units if they are relevant for those respective business units. So operator, over to you.

[Operator:]

Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Jigar Mistry from HSBC. Please go ahead.

[Jigar Mistry:]

Good evening, gentlemen. Two questions from my end. Tom, there has been a lot of speculation in the media with regards to how the Vedanta and Cairn merger is progressing to the extent that they go on and suggest that almost a majority of minorities sort of do not seem happy with the deal. That is pretty evident even from the spreads between the Cairn and Vedanta equity pricing, which has expanded to almost 30%. Now I don’t expect you to speak on behalf of them, but in your interactions, have you come across them asking for a much sweeter deal than what the respective boards have already offered? That is number one, and maybe I can ask the second question once you answer this.

[Tom Albanese:]

Well, I think, Jigar, as those and I’m sure you have been involved, but those that are involved with transactions that require shareholder approvals after other things are put in place, it takes some time. It’s important to recognize that, it’s in the best interests of people to let that time pass, see how markets develop, see how conditions were to play out. And I would say it’s speculative at this stage to be too conclusive of how people would vote at sometime in the future. Again, even just over the past few weeks, we’ve seen quite a bit of market volatility and these things could go any way. So I think in the fairness of time, we will continue to engage with each of our investors, we will engage with the Vedanta Limited shareholders, and of course, we and the Cairn teams will be engaging with the Cairn shareholders to make sure, they have all the information, they have any questions that they might have. So that at that time of the – when we are ready to take it to a shareholder vote, they are ready with all materials, so they can make their decision at that point in time. Anything before then would be purely speculative. And I would say that, just from the nature of what I’ve been reading in the press, newspapers have to sell papers.

[Jigar Mistry:]

All right. And a connected question to Mr. Jalan on this should – in the eventuality with which, and the opinion of the board might be remote. But should the deal not go through, is there the position of the banks that the refinancing could get a little more tougher than what it already is?

[DD Jalan:]

So I think, Jigar, as I have been mentioning earlier also that the refinancing is independent activity, and we are very comfortable on refinancing of our maturities, which are coming in this year and year to come. And the other activity is the simplification of the structure, which is our strategic priority. So both are independent and nothing is connected with each other and refinancing is going on. And as I have announced earlier also that we will complete all the refinancing for the upcoming maturities within this calendar year and hopefully sometime in November or so when we come up for Vedanta PLC call, and by that point of time, we will be having very clear picture of refinancing plan.

[Tom Albanese:]

And I just want to add to that that if you recall from our Capital Markets Day in Mumbai back in late March and our year-end results before there were any decisions on the Cairn-Vedanta merger, basically what DD had said then is exactly what we’re saying now. So our intent is to complete these refinancings in what is a favorable market for us to do so independent of the Cairn-Vedanta merger.

[Jigar Mistry:]

Right. Thank you.

[Operator:]

Thank you. Next question is from the line of Danielle Chigumira from UBS. Please go ahead.

[Danielle Chigumira:]

Hi, there. And thanks for the call. A couple of questions from my side. Firstly, you mentioned putting BALCO II on hold. Can you give us a sense of what kind of realized aluminium prices you need to restart that expansion, or alternatively if you’re looking at cutting costs for those operations that would make sense to continue to expand there? And secondly on Zinc-India, you mentioned a $48 a tonne headwind from the water cess and electricity duty. Could you clarify whether that was fully realized within Q1, or whether there is still a bit to come in Q2?

[Tom Albanese:]

Okay. Well, maybe if I can just say something about BALCO in general, but Abhijit Pati, if you can comment more specifically, and then I think that DD probably your best position on Zinc-India focusing on.

[Abhijit Pati:]

Sure.

[Tom Albanese:]

I think that first of all this is a provision rather than actual monies, but then how it plays out in terms of renewable purchase obligation and those dynamics. I just want to reinforce, Danielle, that on BALCO, we are looking at all aspects of the business to make sure that that business is sustainable and survivable at any aluminium price. And we should recognize that that business has been – it was originally part of state-owned entity, and I think that it’s fair to say there is probably some legacies that come with that. And this is the time for us to be quite disciplined in terms of tackling anything that does not need to be run to keep this thing in production. Once we do that, we would expect to see an overall reduction in our cost of production. That gives us a lot more flexibility to see at what pace we increase and bring on incremental costs. The second part of it’s going to be ultimately what price can we procure our ore at and what price that we can reverse that coal to energy for aluminium and there are the two factors. First would be to get our own mining going from the recently approved and soon to be operated Chidnub [ph] mine. And second, as we have ramped up our second unit of the BALCO 1,200 megawatt power plant to be putting that online while we then potentially take a tough decision on the existing older power plant, which does not convert that coal to electricity at a very competitive price. So Abhijit, anything further you would want to say on aluminium?

[Abhijit Pati:]

No, I think, Tom, because you mostly covered the outline. Yes, because the decisions for the ramp-up hold is a decision purely taking into consideration the present business situation. And apart from that, we have been looking into many other opportunities, because this is the right time for even do the corrections of the financial restructuring of the BALCO, where we are definitely looking into certain specific business like roll product. We are also looking into that where the substantial amount of the legacy of overheads, which has been creating definitely disturbance so far as the cost structure is considered in BALCO can get optimize. So this is a temporary hold, because initially, I think, one good part is happening in BALCO that we are steadily getting into a commissioning of the power plant – newly commissioned power plant. So that’s getting in and it is good to really share with all of you that the COD has already been obtained for the first unit. So the stability of the power plant is moving as per the plan, but we will certainly look into the market properly to – before really get into further, the ramping up of the BALCO facility. So we are looking into mainly other aspects of large cost control into that particular unit, so that we can really come down to a reasonable level of cost of production. So there is still having a good amount of margin between Jharsuguda and BALCO, we have a clearly – the increase of around $200, and you will certainly appreciate at this market level this increase of – is very, very difficult to absorb and thereby we need to really cut down basically certain amount of non-productive assets in the process. So that’s what we have been doing now.

[Danielle Chigumira:]

Okay.

[Tom Albanese:]

Can I just add to that, and I think it’s just from a global context. We would see BALCO as a third quartile producer, not a fourth quartile producer. So in many ways, it suggests the difficult state of the global aluminium sector when a third quartile producer has to look at these types of tough actions. And so you could imagine that what that means in terms of the sustainability of the overall supply, demand balance in these market conditions.

[Danielle Chigumira:]

Sure.

[Tom Albanese:]

DD, over to you.

[DD Jalan:]

Yes, I think if you just like to look at most of the provision what we have made of $48 per tonne in zinc on account of contribution to the District Mineral Foundation, renewable purchase obligation, and electricity duty and water cess, which has been imposed, I think these all are revenue earning measured by the government. But though there is no cash out, but at the same time, as a conservative method of accounting, we have made provision of this in our quarter-account [ph].

[Danielle Chigumira:]

Okay. But that’s reflected in the Q1 cost numbers that you’ve reported, that’s fully reflected?

[DD Jalan:]

Absolutely right.

[Danielle Chigumira:]

Perfect. Okay, thank you.

[Operator:]

Thank you. Next question is from the line of Pinakin Parekh from JP Morgan. Please go ahead.

[Pinakin Parekh:]

Yes. Thank you. Two quick questions. First, on aluminium. Given that the current coal and oil prices have fallen so sharply, is there scope for further cost reduction in Jharsuguda from current levels? And what is the latest update on 2,400 megawatt power unit at TSPL? It seems that you were told that all was clear. And secondly, how much…

[Operator:]

Mr. Parekh, this is the operator. Your voice is not audible, sir.

[Tom Albanese:]

Yes. Can you maybe speak a little slower and just repeat the questions if you can please?

[Pinakin Parekh:]

Sure, sure. Just on aluminium given that the coal and oil prices have fallen so sharply, is there scope for further reduction in Jharsuguda cost of production?

[Tom Albanese:]

Okay. Maybe I’ll take that one first and then Abhijit can go into that. It’s that – while there have been a reduction in coal prices on a global basis and we have had some reduction year-on-year in coal prices in India, unfortunately, coal pricing in India is still trending upward. And we are mindful of the fact that there is a risk that coal prices can continue to increase for e-auction coal in the coming term. So I think it’s fair for us to assume that we have to find compression in our coal pricing. We have to improve our efficiency, even at Jharsuguda converting that coal to electricity, which I think getting a higher PLF factor will help us with. In the case of alumina, we have to find a better sourcing for alumina to reduce the delivery cost of that, including from producing more of our own alumina at Lanjigarh. And while we’re all very proud of our conversion costs at Jharsuguda and the efficiency of the manpower, we have to look at compressing all of the other conversion costs, including coke, including pitch, including manpower, including all the other inputs. Abhijit, anything if I missed?

[Abhijit Pati:]

No, I think you have covered up everything virtually. And there definitely lies the opportunity, as Tom has indicated the areas that definitely have a substantial positive impact, so far as cost of generation is concerned. So today, we are at maybe around $1,690 level of Jharsuguda metal cost and opportunity remains in a short-term. And moreover one point I would like to also add that we’re looking into very aggressive opportunities for our RTS initiative. That’s an initiative, which is certainly getting a good amount of potential to further have some amount of positive, the cost contribution reduction into the metal. So that also one of the area I would like to mention in this call.

[Tom Albanese:]

Before we go to your next question, I like maybe Ajay Dixit, this is your debut answer. If you can maybe speak briefly about what you see that has to be done in terms of both improving coal pricing, but also the conversion of coal to electricity.

[Ajay Dixit:]

Yes, Dixit here. I think, Tom already made a presentation on his slide on page 17, where you see linkages price are going up and we see imports coming down only after May. So practically as far as the quarter one is concerned, the linkage price went up, because the deallocations, all the earlier consumers of coal went into the nearly same mines where we were operating, and therefore the linkage cost soared up. We are seeing slowly that it comes down and we also have to see Coal India brings production up on the coal into which pockets. Are they the close ones to us or are they farther than us? So that is the topic which we have to see how this e-auctions of the coal blocks and the coming of linkage auction go. We would like to have a stability and I would say also draw advantage of practically all options that when the imports prices are now going down, we would like to place ourselves well on this. So we will squeeze some opportunities here going forward. And as far as the conversions are concerned, we are moving up significantly and improving the plant load factors and specific coal consumptions where specific initiatives have been taken on all plants, as well as in Jharsuguda. So we will see this improvements coming up slowly as we move forward both on the plant machinery, on the auxiliary power consumption improvements, and also on the coal block squeezing out of the prices on the making a good basket out of linkage on own mines and import.

[Tom Albanese:]

Thank you, Ajay. What was your second question?

[Pinakin Parekh:]

Sure. Just related to aluminium, what is the update on the two regulatory headwinds? I mean, what are the bottlenecks holding up the 2 million tonne Lanjigarh refinery expansion? And secondly, the 2,400 megawatt power plant as of Q4, it was supposed to have been addressed. I mean, are there any lingering issues, which is not allowing the company to use the power from the power plant?

[Tom Albanese:]

Yes, I think, maybe I will just – Abhijit, if you can talk about those, one is the approval on the expansion of Lanjigarh that’s now residing at the state level, and second, the CPP conversion of the 2,400 megawatt power plant at Jharsuguda.

[Abhijit Pati:]

Yes. So far as the Lanjigarh unit expansion approval, definitely whatever EFC meetings and other things was required that has been conducted. So it is still at the state level, because it needs to get referred to the center. It is the last leg of an approval at the state level, which is resting on. So we are hopeful that the way we are driving now and with the state positivity, thing should really get materialize fast. So that’s the status, otherwise so far as the expansion related to Lanjigarh is there, there is no further hold up. So that is so far as Lanjigarh is concerned, and I think so far as IPP to CPP conversion, we had an extremely good representation, and as you know that OERC’s last phase of the direction is required. There is an interim order which has come out, so we are very close to get realized one unit conversion and thereby start our ramp-up process in Jharsuguda. So we are expecting that by, at least, in the mid of August, or end of August, we should be in a position to really get that clarity. And there is a very good positivity so far as the state is concerned and government is also supporting this move.

[Pinakin Parekh:]

Thank you. Thank you very much, sir.

[Tom Albanese:]

Next question.

[Operator:]

Thank you. [Operator Instructions] Our next question is from the line of Indrajit Agarwal from Goldman Sachs. Please go ahead.

[Unidentified Analyst:]

Yes. So this is Navin here. So just following up on the previous question, we have been getting this assurance from you in the last couple of quarters on the power transfer and this EPP. And every time, we pretty much hear the same answer that the state government is very keen on getting it done and the timeline keeps shifting. So is there anything that we are missing in this, or are there any specific? Can you help us understand the specific approvals, which is holding up, because there seems to be a consistently shifting timeline on this?

[Tom Albanese:]

Navin, since Abhijit is used to hearing the same question from DD and I on a regular basis, maybe Abhijit, you’re well practiced on the answer.

[Abhijit Pati:]

No, let me – I think thanks for this question, and I do agree that you have been listening to the same answer. But let me give you little process clarity of this approval of 2,400 megawatt supply to the SEZ aluminium smelter. As we stand and we continue to stand that so far as this technicalities of this proposal is concerned, this is absolutely clear. It is not clear from our side, it is even clear at the OERC, as well as the technical body of the GRIDCO side. What we wanted to do, because please try to understand, in case, suppose we go, we would have gone ahead with the conjunction of this power. There is always the liberty by the WESCO, in this case it is the DISCOM of the state who has the liberty to raise the cost of city-bill [ph]. We did not want to do that, because as a very transparent and honest business transaction process, we did not get to really get into any liabilities when we move forward. And that is the reason we wanted to refer this matter to Orissa Electricity Regulatory Commission, and that is what exactly has happened. At Orissa Electricity Commission, we have presented our case in the last month, and it was one of the historical, I think, event I must say that Orissa Regulatory Commission without even waiting for the next hearing to happen, they came out with a complete directive. And the directive was so clear that definitely there is a need and feasibility for the supply of the power of one unit to produce for the aluminium production. What we are waiting today is only a recent communication from the OERC and whatever the directive they have given, we are already complying. That’s the reason with very confident level we are today talking about another one month’s time is basically compliance of the order, which they have issued in the last month. So that those compliance once it is done, then we are absolutely free and there is no further liabilities from any corner whether it is WESCO, or whether it is GRIDCO can really impose on. So, that’s the level we are today here. And I believe that that is the process, which we should follow and it will be the right process with the right government.

[Tom Albanese:]

And, Navin, this is Tom. In all seriousness I would say that this has been one where the devil has been in the details, where it is a quite complex – technically complex process. You have many stakeholders that are involved, some of them are part of the Odisha government, some of them are wholly owned by the Odisha government. And ultimately, what we got to do is get this thing right in the first instance and not find a situation, where we’ve missed a step and then a year later have to unwind something. So, I think it’s appropriate for us to take all the necessary steps as Abhijit would say. And I think also that the system we have in place now actually gets us a higher level of confidence, not just for this first round of increase. You may recall, we’ve talked about the need to fully build up the entire capacity of Jharsuguda. The steps we are taking now probably gives us a higher probability of doing so than where we would have been four months ago.

[Unidentified Analyst:]

Sore. So just one more question, maybe for Mr. Jalan. So, if I look at the debt numbers on Slide 21, the net debt in the Cairn acquisition has – clearly has come down in the quarter. I assume this is because of the 5% stake transfer that was done from the SPV to the standalone entity. Is that understanding correct?

[DD Jalan:]

Absolutely right.

[Unidentified Analyst:]

So following up on this, so, how should we look at funding of interest on this SPV, because if I look at the standalone net debt, that’s gone up quite substantially, it’s Rs. 39,000 crores. And if I annualize the current quarter’s EBITDA, the net debt to EBITDA is almost 10x over there. So what are the ways we should look at funding of the interest on the Cairn SPV, if you could just help us?

[DD Jalan:]

So basically, I think the funding at Cairn SPV level is by two, three ways. Number one is by way of dividend on the shares, which are being held in the SPV. So that takes care of part of the interest funding. And then the second is by way of upswing of the fund from India over there. So I think these are the two ways how the funding of interest is taken care of at the SPV level.

[Unidentified Analyst:]

Okay. So you don’t foresee any issue on the interest payment at the Cairn SPV level?

[DD Jalan:]

No, I don’t think that there is any issue over there.

[Unidentified Analyst:]

Okay. Fair enough. Thank you, sir.

[Operator:]

Thank you. Our next question is from the line of Ritesh Shah from Investec Capital. Please go ahead.

[Ritesh Shah:]

Yes. Hi, sir. Thanks for the opportunity. Sir, if you could please clarify what is the percentage of export by volumes for the aluminium division? And if you could provide some color on the differences in premia between domestic and export sales? And thirdly, I think there were some press articles which did indicate wherein the company had asked the government to change the duty structure specifically on aluminium to make the assets more viable. If you could please answer those three?

[Tom Albanese:]

Okay. Ritesh, I’ll ask Abhijit directly to respond on the percentage of exports by volume versus imports, and also what is the difference in premium we get on our export business versus our domestic business. And then maybe I will just take the first shot at your third question and ask Abhijit to follow-up on that. And in that third question, I think what I’m increasingly seeing and we’ve actually been foreshadowing this with government officials for the past six months is that we’re seeing more for the first time sizable amounts of Chinese aluminium leaving the Chinese domestic market and being exported under the guise of finished products with the relaxation of some of the export duties in China. So increasingly we see that X-increased [ph] aluminium export is looking a lot like Chinese steel exports, and I think it’s beginning to have the same effect on the Indian aluminium sector as we’ve all heard for a long time, it’s had an effect on the Indian steel sector. So our position, and it’s not just Vedanta, but this is the aluminium association with support by customers and others that are stakeholders in the aluminium business are basically saying, let’s look at creating a common approach. We propose a common approach between the aluminium steel sector and the aluminium – Indian steel sector and the Indian aluminium sector with regard to import tariffs so that we can protect these businesses, allow them to survive, and grow in anticipation of increased future demand from India, which we believe is in the cards, it’s a matter of time, and India will want to have this as a solvent as a thriving sector not something that’s struggling. An industry that can invest capital and just – so similar issues for Indian steel as we see for Indian aluminium. But Abhijit, go ahead with all the other questions.

[Abhijit Pati:]

Yes. I think the first quarter the total aluminium volume as a sector, we have around 232 kt, out of that the aluminium sold into the market domestic plus export is around 226 kt. We offer it around 40% of the export, which volume wise is around 90,000 tonnes. That’s the level today.

[Ritesh Shah:]

And how much will be the differential in premium between domestic sales and external sales and how much would it actually mean at the contribution level given there will be a hit on the logistic cost as well?

[Abhijit Pati:]

So far as the premium, as you know, the premium level today between the domestic and others is more, and the average is around $100 level, because today even though alumina is $1,600 and $100 is the premium level average. So, that’s the level we are at today in the Q1. And your next question was on logistic cost?

[Ritesh Shah:]

Correct.

[Abhijit Pati:]

Logistic cost component is if you see the net realization level definitely domestic realization is in the tune of around 20% higher compared to the exports, so it’s including the logistic cost and everything. So obviously that’s the main focus and really the domestic volume over the precisely over the last six to eight months, we have grown and at least today roughly around 60,000 tonnes of the domestic volume per month we are able to really sell it down. So there is a substantial market share in domestic increase, around 14% in Q1, compared to the corresponding figure in the Q1 of the last year. So, that’s the strategy we are making because where there’s more money, we sell more and where there is less money, we are selling less. That’s the way.

[Tom Albanese:]

Abhijit, I just will also comment that the first quarter was a very unusual quarter and maybe Abhijit, commented on whether it was representative or not because we had a very, very rapid decline in those premiums in the first part of the first quarter and we found that our customers, none of them were willing to go long. They were all rapidly depleting their stock piles. So we and others in the sector – producing sector had a big build up of finished stock. We were able to bring it down by the end of the quarter, but it made for an unusual set of trade and possibly export flows the consequence of that.

[Ritesh Shah:]

Okay, great. Just two follow-up questions. If you could provide some color on the value addition for the aluminium segment at BALCO and well separately? And secondly, how much is the scope for further cost reduction at BALCO specifically?

[Tom Albanese:]

Abhijit, maybe you can comment on that and also give us your vision of where you want to take the business on value addition too.

[Abhijit Pati:]

We see the today’s difference as I indicated earlier so far as the BALCO production cost is concerned is in the tune of around $200 difference from the Jharsuguda. And Jharsuguda, as I indicated, today I’m producing a metal at Jharsuguda in the tune of $1,690. Obviously there is an opportunity going forward in which you’re targeting to at least save out roughly around $80 to $100 of the reductions further going forward. Now if I really compare that particular difference for the BALCO, BALCO challenges are pretty high, we have at least a migration required to definitely go to a certain amount of cash positive level of BALCO production. Definitely there is a shed-off [ph] of roughly around $200 needed to really make some positive contribution so far as aluminium is concerned. So that’s the referral journey what we have. That’s the vision and obviously this is what the vision, which is a short-term and long term, as Tom indicated earlier, the potentials are high when you have your own supply of the bauxite, your cost of generations of the alumina comes down from a present level to a desired level at least $75 to $100 reduction from the present level of alumina with your laterite and bauxite coming in into the system. So obviously if I correlate with that, that itself will give you $150 to $200 reduction per tonne of aluminium. Now if I really see that value addition – your first question of the value addition, yes, we do have moved into the value addition propositions of the BALCO and for your information we have successfully launched two products in the domestic market. Those are basically alloy invert of AFC562 [ph] for alloy wheels and the aluminium silicon alloy slab for the galhum and gives us an advantage to grow our domestic market share. So apart from that also, we are also trying to do certain amount of the value addition so far as the physical quality of the wire rod is concerned because one thing which has come in that we have a very large capacity of the wire rod, two mill has been commissioned in the BALCO and parallelly there is a growth in the wire rod market in the domestic due to PGCIL and other order on an average of around 25,000 to 30,000 of the wire rod market has opened up domestically. So, we are also addressing that. So, value addition plus the wire rod combination to sell into the domestic market is the real focus for us and that’s the way the BALCO alloy additions and the other value added products are getting organized.

[Ritesh Shah:]

Great, Just one last question. In an event of delay in the proposed merger, how do we see foresee the CapEx plans going forward? So is it still on track or we going slow?

[Tom Albanese:]

Can I just maybe comment on that, but I’d also maybe ask Mayank Ashar, as CEO of the Cairn business talk about what the capital plans are for the Cairn business. And I just want to reinforce what we’ve said previously, which is that all of our businesses are prudent in their capital spending, but also looking for the right opportunities and that’s basically an allocation of capital in this year and next that’s independent of the merger. So we will continue to focus on sustaining capital which for the most part is what we’re spending, wind down of some capital projects and some of the aluminium and power plant projects. As you know, we pared back the capital spending this year for Gamsberg and that’s based on the phase basis. We are continuing with our overall conversion of our open pit operations at Hindustan Zinc to underground, that’s staying on the same pace. And of course in oil and gas, we are continuing to focus on building the oil and gas business within the confines equivalent to that stress testing of $55 which we would have talked about for oil price. But maybe Mayank, if you would just say a few words about your growth plans in the oil and gas business with or without the merger.

[Mayank Ashar:]

Sure, Tom. And – as far as the Cairn Capital is concerned, it is focused on three areas as a function of today’s oil prices. One is the core field of Mangala, Bhagyam, Aishwariya where we enjoy very low cost. So, we will continue to do projects like EOR and others that will continue to produce from our core field. Second is we have announced the Raageshwari deep gas project that where the capital will spend over multiple years to bring 100 million scfd of production. And the third is tight oil, the first phase of it we recently announced in – with respect to Aishwariya Barmer Hill and we’re looking at subsequent phases of tight oil projects. So, these are all predicated on a $55 per barrel oil. We have a suite of projects that are more economical at higher prices, but they effectively have been on hold. To summarize, the capital program on a go-forward basis would be broadly similar to this year consistent with the $55 per barrel oil.

[Ritesh Shah:]

Great. Thank you. Tom, just a follow-up. Specifically on the duty structure that you indicated for aluminium, you cited that the association is working closely. Have you proposed anything specific like the safe guard duties or anti-dumping duties and is there any timeline to this that we are looking at?

[Tom Albanese:]

Maybe Abhijit, can you comment on that since you were in those meetings.

[Ashwin Bajaj:]

And Ritesh, we’ll take this question and then just move on to others because there are quite a few people in the queue, please.

[Ritesh Shah:]

Thank you.

[Abhijit Pati:]

We have – what we have taken up is a very specific point with the [indiscernible]. We are all talking about the import duty, the increase, because we have been very common that there is only one metal aluminium in the country compared to the other non-ferrous metals where there is a difference between the aluminium import vis-a-vis the scrap, there is a difference of 5%. So association objective what we have taken up to the center is that clearly the increase of the import duty and make as part between scrap as well as metal. So, that’s the only one point. We have not taken up any other issue as of today.

[Ritesh Shah:]

Thank you so much.

[Operator:]

Thank you. Our next question is from the Rajiv Gandhi from Sundaram Mutual Fund. Please go ahead.

[Rajiv Gandhi:]

Thanks for the opportunity, sir. There were news regarding state government having forwarded to center the proposal to give Larsen mine where we are the JV partner, approval to move ahead with the production since under MMDRA merchant mine will be allowed till 2020. So, any progress on that?

[Tom Albanese:]

Yes. Maybe Abhijit, you can talk about the L&T lease in Odisha state. I think you’re referring to that Odisha state government. Is that right, Raj?

[Rajiv Gandhi:]

Yes.

[Tom Albanese:]

Okay.

[Abhijit Pati:]

You see so far as the L&T mines are concerned, I think, yes, they have at least got the PL referred for the ML from the state to the center level. And as you know that there are three years in time frame they have indicated, they need to really come out with their own refinery and that three to four years of the time they have the possibility of a merchant where to sell this entire alumina. So far as – we are just watching the situation because there are different type of complications are there into the system, it is not as so simple case of an just in supply agreement. So we are observing, we’re getting engaged with the L&T. As of now, there is not much of a clarity that how we really get associated with them, but definitely there is an active discussion which is going on between L&T and our management.

[Rajiv Gandhi:]

That’s right, but, let’s say, under this MMDRA till – if they get the AML from the center – the PL to ML conversion is approved, in that case Larsen can even without promising alumina refinery, they can progress with production and sell in the market till 2022 to Vale or anybody else, right?

[Abhijit Pati:]

No. As per the condition which has been laid, it’s very crystal clear that within five years from the commencement of their approval, I think they need to come out with a refinery complex. Till that four to five years of a timeframe, they are allowed and have got a liberty to sell this product to any other customers. But those bindings are absolutely clear so that’s the way they have to do it.

[Rajiv Gandhi:]

Okay. And just assuming we have 100% captive bauxite and we ramp-up the Lanjigarh refinery to 2 million tonne, what will be the COP in such a scenario for this captive alumina with 100% bauxite?

[Abhijit Pati:]

You see today we are producing on an average of around $340 per tonne of buying bauxite from domestic as well as import. Obviously, once we have a complete bauxite stream and it comes up to a 2 million tonne in production level, definitely there is a production possibility to produce this alumina at a level of around $200 to $225. So you can see that’s the difference and that is clearly $100 to $125 reduction is just possible by way of an 100% captive supply of the bauxite.

[Rajiv Gandhi:]

Okay, okay. Thanks a lot.

[Abhijit Pati:]

This is part tonne of alumina for your information, not for metal.

[Rajiv Gandhi:]

Yep, yep, yep. Thanks a ton.

[Tom Albanese:]

All right. Thanks.

[Operator:]

Thank you. Next question is from the line of Anshuman Atri from Espirito Santo.

[Anshuman Atri:]

Thank you. Thanks for the opportunity. My question is related to iron ore business. At the current pricing for iron ore, how much production can we expect from the Goan margins?

[Tom Albanese:]

Well, maybe Kishore, you can talk about that both in the context of the existing cap that’s there and the type of margins you’d be looking for. But I think it would be also good, Kishore, if you talk about the increased level of government cess, royalties, permanent funds, export duties, et cetera., that we have to bear in this typical iron ore market.

[Kishore Kumar:]

Thanks, Tom. Anshuman, as you know at the current level of taxes and duties, the cash costs for a typical Goan miner will be anywhere between $30 to $32. That is the kind of cash cost that would be incurred and your FOB realization is almost at the same level, so hardly any business case to restart. So we have already appealed to the government not to allow any duplication of taxes especially on the Goa permanent fund and the district mineral fund. Similarly the export duty is no longer a viable option because hardly any exports are happening except for a few controlled exports by the government. So as you see that the Goan opportunities directly rest on two important levers; A, the scale of production has to come on place which is important, and still can only come up with the EC limits getting in hand. The second one would be the costs have to be managed out of the large part of the costs are stuck with duties and royalties and we have made representation both at the state as well as central government.

[Tom Albanese:]

And maybe, Kishore, if you can explain how we’re going to regain market share loss with this new supply that’s coming into the market.

[Kishore Kumar:]

And one of the most important challenges for Goa would be how do we reposition ourselves to the market share that we have lost largely to Australia and Brazil, and South Africa. So, the question that comes up is that what is that Goan ore can offer to the Chinese mills. The production albeit being slow, is there a value proposition from our side and from what some of you are observing that in terms of the quality of the Goan ore, probably that is the only ore in India which can actually be exported because of couple of reasons. A, you have a much stronger phosphorus content in your product. Your product phosphorus is almost at 0.5% compared to global average of 0.1% coming from some of the large mines in Australia. Number two, your LOI, which is your loss on ignition is about 4% to 5%, which still makes your product much heavier product in terms of the sinters we are seeing as well as for the productivity of the cargo that you have. You are in a position to much easily access a stronger market for the blend with high grades in China. And third of course, there is a price component which obviously has to be profitable for the Chinese operator. So mix of all these three, four value adds, if anybody can export today in India at this price, it would be Goa. And provided your duty structure and your permanent fund, duplication taxes are all removed in the next couple of quarters. We can see Goa has a good chance of coming back into this.

[Anshuman Atri:]

Okay. So what could be the cash cost if such things are removed and say…?

[Kishore Kumar:]

Today the cost of taxes is 50% in your FOB price. The FOB price is $32, the taxes are round about $15, $16.

[Anshuman Atri:]

Okay.

[Kishore Kumar:]

Right from export duty, Goa permanent fund, district mineral fund, royalty, transport sales, if you add all these things and then you add the VAT, that is $16 for you in the price.

[Anshuman Atri:]

Okay. And secondly on the Karnataka iron ore front, there’s been talks of increasing cap on Karnataka iron ore mining so what can we expect in terms of our cap for Vedanta?

[Kishore Kumar:]

As you know, our EC limit on Karnataka has been at 6 million tonnes and now that we have cases happening in the Supreme Court and as you know today and tomorrow cases are being extended. So, let’s wait for the total decisions post the Supreme Court hearing on our iron.

[Anshuman Atri:]

Okay. Just one last final question. Given that copper is doing really well in terms of TCRC margins, are there any plans of the Brownfield expansions which were earlier discussed and then shelved?

[Tom Albanese:]

We are continuing with our engagement with the state for the requisite environmental approvals. We haven’t seen a lot of progress recently and I think as those approvals progress, we’ll be considering it mindful of overall points regarding capital allocation so it has to be a good return project. I think also we would recognize that it makes sense to expand this business, particularly if it has the ability to handle some of the more complex constraints are now beginning to come into the market. But DD, anything else you can add to that?

[DD Jalan:]

No. I think as of now looking at current economics, this business proposal, and business just makes lot of sense. But, once we get all the regulatory clearance, at that point of time we’ll again review the project economics, and as Tom said, the project has to go through a rigorous hurdle rate and if the project makes sense in the long-term, then definitely we’ll make the investment.

[Anshuman Atri:]

Okay. Thanks a lot for answering my questions.

[Operator:]

Thank you. Our last question is going to be from the line of Dhawal Doshi from PhillipCapital. Please go ahead.

[Dhawal Doshi:]

Hello, sir. So my first question is what would be the revised aluminium production guidance? So we were targeting close to 1.4 million tonnes earlier, but with the slower ramp up at BALCO and a delay in the power plant conversion, how do we see the aluminium production for this year?

[Tom Albanese:]

Dhawal, maybe I’ll start with that, and I’ll ask Abhijit to follow-up. But again to some extent in this market, it’s a frankly dynamic number, and I want to say that because if we can’t get the necessary production of increases and cost cuts particularly cost cuts at BALCO, then we’re going to have to take some tougher decisions and that could have the negative effect on our aluminium production. Our objective is to maximize cash flow per tonne of aluminium produced and that’s first and foremost the priority before growth. And I think that if we can do the right things in terms of protecting the business, reducing the costs, then we’re going to have a lower marginal cost for new parts coming online and that then allows us to ramp up. So, success will breed success on that basis. Meanwhile at Jharsuguda, right now, as long as we continue to stay cost disciplined, that allows us to increase our production as we would expect although realistically we’ve lost a few months from what we would have expected earlier in the year. But Abhijit, anything more to add to that?

[Abhijit Pati:]

No, I think you have covered everything because in this dynamic market we are very cautiously and carefully evaluating the proposition of the ramp up, because there is no point in doing in a cash negative business at this scenario. But expected production as you indicated as of today, what we decided for it at least one line ramp up at the Jharsuguda and ramp up completely hold on BALCO, we should be in a position for the year estimate around 0.9 million to 1 million tonnes of aluminium production.

[Dhawal Doshi:]

Okay. Sir, secondly let’s say if there is some further delays with regards to getting the approval for converting from an IPP to CPP, what is the maximum time that we can wait on for this year to start the production, because we need to minimum cater to that 50% capital consumption limit? So, does this plan get pushed to FY 2017 then probably if there is a couple of months needed further?

[Tom Albanese:]

Well, Abhijit, I think you get that question more often than not, so maybe you can answer that one pretty well too.

[Abhijit Pati:]

Yes. I think the most – latest by at least in the month of September is something where you need to really start because you have to definitely qualify at 51% of the consumption level. So if as an interim the relaxations we get one unit of conversion definitely that’s the time line. Beyond that it becomes little tougher, but definitely September is something where you need to really take on so far as the conversions.

[Dhawal Doshi:]

Okay. And lastly, sir, just an update on the court case with regards to the Gare Palma coal block as from what we’ve heard that the court was favoring us as far as the overall auction process was concerned and had asked the government to review the entire thing once again so is there some further…

[Tom Albanese:]

I think that recently there was a court hearing and the government asked for 30-day extension in the consideration of making the transfer and that was granted by the court.

[Dhawal Doshi:]

Okay. Thanks. Thanks a lot.

[Tom Albanese:]

Well, look I always like a call that has more questions than fewer. So again, I want to thank all of you for your continued interest and your continued participation in these events. Thank you and have a good evening.

[Operator:]

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