London Nov 4, 2015 (Thomson StreetEvents) -- Edited Transcript of Vedanta Resources PLC earnings conference call or presentation Wednesday, November 4, 2015 at 9:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Ashwin Bajaj Vedanta Resources plc - Director, IR * Anil Agarwal Vedanta Resources plc - Executive Chairman * Tom Albanese Vedanta Resources plc - CEO * D.D. Jalan Vedanta Resources plc - CFO * Abhijit Pati Vedanta Resources plc - COO, Sesa Sterlite * Steven Din Vedanta Resources plc - CEO, KCM * Mayank Ashar Vedanta Resources plc - MD and CEO, Cairn India * Kishore Kumar Vedanta Resources plc - CEO, Base Metals Africa ================================================================================ Conference Call Participants ================================================================================ * Danielle Chigumira UBS - Analyst * Fraser Jamieson JPMorgan - Analyst * Anna Mulholland Deutsche Bank - Analyst * Menno Sanderse Morgan Stanley - Analyst * Eily Ong Bloomberg Intelligence - Analyst * Ioannis Masvoulas RBC Capital Markets - Analyst * Harsh Agarwal Deutsche Bank - Analyst * Varun Ahuja JPMorgan - Analyst * Mahurkh Shekika Standard Chartered Bank - Analyst * Entia Sulfadin Societe Generale - Analyst * Alex Choi HSBC - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, good day, and welcome to the Vedanta Limited conference call. (Operator Instructions). I now hand the conference over to the speakers. -------------------------------------------------------------------------------- Ashwin Bajaj, Vedanta Resources plc - Director, IR [2] -------------------------------------------------------------------------------- Ladies and gentlemen, good morning. I'm Ashwin Bajaj, Director of Investor Relations for Vedanta Resources. Thank you for joining us today to discuss our results for the half-year financial year 2016. Let me introduce our management team present with us today. We have Mr. Anil Agarwal, our Chairman; Mr. Tom Albanese, CEO of the Group; and Mr. D.D. Jalan, Group CFO. We have leaders from several of our businesses on the phone lines. We have Mr. Mayank Ashar and Mr. Sudhir Mathur from Cairn India; Mr. Sunil Duggal from Hindustan Zinc; Mr. Steven Din from KCM, in Zambia; Mr. Abhijit Pati from aluminum; and Mr. Kishore Kumar from iron ore. With that, I would like to hand over to our Chairman. -------------------------------------------------------------------------------- Anil Agarwal, Vedanta Resources plc - Executive Chairman [3] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen. I welcome you to the interim results of Vedanta Resources. During the first half of the financial year, we drove operational efficiencies; managed operating expenses; and produced our best-ever half-yearly cash flow, lowest CapEx record from our diversified and well-invested assets. In line with our stated priorities, we remain focused on reducing net debt and improving free cash flow. Over the last six months, we have continued to witness volatile commodity markets. As a result of current market uncertainty, the Board has not declared any interim dividend, and will review dividend payment again in May 2016, when we deliver our FY16 results. We are following a disciplined approach to capital spending and operational efficiency that is leading to reduce direction of cost, with the people across the organization working together, and this will be the key to managing this period of volatility. Given the recent commodities crisis, the global resource sector outlook is challenging in short and medium term. But I'm optimistic about the future. In India, a sub-continent with a population of 1.5 billion people, Vedanta is uniquely positioned to be a significant player in the diversified natural resource sector with more than 25 years' history, and strong moorings in the home market. Vedanta aligned with Prime Minister Modi's vision for the country to emerge as a global innovation hub and to make in India. The Prime Minister's upcoming visit to the UK demonstrates the strong relationship between India and UK. We are focused on achieving a sustainable future for the communities, and will drive new technologies and innovation in our businesses. Our talented R&D specialists are on the job to work towards applying disruptive technology which can minimize the impact to the environment, as well as, future, optimize costs. I'm delighted that, as a Group, we have taken the lead to overcome business challenges, and let me share some of these developments. Last month marked our first export shipment of iron ore from Goa in three years. We are also the first company to resume mining in the state. We welcome the Goa state Government's immense effort to get the industry up and running. In July, we broke ground at Gamsberg project in South Africa; one of the world's largest underdeveloped deposits of zinc. The exciting milestone comes at a time when demand of zinc is growing and supply is shrinking. We have a long-term vision for KCM in Zambia to lead a world-class ore body with a strong reserve base. Over the past six months we have been working towards simplifying our corporate structure; announced the merger of Vedanta and Cairn India. I'm confident that this merger will create significant value for both sets of shareholders. I was delighted to welcome Cynthia Carroll, as the Chairman of Vedanta Resources Holding Limited, in September. As you know, she's the former CEO of Anglo American and has extensive experience in mining, oil, and gas, and aluminum industry. She will drive key strategic initiatives for our business. As we continue to engage closely with all our stakeholders, I'm pleased to mention that we held the first sustainable development day in London. This was a platform for open dialog with our stakeholders. Vedanta will continue to retain its position as one of the lowest [cost] producer in the world. I will now hand over to Tom, who will give you a full overview of our results. Thank you very much. -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [4] -------------------------------------------------------------------------------- Thank you, Chairman. And good morning, ladies and gentlemen. I'm pleased to welcome you to the Vedanta Resources plc first-half FY16 earnings call. I don't need to tell you that the first two quarters have been a testing time for the natural resource sector globally, as commodity prices have fallen to multi-year lows. As basic forces of supply and demand continue to drive the markets, these low prices are encouraging more consumption and discouraging new supply. So [economics one-on-one] still prevails. Although the global resource sector outlook is challenging in the short to medium term, I continue to be optimistic about the future for mining and the natural resources sector. From my own perspective, China will continue to grow, albeit at a slower pace than we've seen in the past. I believe that following a disciplined approach to capital spending and efficiency in operations will be the key to managing this period of volatility. So we, at Vedanta, have been implementing a series of initiatives to reduce capital expenditures, and our operating costs, to maintain the financial strength during this period of low commodity prices. So, let me start with a review of the first-half performance, and highlight some of these initiatives. And, again, I'll start with safety. Unfortunately, it's with the deepest regret that I have to report the loss of seven of our colleagues to fatalities in the first half. This is a deep disappointment for the organization. As I said, we're continuing in our efforts, and committed in our efforts, to achieve our objective of zero harm. And let me reassure you, zero harm is an integral part of our strategic priorities, and that's set upon to us, as management, by the Board. On a lighter note, the picture you see on the bottom right is an environmental initiative just from last week, where our subsidiary, TSPL, in Punjab province, attempted a world record for planting the largest number of saplings in an hour. And amazingly, they planted 200,000 saplings in 200 acres of land in one hour; try to replicate that. This would be the second such record globally, and the first one was about half that in Australia. And a huge initiative of the size and scale for Punjab and India, and an example of what we achieve with our CSR and our sustainable program. Considering the small forest cover in Punjab, these additional trees will help improve the biodiversity in the region. Moving to the next page, operationally, we had a robust first half with higher production at zinc India, oil and gas, aluminum, and power; and a high utilization at copper India. At iron ore, we commenced mining at Goa. And I'm happy to share the first export shipment was made in October, after a gap of three years. Overall, we had a robust EBITDA margin of 30%, despite softer LME and brent prices during the first half. That's very comparable with the best of the peers. This was primarily driven by the strong volumes and cost initiatives across the business. Our diversified portfolio helped us to deliver robust margins in this weak commodity price environment. As a result of the volatile commodity environment, the Board decided, as the Chairman said, not to pay an interim dividend. And the Board will, again, review the dividend payment in May 2016, when we deliver our FY16 full-year results. With strong operational performance and prudent capital allocation, we've reduced our net debt by $900 million in the first half. At this point, I'd like to reinforce our commitment to further reducing our net debt, and de-levering our balance sheet. We continue to progress with the merger with Cairn India with the Indian Stock Exchange approval in hand, and further approval steps in process. And we would expect the EGM for Vedanta plc shareholders to vote on approval, expected in the next few months. Moving to the next page, maximizing our cash flow and de-leveraging the balance sheet are our top priorities, given the long-term volatility and low commodity price environment. Despite the tough macro headwinds, we've been able to reduce our net debt by $900 million during the first half. And we continue to optimize our CapEx. And we keep a key focus on reducing and optimizing our CapEx; focusing on reducing OpEx; reducing marketing costs; and improving marketing margins across our businesses. As a consequence of those efforts, we have achieved about $200 million of savings in the first half, through these measures. At Gamsberg in South Africa, we've re-phased FY16 CapEx, and reduced overall project CapEx by $100 million. We want to remain positive free cash flow at each segment, and we've taken a number of restructuring initiatives to protect the free cash flow. And give some examples, a rolled product facility at BALCO was temporarily shut down; and at Lanjigarh, where we're always running at lower levels of capacity, we shut down one of the alumina refining streams. We are committed to deliver cost savings and marketing synergies of $1.3 billion over the next four years. While we're naturally focused on weak commodity prices in the near term, I'd like to recommend you that our portfolio of well-invested assets will enable us to deliver near term growth, with minimal capital costs, over the next few years. We will look to take advantage of this unique growth optionality embedded in our portfolio of low-cost assets in a disciplined manner, with a focus on free cash flow. We're positive on the India growth story, and we want to be part of this growth. We've contributed circa $1.9 billion to the Exchequer in the first half of FY16; clearly, demonstrating our commitment to India's development. India is experiencing a structural shift with lower inflation and improved energy costs. Interest rates in India have been coming down, buffering global trends; and I believe further reductions in interest rates will fuel the next India leg of economic growth. On the regulatory front, there have been a few positive developments in India during the first half. We saw the district mineral fund contributions at DMF. They were notified of 30% of royalty, at the low end of the expected range. And as the Chairman mentioned earlier, we made our first iron ore export shipment in Goa, in October. We are the first miner in Goa to restart exports after the mining ban was lifted in the state. We are constantly and continuously engaging with the government on various fronts, such as the aluminum import duty to level the playing field on Chinese aluminum imports; removal of export duty on iron ore, low-grade iron ore; linking obsessed with oil price and fair price realization for our domestic crude products. On this slide, before I move on to D.D., we reiterate that our strategic priorities remain unchanged with production growth in a disciplined manner; asset optimization; balance sheet de-leveraging; and a completion of Cairn India, Vedanta Limited merger being the top priority. At the same time, remain focused on preserving our license to operate everywhere we do business, and adding resources more than we deplete them. With that, I'll now hand over the CFO, D.D. Jalan, to provide the financial update. -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [5] -------------------------------------------------------------------------------- Thanks, Tom. And good morning to you, ladies and gentlemen. Commodity prices continued to be weak, as you all know, pretty much across the board during the first half of FY16. And this environment has impacted the performance and financials of all the major commodity producers. Despite such a current challenging environment, we have delivered a solid set of numbers for the first half of FY16, reflecting the quality of our low cost and diversified asset portfolio. The Group generated EBITDA of $1.3 billion, 39% down versus H1 FY15. But we maintain a robust EBITDA margin of 30%, thanks to both volume and costs, and marketing savings. I'll talk to you about these initiatives in later slides. EBITDA is also down, as a result of unprecedented 60% depreciation of the kwacha in first half of FY16. This resulted in a negative of $68 million on work receivables. As mentioned by Tom earlier, positive free cash flow at each business continues to be a top priority for us. Considering this, our focus remained on volume growth; a strict working capital management; and cash generation, which helped us to generate record half-year free cash flow of $1.3 billion, post-CapEx. In turn, this resulted in gross debt reduction of $700 million, and net debt reduction of $1.5 billion over last one-year period. Net gearing is higher, at 40%, on account of impairment charge taken in March 2015. As stated earlier by Chairman and Tom, the Board has decided not to pay interim dividend. And the Board will, again, review this at the year end. From this chart, you can see that lower commodity prices were the major headwind with an adverse impact of over $1 billion. In total, market and regulatory factors impacted by EBITDA by $1.3 billion, on the left-hand side of the slide. However, our volume growth and cost-saving initiatives helped us to mitigate this adverse commodity price impact by $0.5 billion, as shown on the right-hand side of the chart. Of this, $50 million was the saving coming from Zambia. These cost and marketing initiatives covered various areas, such as more efficient procurement, vendor development and alternate sourcing; production line optimization; and marketing strategy around product mix of -- product mix or customer mix to improve realization. As of now, we are working on 700 ideas to reduce costs and maximize the marketing benefits. At our Capital Markets Day, in March this year, we presented our cost and marketing savings program with a target savings of $1.3 billion over four years. I'm pleased to report that we have made a good progress in terms of implementation of these measures, and realized savings of over $191 million during H1, of which $170 million are expected to be recurring savings. In full year of 2016, we expect to deliver $400 million of these savings. The savings are reflected in lower cost burden or high realization for our products in the [results statement]. The savings also include capital expenditure that has been permanently reduced or avoided. We shall continue to bring this report card at the year-end results, again. These savings have been computed based on total cost of ownership methodology and do not include the benefit of extra spend due to input commodity inflation or deflation, regulatory or technology changes. As can be seen on this chart, net debt has been reduced by $900 million in first half of the year to $7.5 billion, primarily on account of a strong volume growth; working capital initiatives; and discipline on capital allocation. Out of these working capital initiatives, about $600 million should be seen as sustainable in the medium term, while the balance may unwind in the second half of the current year. These initiatives demonstrate the Company's ability to generate cash in challenging environment, and we are confident in the sustainability of these optimization measures. In line with our strategy of maximizing cash flow, we have re-phased our short- and medium-term CapEx spending. FY16, CapEx has been further reduced to $700 million versus $1 billion announced previously, and $1.6 billion announced initially. CapEx for FY17 is being budgeted at around $1 billion. These CapEx cuts are the consequences of a pragmatic assessment of development projects and, whenever possible, a modular approach in order to retain flexibility between financial disciplines, on the one hand, and potential growth on the other. While we continue to optimize CapEx, we allocate it wisely, towards growth projects like [UR] in oil and gas, zinc India, and other similar projects. Further, the Gamsberg project, the spend is now revised to $40 million, from $80 million budgeted for the year; and $60 million to $100 million budgeted for FY17. This will result in delay of around nine months to first volume shipment, compared to original plan of FY18. As a result, free cash flow for the first half of FY16 was $1.3 billion, compared to $1.1 billion for all of the year 2015. Lower depreciation is driven by increase in useful life of metals and mining assets with effect from October 1, 2015 (sic). Amortization was lower on account of lower asset base post-impairment charge in oil and gas business in the last financial year. Interest expenses at half year is lower by $106 million on account refinancing at lower cost and lower gross debt level post repayment of INR convertible bonds in H2 of FY15. These savings have been partly offset by $29 million of higher charge on account of capitalization of capacities at BALCO and the power plant in Punjab. However, finance costs are likely to go up marginally during FY16 with further capitalization of assets in the power sector. Investment revenue was lower compared to first half FY15, primarily on account of mark-to-market gains booked in the previous year. The tax charge, excluding the special item in H1 in the first half of this year, is $224 million, compared to $158 million (sic - see press release, "$159.7 million") in the previous period. This is on account of higher deferred tax at zinc India and a lower profit base at Cairn India. Deferred tax expenses at zinc India is higher, due to higher bond income in the current year. The full tax rate, however, will be around [40%]. The tax, a special item of $174 million, pertains to copper Zambia. This is on account of deferred tax charge resulting from changes in tax legislation. During H1 of current year, the kwacha depreciated by about 60%, from ZMW7.58 to ZMW12.06 per $1. As I mentioned earlier, this resulted into a loss of $68 million on the translation of VAT receivables. This space sets out our debt maturity profile and our refinancing plans. We have been successful in refinancing our maturing debt during the year, both at Vedanta plc and subsidiaries, through rollovers; issuance of new term debt; and repayments from internal accruals. In addition, we are able to lower our overall borrowing costs by 20 basis points, benefiting from interest rate cuts in India; issuance of INR bonds at competitive costs; and reduction on script on our term-loan portfolio at subsidiary companies. For Vedanta Limited, we continue to benefit from ample liquidity position in the Indian market. Of the FY16 maturity of $1.5 billion, $0.5 billion has already been tied up. And for the balance, $0.9 billion, in- principle approval has been obtained. We have successfully negotiated the spreads on majority of our existing term loan portfolio, and obtained an average reduction of about 22 basis points. Our refinancing plan for the rest of the year will focus on extension of the maturity profile of the debt. This will include refinancing of maturing debt for this year, and for future periods, through longer-term loans, thus resulting in about 0.5 year's higher maturity profile of the overall portfolio. As regards FY17 maturities at Vedanta plc, we will refinance part of the maturities with loans from banks, as I previously indicated. I am pleased to report that we have made significant progress, and our proposals are in the final stages of discussions with the banks, for an amount of $700 million to $900 million. The balance will be covered through part repayment of the $2.6 billion of inter-company loan, due from Vedanta Limited. We have a strong relationship with our banks, and continue to actively work with them on the refinancing efforts. At the same time, we remain focused on generating free cash flow and reducing leverage through efficient operational performance and initiatives. In summary, we continue to focus on optimizing OpEx and CapEx; generating and preserving cash; allocating capital prudently; and reducing net debt. We are confident that this continued focus on financial efficiency will help Vedanta to better deliver its long-term strategy, going forward. Thank you. And now, let me hand back to Tom. Tom? -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [6] -------------------------------------------------------------------------------- Thank you, D.D. We'll start off with oil and gas. Our gross production in our oil and gas business was in line with our guidance. However, production was 2% lower quarter on quarter, due to the conversion of some of our pre-producer wells at Mangala and to polymer injectors; and this was according to plan. This conversion will eventually lead to ramp up in our oil production. We are on track with our guidance to maintain production from Rajasthan in current year to FY15 levels. On the costs side, substantial savings were attained in key high-value contracts through negotiations, optimization of field operations, and improvements in well drilling time. Our Rajasthan water flood OpEx remained low at $5.4 (sic - see slide 21, "$5.5") per barrel of oil equivalent in the first half of the fiscal year. We continue to invest in our core fields, and drive growth projects. At Mangala EOR, the injection ramp-up plan is on track as we increased the polymer volumes from 80,000 barrels per day to 200,000 barrels per day quarter on quarter. At Aishwariya Infill campaign, we successfully brought six more wells online in the second quarter, increasing the total well count to 12, out of the 20 that had been planned. And the Bhagyam EOR is progressing well. In our Rajasthan deep development project, we've recently signed an agreement with GSPL. And, as per that agreement, they will build the gas pipeline and provide us with the gas tie-in provisions to connect with their nature gas grid. Exclusion of that gas pipeline from our own capital scope of work will help us reduce our forward capital costs for the project. We are progressing on the tendering process for new gas processing facilities, and the production is expected to start in the second half of 2017; again, subject to pipeline approval. With that pipeline tie-up with GSPL, we expect to close FY16 with a CapEx of $300 million, as against our earlier estimate of $500 million. At current crude prices, we expect, for FY17, we'll see a capital outlay of about $500 million. And we're engaging with the Government of India on issues like the revision of cess on oil production, the PFC extension policies, etc. And finally, I want to emphasize that our priority in the oil and gas business remains to be free cash flow positive in the current low oil price environment. Over 90% of our production volumes are from the core fields at MBA, Ravva, and Cambay: each with very low operating costs and high cash margin. Moving over to zinc India, our world-class zinc portfolio had a very strong first half as mined metals increased during the period, driven primarily by higher ore production across each of the mines. The refined metal production was even higher, on account of in-processing of earlier inventories and higher smelter efficiencies. We lowered our cost of production in the first half to $788 per tonne, due to these higher volumes, cost savings initiatives, and the Indian rupee depreciation; partly offset by higher government levies, like water, cess, and electricity duties. We expect the second-half cost of production to go down further, if prices of commodities like diesel and coal remain at their current levels. We also wrote back, upward, the additional provision of DMF, which was now notified at 30% of royalty, against our earlier provision of 50%. And I'm pleased to report a 50% increase in silver production, due to higher silver grades and higher ore production, mainly focused on silver from our SK mine. And that is expected to continue into the second half. On the announced 1.2 million tonnes per annum expansion at zinc India overall underground mining, at Rampura Agucha we sunk the shaft 850 meters, out of the planned 950 meters. And our mine development plan is moving ahead at a rate of 1,000 meters per month. As a matter of fact, just in October we even beat that; we had 1,200 meters per month. This is a record, and gives us the confidence to ramp up the underground mines, as per our plan, and per our commitment. The pre-stripping work for further development at Rampura Agucha open pit also made impressive progress during the first half. At the SK mine, the internal infrastructure works at the 1,000 meter level is advancing well, and we expect to enhance the ore production capacity of SK mine by 50% by the year end: that is from 2 million tonnes to 3 million tonnes. And I was just at that level at SK, the 1,000 meter level, just last week. I think international production we affected by shutdowns at Skorpion and ramping down of production at Lisheen, which will now [end] production in November of 2015. So, overall, we are on track to produce about 220,000 tonnes to 230,000 tonnes in FY16. At Skorpion, the pushback is in progress for an extension of the pit from FY17 to FY19, but that's resulted in a higher cost of production, as we've guided earlier. At Gamsberg, in South Africa, the pre-stripping commenced in July. And the project is being developed using a modular approach, as we've said, that allows flexibility to manage the capital expenditure program. Overall, again, with these good markets and strong performance by the project team, the overall Gamsberg and Skorpion refinery project CapEx of $782 million has now been reduced by $100 million; and we're pushing them to reduce that even further. And the spend is also being rephrased. FY16 CapEx is expected to be in the $40 million range; and FY17, in the range of $60 million to $100 million. This would result in about a nine-month delay in the ramp up of volumes, as against our original plans, but certainly improve cash flows over the next two years. In light of the current market conditions, the business is following a locked-box approach towards it CapEx, where the CapEx will be funded by the project's internal cash generation of the zinc international business during the same period. Let's talk now about our copper business in Zambia. At copper Zambia, our production was higher, in line with earlier guidance. Copper and concentrate was up 14% in the first quarter, with Konkola up 18% and Nchanga 5%. TLP production was up 14% in the first quarter. At Konkola, we have started to see positive impact from shaft remediation activities, improvement in equipment availability, and other pivot initiatives that we put in place one year ago. More to do, but we've seen some progress. But some of these areas would be, first, talking about shaft remediation. Number 1 shaft resumed hoisting in the first quarter of FY16, and number 4 shaft resumed partial hoisting in the second quarter of FY16. We have finished the rehabilitation of the number 4, 4 shaft mid-loading station. And that will remove a major constraint on waste hoisting, and, consequently, primary and secondary development at the 950 [meter] level. We'll pick that back up. And we'll see improved waste management through the installation of materially tracking systems and the rehabilitation to track in the hotspots, which are in progress. We've talked about our pivot initiative at Konkola to reduce unprofitable areas of production, and that's yielding some benefits. And now, we'll focus on improving operational productivities from these areas of focus. And we will maintain flexibility around these pivot initiatives. And we expect it will change from time to time, as we evaluate conditions on the ground. We're currently at a run rate about 55,000 tonnes at Konkola. And we hope to build on these successes, and reach the full potential of the high grade 270 million tonne ore body at Konkola with an average 2.7% copper. At Nchanga, where our underground costs of operations are high, we've taken a number of measures to improve the levels of profitability. And we continue to evaluate the future of these assets in light of the current copper prices, and, of course, the continued shortage of power in Zambia. The production of the tailings leach plant at Nchanga is up 14% compared to the first quarter as we see an improved reliability level in the plant, following some systematic maintenance programs that we've been running since July of 2015. The cost of production exit costs for the first half at copper Zambia was at about $1.60 per pound. And those of you that have been following our business there, you'll appreciate that's been a significant, significant improvement. I'm pleased to inform the refund of VAT has recommenced in March 2015, and has started to positively affect cash flows. The royalty rates were reduced to 6% and 9% for underground and open pit, respectively, compared to 9% and 20% as previously in place last year. Management, through the chamber of mines at Zambia, have continued its discussion with the Ministry of Mines and Ministry of Finance to improve the competitiveness of the fiscal regime in operation. Since the announcement of the national power shortages in Zambia, our own energy savings programs at KCM has reduced our overall power consumption by 5%. And we're targeting to take this to 10%. I'd like to commend the entire KCM management team, under the leadership of Steven Din, for driving this continued turnaround of this asset. But there's still a lot more to do. In August, we strengthened the team with the addition of Mark Adams as the Chief Operating Officer of KCM. He brings over 35 years of underground mining and processing experience with him. So I'm confident of even a better performance of production levels in the second half, as we continue in the turnaround of this asset. And we expect to move it to positive cash flow territory, even in the current markets, in the second half. As stated earlier, we're focused on bringing down our cost of operations, along with increasing volumes. We've been working closely with the Zambian Government, the workforce, and the unions to make sustainable long-term cost change to KCM's cost base to ensure that KCM moves down the cost curve and is competitive for the long term. We have a strong ore reserve and mineral position with at least 25 years of operations ahead of it. Now, for me, that's a 50-year vision. Finally, on October 30, pleased to say, the President of the Republic of Zambia, His Excellency Edgar Lungu, toured the Konkola mine and met with KCM management and its workforce. And we'd like to commend His Excellency on his positive leadership during this low commodity price cycle. In aluminum, production at both the smelters and the refinery were stable. Aluminum prices and premiums declined even further during the first half, while our EBITDA margin has declined from $480 per metric tonne in FY15 to $158 per metric tonne in the first-half FY16. The cost of production has been lower year on year, both at Jharsuguda and BALCO, due to currency benefits; lower alumina costs; lower power costs, probably offset by higher coal costs at Jharsuguda. Under the current challenging environment, we've also put in place, as D.D. has said, several structural measures. We have shut down the high-cost rolling product facility at BALCO; expected to result in about $10 million [cost] savings per annum for FY17. But we would like to have to face some one-time costs this year, on account of resource and people optimization. We also plan to put in the 270 megawatt CPP, which is the older and least efficient of the generators, at Korba on standby, post the startup of the new 300 megawatt CPP at Korba in the third quarter. At Lanjigarh, where we're always running our alumina refining at lower capacity due to government constraints, we decided to shut down one of the streams and enhance our utilization from another source. So, increasing the proportion of evaluator products and sales over the business will help us also guide us and hold our head over water in these current markets. We have been in discussions with the Government of India to level the playing field with the Chinese aluminum and scrap that's going into the Indian markets and increase the import duty. We've seen a huge increase in aluminum production in China, and we've also seen expansion of aluminum subsidies in China. So all we're looking at is leveling that playing field to provide a competitive environment for Indian investments of aluminum. If we look ahead, in terms of a further ramp up of aluminum smelters, we'll continue to follow a disciplinary approach and only ramp up if there's positive cash generation with that ramp up. So, we've been in discussions with the government authorities for using power from our 2,400 power plant for the Jharsuguda-II smelter. Outcome of the final hearing, which was upheld two days ago, was very positive. And we expect to get an order on for conversion later this month and commence the ramp up of the remaining pots in the first line of the 312,000 tonne facility. However, [while lines] are just focusing on positive cash flow, we have taken this BALCO II ramp up and placed it on hold, until we can show that we've reduced the cost and restructured where necessary. But notwithstanding these above measures, we are mindful of weak alumina prices and even weaker premiums, so re-evaluating all parts of the business. I've talked with you over the past year about our intent to create a power vertical and look at the 9,000 megawatts of power-generating capacity and look at creating maximum potential. I'm pleased to share the progress so far. We've seen already, just in a few short months, a large amount of best-practice sharing, improving plant performance, and bringing improved progress on the commissioning of our new units for production. We've consolidated and centralized our power sales, and ramping up the sales of our power to the retail markets. We've consolidated and centralized our coal purchase. And that's seen some savings. And we've even integrated our Hindustan Zinc, our MALCO, and, to the [coal in] generators, an import procurement under a central coal procurement group from the second quarter. With this integration, our entire coal imports are fully centralized to leverage the volume and bring synergy across the supply chain. And we do purchase about 32 million tonnes of coal per year, and that's going to exceed 40 million tonnes as we ramp up all of our facilities. So huge opportunities for synergies, as our CFO has discussed. As we look ahead, in terms of further improvements in our power, we see other areas, including logistics and service contracting, across the Group, eAuction buying, etc. During the first half, our PLFs at the 2,400 megawatt Jharsuguda power were at only 40%, due to continued lower demand and softer rates. But we would expect that PLF to increase gradually in the third quarter of FY17, as we start converting one of the generators to CCP and ramping up the pots at Jharsuguda number 2. At TSPL, the first 660 megawatt unit has availability of over 80%. And that unit's expected to continue to operate at above its 80% availability requirement. The second 660 megawatt unit of the TSPL plant will be synchronized in this quarter. The first 300 megawatt IPP unit at the 1200 megawatt Korba power has commenced its operations. And the second unit, again, will be synchronized this quarter. With the decline of imported coal prices in the second quarter by 8% to 12%, we did increase the proportion of imported coal used from previously 18% to the current 25%. And, effective this week, we expect to commence mining from the Chotia coal block. Moving on to iron ore, mining resumed in the second quarter with our first export shipments made on October 19, 2015; and we expect to produce 5.5 million tonnes from Goa this fiscal year. Our Goa iron ore, which is relatively lower grade, has received a positive response from the Chinese market, even though iron ore is currently oversupplied in the global seaborne market. Steel mills are trying to reduce their purchase price of iron by running lower grades. And, again, we have a value-in-use benefit with the Goan ores, so they can run at optimal blends. And, of course, the phosphorus content in the Australian qualities coming in the market have recently spiked to 0.1%. To offset this, the steel mills are inclined to buy low-phosphorus iron ore, which is what we can provide from Goa, which has a positive, as I said, value-in-use benefit. We also looked to take advantage of the strong domestic demand of pig iron. We've been ramping that facility up. We've seen global pig iron prices weaken, so we've increased the penetration of our pig iron into the domestic, particularly, Western, seaborne pig iron market. At copper India, our second-quarter production was impacted by maintenance shutdown. However, we anticipate over 90% utilization rates on a going-forward basis. Our TCRC's are expected to remain strong at plus $0.24 per pound on account of approved mining supply and increased concentrates into the market. So we're building enhanced complex concentrate [handling] capacity to improve our own operational flexibility and better TCRC realization. We're also, in the downstream end of that business, working on enhancing a higher margin rod-manufacturing capacity to serve the increasingly large domestic demand for copper rods. If I can sum up, our strategic priorities remain unchanged. We're focused on production growth, asset optimization, and de-levering the balance sheet. On refinancing, as D.D. has said, we're comfortable on the progress made; and I'm confident we will complete it well on time. We've demonstrated our intention to achieve our objectives through optimized OpEx and CapEx in the first half, and will continue on this path. We have adapted to the new normal environment of weak commodity prices, and pragmatic decisions have been made to maximize free cash flow at each of our business units. We are focused, at the corporate front, of completing the merger of Cairn India and Vedanta Limited. And finally, with continued focus on improving production and reducing cost, we aim to keep delivering superior returns for our shareholders. And for that, I'm happy to open the floor for questions. Thank you very much. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Danielle Chigumira, UBS - Analyst [1] -------------------------------------------------------------------------------- Danielle Chigumira, UBS. A couple of questions on aluminum. You flagged that you're pursuing a rational approach there. I would guess that at BALCO, even after cutting the rolling capacity, that's still a marginal asset, so could you clarify whether at spot prices you're cash positive at BALCO? And what would be the approach to potentially mothballing capacity if you're not? Secondly, on aluminum, the import duty was obviously recently increased to 5%. Do you have any visibility in terms of whether that duty could be increased further, going forward? -------------------------------------------------------------------------------- Danielle Chigumira, UBS - Analyst [2] -------------------------------------------------------------------------------- Yes, thank you. Maybe I'll take the BALCO question; and if you want to add anything to that, D.D., you may, and then maybe the import duty; and the Chairman, if you want to say anything on aluminum, I'm happy to have that. At BALCO, I think we have to remind ourselves that we're not only working to reduce the costs of restructure, but also increasing the value-add side of it. As a matter of fact, we're now in a position where we're not selling any ingots, so everything is one type of alloy or another. As we look at the business in terms of both the LME realization, the normal physical premium realization, and also the value-add, we're in a place where we are confident that, with our continued efforts, we can continue to be running that business. At this stage, though, we don't see it makes sense to expand the next pot if the next tranche of power costs will be higher than the current tranche of power costs. So we would not see that situation eventuating for that next level. We're working very hard on reducing that coal procurement for that next tranche of power costs. And certainly, as we have the 300 megawatt facility replacing the 275 megawatt facility, hopefully, that will give us a little more free [board]. But, in the foreseeable future, we will do what it takes to keep the current production on an EBITDA-positive basis at BALCO. Yes, sorry, I apologize, we have Abhijit on the line. Abhijit, would you take that question any further? -------------------------------------------------------------------------------- Abhijit Pati, Vedanta Resources plc - COO, Sesa Sterlite [3] -------------------------------------------------------------------------------- No, I think, thank you, Tom, because mostly it is covered. Because, though, as of today, the restructuring measures which we have taken in BALCO is definitely aimed to getting to a cash-positive situation, whereas all indications, and we are able to see that after the restructuring, where this cost is definitely coming down. Maybe we need to do little more on to the product development side. We have a couple of execution plans. It's not even a thought process now; we have a couple of execution plans on different product development which has gone in. So, thereby, we are confident that we should be in a position to take it down to a cash-positive situation. For example, [with] (inaudible), it's very clear for Vedanta aluminum sector, if it is making certain amount of the cash positive we [can] then only the ramp up; otherwise, we are holding it for the cash reserve. -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [4] -------------------------------------------------------------------------------- I think Abhijit, and the Chairman, and I have all been involved with the discussions on the import duty, leveling the play field. But maybe, Abhijit, since you've been working with the other aluminum producers, including the state-owned aluminum company, you can talk about some of those efforts to keep the playing field level. -------------------------------------------------------------------------------- Abhijit Pati, Vedanta Resources plc - COO, Sesa Sterlite [5] -------------------------------------------------------------------------------- Yes, we have been very actively getting engaged with the (inaudible) of India. And I think it is a very, very consolidated approach with the all primary aluminum producers. So, yes, the very effective [aluminumization] of India, under with that banner with us partnering the other companies, like [Hinda Coal], National Aluminum Company, we have been positioning our input duty. Enormous amount of you know the fact-based [presentation] has been done to the government. Government is quite sensitive. They have heard us very favorably, and we have been getting [any news]. And we are getting certain amount of very positive signals that they are trying to definitely help us out, because they understand the Chinese, the market, which is creating certain amount of the issues so far as the domestic aluminum production is concerned. We had quite successful to get this message up to the mining, as well as the commercial, the department of the Government of India. And we are expecting a very, very positive outcome within couple of months to really hear our story and then [clear] a certain amount of production which need to be [there] for the primary aluminum production. -------------------------------------------------------------------------------- Fraser Jamieson, JPMorgan - Analyst [6] -------------------------------------------------------------------------------- Fraser Jamieson, JPMorgan. A couple of questions. Firstly, on the refinancing that you've been talking about, you've obviously got the term loan discussions that are going on. You say, also, that you'll have a partial repayment of the Vedanta Limited loan. Just looking at your net debt summary, Vedanta Limited, it looks like, has net debt of $4.1 billion, which is over three times net debt-to-EBITDA; it has cash of just over $300 million. So where is that $1 billion coming from in Vedanta Limited? That's the first question. Then, second one is on working capital. Obviously, an extremely strong performance in this half; you mentioned some of that's sustainable, some is unsustainable. Could you maybe just breakdown some of the initiatives that have gone into that $1 billion that you've been able to unwind? Looking at the face of the accounts, for example, it looks like your payable days are now over 200 days. That kind of feels unsustainable. But any comments around that, and the portions that you think are and aren't sustainable, would be great, please. -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [7] -------------------------------------------------------------------------------- I think if we just try to look at Vedanta Limited, as Tom also has been saying, that this is a new normal: that in current commodity prices how do we maximize the value from the businesses, how do we reduce our costs, how do we see that, what our investment what we have made throughout the cycle? We make it operational so that the assets, wherein the investment has been made, we start getting the results from that. And in that process what we have done, we have started our aluminum project, Jharsuguda, albeit at a little slower pace; and now, with a clear clarity, will be ramping up faster. Number two, we have started our iron ore operation, and the first shipment has been made. The full result of that is going to come in the second half of the year. Third is some of the power plants which were ready and those are also being put to the operation. So, culmination of all these assets which are being put to use, and the robust plan to manage the cost in the current new commodity price scenario, that is what is the belief and the confidence what we are having to generate good amount of cash flow. And in this, we have got another lever to maximize our cash flow by working capital optimization. And the third piece what we have said, to optimize the CapEx. And we have shown that how we are reducing our capital costs without compromising the growth aspect. Where the capital is needed, we are putting the capital; and where we can think that this capital can be optimized, we are optimizing the CapEx. Coming back to working capital, what we have done, few levers are what we have pulled. Number one, the overall inventory cycle we have tried to optimize. And we have tried to see that we work on a thin inventory level, thin inventory level. And the second is our debt cycle. The debt cycle was also pretty large. We were giving advance to the customers, albeit little interest-bearing. So, we have decided to see that we become liquid and we don't give the extended credit facility to the debtors, and we discount those bills. And the third is some of the customers they have put in the advance payment also with us for the future supply of the material. So, the culmination of these activities, which are sustainable in nature, our cash flow has been able to improve. Coming back to the payment cycle, what you were saying, I think the overall number of days are a little larger, basically, because we have got the extended credit facility from some of our bulk commodity supplies, like concentrate, like alumina. So, that is how the overall number of days looks little high. -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [8] -------------------------------------------------------------------------------- I'll just [add] here, if we look at the savings run rate, you saw it with the Konkola numbers, they were better at the back end of the first half versus the first end. And we also saw other things, such as alumina purchases, where seaborne alumina prices dropped a lot in the last month or two of the quarter. Because of inventory effects, a lot of those savings will begin eventuating in the second half. So, that just reinforces what D.D. is saying about having that confidence of focusing on cash flow, continuing, if anything, with higher momentum in the second half. -------------------------------------------------------------------------------- Fraser Jamieson, JPMorgan - Analyst [9] -------------------------------------------------------------------------------- And, if I may follow up on that, you talked about customer advance payments. Could you give us a sense of how large that is? And what are the bits, specifically, that you think will unwind in the second half? -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [10] -------------------------------------------------------------------------------- Basically, I think these are normal trade advances what happens in the customer -- in the purchase-and-supply relationship. And some of the customers, they have paid the advance to us against the future supplies over a period of couple of years, and the amount would be somewhere around a couple of hundred million dollars. -------------------------------------------------------------------------------- Fraser Jamieson, JPMorgan - Analyst [11] -------------------------------------------------------------------------------- Sorry, that happened in this half? -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [12] -------------------------------------------------------------------------------- That happened -- -------------------------------------------------------------------------------- Fraser Jamieson, JPMorgan - Analyst [13] -------------------------------------------------------------------------------- Sorry, that $200 million -- -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [14] -------------------------------------------------------------------------------- It happened in the H1, first half of the year. -------------------------------------------------------------------------------- Fraser Jamieson, JPMorgan - Analyst [15] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Anna Mulholland, Deutsche Bank - Analyst [16] -------------------------------------------------------------------------------- Anna Mulholland, Deutsche Bank. I have three questions, please. The first is on your covenants. Obviously, your covenant looks at trailing EBITDA, last 12 months; and today, if we took a spot check on net debt-to-EBITDA, for example, you would be in breach. I'm just wondering when your covenants are next tested, whether you're in discussions to change or waive those covenants. The second question is specifically on the power situation in Zambia. You're discussing with the government, with the power suppliers. I wonder if you could give us some more detail on what the options are, what the situation is today. And finally, an update on your discussions, or lack of, with the Government of India around the proposed sale of their stake in HZL. Thanks. -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [17] -------------------------------------------------------------------------------- D.D., do you want to take the covenants? -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [18] -------------------------------------------------------------------------------- Yes. Basically, I think the covenants are tested on a half-year basis. These were tested in September, now the next testing is going to be done in March. And we have to remind ourselves that the net debt-to-EBITDA covenant is one of the strictest covenants in the sector. What is the EBITDA? It's [2.75]. And in spite of that, we are comfortably -- we have seen that we are well within the covenant ratio in September. And with the cash flow what we are generating, and with the interest what we have got in our entire businesses, to see that how do we adapt to the new real world of the low commodity price, we are quite confident that the cash flow is going to be very positive. And that positive free cash flow what the business is going to generate, that brings us the confidence that, yes, the all the covenants will get complied with. -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [19] -------------------------------------------------------------------------------- I think on power in Zambia, first -- Steven, do you want to talk about power in Zambia? -------------------------------------------------------------------------------- Steven Din, Vedanta Resources plc - CEO, KCM [20] -------------------------------------------------------------------------------- Yes, sure. Thank you, Tom. And, Anna, thank you for the question. As far as power is concerned in Zambia, so if I can just summarize, back in July the Copper Belt Energy Company, which transmits the power to the mining companies in the copper belt, did put out a force majeure notice on 30% of each company's requirements. Now, what we've managed to do since then is look at internal efficiencies, and we've managed to reduce about 5% in some months, 10% in the other. So, we're still exposed to the extent of 20% of our power requirement. Now, you asked about the options. What's happened is that 20% requirement has now been delivered by the Copper Belt Energy Company, however, at an elevated price. And then, the next option that we have is to look at the blocks of power that we have within our operations to see whether we can take out certain blocks. Taking out certain blocks of power means that you have to close down various operations, and that requires a consultation engagement with government. And we're in discussion at the moment around one of those possibilities. The other option that we obviously have available to ourselves is to look to see whether we can set up our own generating facilities. We have significant power within the Vedanta Group -- I beg your pardon, we have significant expertise in power within the Vedanta Group. And we're also looking at a Greenfield coal deposit here, which has shown good thermal characteristics at the moment. So those are the various options that we have available to ourselves. Thank you. -------------------------------------------------------------------------------- Anil Agarwal, Vedanta Resources plc - Executive Chairman [21] -------------------------------------------------------------------------------- On the HZL, the new government which has come, they have promised us that their process has started. The Cabinet has approved sale of 29% share what we have -- what they have in HZL. In their budget, also they have made a provision that this amount will come from their budget this year. We haven't seen any much activity, at this point of time. We have been meeting. I believe the Government is very serious. This Government believe in doing business, and should come through. -------------------------------------------------------------------------------- Menno Sanderse, Morgan Stanley - Analyst [22] -------------------------------------------------------------------------------- Menno, Morgan Stanley. Two questions. First, on copper Zambia, did I hear correctly that the exit costs were $1.60 per pound for the half? First of all, does it include the elevated power cost that was just talked about? And secondly, is it a sustainable number? Because that clearly is quite an amazing turnaround from where it was. Secondly, this is a bit more nitty-gritty, on slide 18, where you talk, very helpfully, about the debt and the debt payback, I want to come back to a question by Fraser and talk a little bit about the Vedanta Limited loan that's going to be repaid. So that $2 billion there in 2017. If you go to slide 35, and, I'm sorry, this is going to be nitty-gritty, where the Company, very helpfully, splits out debt and cash, where is that money going to come from? Because the cash position, as Fraser alluded to, is only $334 million in Vedanta standalone; and then, the TSMHL only has $30 million of cash. So how is that going to go up to the plc? Because, clearly, if you can achieve that, that will be a very big hurdle that's been removed. -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [23] -------------------------------------------------------------------------------- On KCM, Steven, if you can talk about how much of that power increase is in the September numbers. For my own perspective, and I speak for Steven, I think that Steven and his team would be uncomfortable with that not improving from that run rate. I mean the efforts of the team there is to keep continuously improving it. We're very mindful of the copper markets. We're mindful of our need to see that business paying its way so it can begin then attracting the necessary capital for the next generation of its development. But, Steven, can you talk about September's run-rate number? -------------------------------------------------------------------------------- Steven Din, Vedanta Resources plc - CEO, KCM [24] -------------------------------------------------------------------------------- Yes, of course, Tom. Thank you, Menno. Yes, the answer to your question is that the September numbers do include the increased power tariff. On a monthly basis, that's just under $2 million per month extra that we're paying on our power bill compared to previously. And the amount of $1.61 is the exit cost in September, where we did have some very good production levels. And, as Tom says, the team is pushing very hard. In H2, we expect to be -- we're even more aggressive in terms of where we want to end up on production. And it's really the production levels now which are going to give us bigger improvements on the overall cost of production into H2. And is it sustainable? Except for the benefit that we're getting from the depreciated (inaudible), which is around about $300 per tonne or $400 per tonne, I would say that the rest of it is definitely sustainable. And, on top of that, we're looking to see where we can get more efficiencies in consumption of materials, and even a drop in rates from some of the suppliers. -------------------------------------------------------------------------------- Menno Sanderse, Morgan Stanley - Analyst [25] -------------------------------------------------------------------------------- Maybe one small follow up. The production rates in September, were they equivalent to your, let's say, the run rate where you want to end the year in the second half? Or were they still a little bit lower than where you hoped to end the financial year? -------------------------------------------------------------------------------- Steven Din, Vedanta Resources plc - CEO, KCM [26] -------------------------------------------------------------------------------- Well, they were still a little bit lower than where we want to be running between October and March, for the remaining six months, but we expect more improvement. -------------------------------------------------------------------------------- Menno Sanderse, Morgan Stanley - Analyst [27] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [28] -------------------------------------------------------------------------------- Vedanta Limited, ability to make the repayment of $2.6 billion loan, if you just like to look at what I have been saying, that out of $2 billion of loan which is required to be paid by Vedanta plc in the next financial year, about $800 million to $900 million will be coming by way of loan from the bank. And balance, $1.2 billion, will be [upstreamed] by the part repayment of the inter-company loan. So, $1.2 billion loan is required to be repaid by Vedanta Limited to Vedanta plc. And that is going to come partly from the cash generation what we are going to have from the business, partly from unlocking of the working capital what this business has. This business has, we should keep in mind, the copper concentrate business, where it's a [tolling] business. So a lot of working capital gets implied over there. So, I think a combination of these two, we'll be in a position to enable $1.2 billion off of [stemming] all the funds. -------------------------------------------------------------------------------- Menno Sanderse, Morgan Stanley - Analyst [29] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Eily Ong, Bloomberg Intelligence - Analyst [30] -------------------------------------------------------------------------------- Eily Ong, Bloomberg Intelligence. We've heard a lot recently about China, Chinese metal demand, so my first question is on India. We heard, during the presentation, that India represents a unique opportunity of growth for Vedanta, and that the focus will be on production growth. The first part of my question is that can you actually provide an insight on what you're seeing in terms of the Indian commodity consumption, especially for your products? The second part of the first question is that in terms of your 66% copper-equivalent projection growth in the near term, how much market share penetration, or sales volume increase, for Vedanta are you expecting from India, compared to your 2014 numbers? The second question is on your Group structure. Given your focus is on cutting costs and delevering your balance sheet, could you provide us an insight on, or an update on, your plans for further simplification of your Group structure? Do you have any criterias that you need to meet, or debt levels that you need to do so, before you take the next step? Thank you. -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [31] -------------------------------------------------------------------------------- Maybe I'll start by just my own personal observation. The Chairman's the expert at this, so if you want to make some comments, I'm happy. But from my own perspective, looking at, say, base metals consumption, we've been seeing, if you include scrap imports, somewhere between 5% and 10%-type increases in consumption. We have found that we have held market share in some of our metals and we've lost market share in others as scrap used to go into -- over the past 10 years a lot of the scrap went into the Chinese market. I think it's being diverted now. We're beginning to see it going into other markets as China's slowing. So it's coming into that Indian market, beginning to cannibalize a lot of our other business. But I do see the signs of that steady improvement, but it's early stage. It's not going to be investment led, it's consumption led. But you do see some investment-led project building activity is picking up a bit. You certainly see it in the major cities, and I would expect to see it in those tertiary cities. I don't think we can assume that India, in the next 10 years, will have that galloping pace that we enjoyed in China, for a whole variety of reasons. But I do see that it's just taking its early stages, and it's got a level of resilience to it. As long as the Indian economy is growing at that 6% to 7% plus-type GDP pace, it'll be good for our individual businesses. I think, in terms of iron ore production sold into the domestic Indian market, as long as we're producing a higher grade product we can probably sell it to domestic producers. But the Goa material, by its nature, is less than 58%, so it's not desired by the Indian steel mills. So any growth in the Goan production, we recognize, will need to be destined for the Chinese market, Until usage preference in the Indian steel mills were to change, which I don't see in the foreseeable future, [these] Indian steel mills seem to have plenty other 58%-plus products. -------------------------------------------------------------------------------- Anil Agarwal, Vedanta Resources plc - Executive Chairman [32] -------------------------------------------------------------------------------- Yes, India subcontinent, 1.5 billion people, the consumption is one-10th of China, with a similar kind of population. And from the stage the government and the people, the young population, of 40% of the population is below 30 or 35 years. With that kind of everything you need. And I'm seeing aluminum consumption double-digit growth; 15% copper, double-digit growth. Everything is growing double-digit growth. So -- and we are the only mining company, metal resource company in India. So, as far as the consumption is concerned, as far as the growth is concerned, it's [still a testament] as potential -- where we come, this Company is a UK company focusing on Indian growth. And we are completely committed, and very, very excited, on the Indian growth; and some of the African countries' growth, that's acquired a similar taste. So, this is as far as the consumption is concerned. Thank you. -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [33] -------------------------------------------------------------------------------- Start of a journey. -------------------------------------------------------------------------------- Eily Ong, Bloomberg Intelligence - Analyst [34] -------------------------------------------------------------------------------- And on the Group structure? -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [35] -------------------------------------------------------------------------------- Basically, I think, as Chairman has been talking about, as Tom also has said, we are committed to deliver a simplified Group structure to the shareholders of the Company. And in that process, we completed one phase of simplification of the Group, wherein we consolidated some of our aluminum business, iron ore business, and copper business in India. And now, in the second phase of simplification, the proposal is to simplify the structure by merging Cairn along with Vedanta Limited. We have received the requisite approval from the BSE and stock exchanges, and we are on the -- now we are on the second stage of filing a circular with the UKLA to take the approval from the Vedanta plc shareholders. And post that, we will be filing the scheme to the High Court to convene the shareholders' meeting of Vedanta Limited and Cairn to take forward the profits. And we think that we are on track. And what we have said, that in Q2 of next financial year we are likely to complete this simplification progress. -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [36] -------------------------------------------------------------------------------- And just from my own perspective, and as we said, this -- these will be a step at a time. It is -- lay out what the next step is and then execute. And that's, effectively, what we're focusing on now, is that Cairn merger. We've laid out the process; we're going through those approval processes. We're mindful of market conditions, but the intention is to execute. -------------------------------------------------------------------------------- Eily Ong, Bloomberg Intelligence - Analyst [37] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Fraser Jamieson, JPMorgan - Analyst [38] -------------------------------------------------------------------------------- Fraser Jamieson, JPMorgan. Very quick one: what are the criteria to reinstate the dividend? That's it. -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [39] -------------------------------------------------------------------------------- I guess, as with every company, you would -- the Board would look at it at a reporting period, and look at the full range of market conditions; performance of the business; the balance sheet. We have a stated policy, which is a progressive dividend. And take those all into consideration, that's what we would intend to do next May. -------------------------------------------------------------------------------- Fraser Jamieson, JPMorgan - Analyst [40] -------------------------------------------------------------------------------- Okay. So, maybe to extend that, why? I think for some time people have viewed the dividend as arguably unsustainable, why cut it now? And what will it take -- where does the balance sheet, etc., need to get to, to allow you to reinstate it? -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [41] -------------------------------------------------------------------------------- These are always holistic discussions, looking at all considerations. I don't think we can just say one thing or another thing; it's taking everything into consideration. -------------------------------------------------------------------------------- Fraser Jamieson, JPMorgan - Analyst [42] -------------------------------------------------------------------------------- Okay. Thanks. -------------------------------------------------------------------------------- Ioannis Masvoulas, RBC Capital Markets - Analyst [43] -------------------------------------------------------------------------------- Ioannis Masvoulas, RBC. Three questions. First, in oil and gas, what's the three-year production profile, following the additional CapEx cuts? Second, just to clarify on working capital, you mention about $200 million of inflows from customer advantages. Would you expect that to grow further? Third, on iron ore, what would be the steady-state unit cost of production on a CFR China basis, assuming you deliver the 5.5 million tonnes? -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [44] -------------------------------------------------------------------------------- Maybe, Mayank, you can start with that; then D.D.; and then, Kishore. And I may just make one comment on iron ore, after Kishore is done. -------------------------------------------------------------------------------- Mayank Ashar, Vedanta Resources plc - MD and CEO, Cairn India [45] -------------------------------------------------------------------------------- Sure, Tom. As far as capital is concerned for Cairn, we have given guidance for this year, as well as next year. And you asked for a three-year forecast. What I can share with you is, at this point, we're not giving the capital guidance for the third year. However, we are working on making sure that the growth pipeline of projects from tight oil is well defined. And once we have clarity, perhaps this time next year, on crude oil price environment, and variety of external environment, we'll be more definite picture. But our job, as management, is to make sure that we spend capital wisely. We produce cash flow in this environment, but continue to make advances in technology, capital cost, operating cost; and make sure that the growth pipeline is as robust as it can be. And the capital guidance for third year, we'll kind of do it later on. -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [46] -------------------------------------------------------------------------------- Coming to the second part of your question, I think in the current commodity price scenario our main focus is to see that how do you generate positive free cash flow, and how do we always remain liquid? So we will not be averse to the idea of accepting more of such advances in future, also. -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [47] -------------------------------------------------------------------------------- Very good. Kishore? -------------------------------------------------------------------------------- Kishore Kumar, Vedanta Resources plc - CEO, Base Metals Africa [48] -------------------------------------------------------------------------------- Yes. And for the iron ore business, the CFR delivered costs to China, which includes all taxes and duties that we pay to the Government of India; it's a number $34 to $35. Now, practically breaking even in terms of cash costs at these prices. And out of this $35, about 40% of that is taxes, and almost $15 we pay in terms of various taxes within these local state government and central government. -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [49] -------------------------------------------------------------------------------- I guess, I would say, on iron ore, the overall approach we're taking is the progressive one: which is that we'll get some production going. We're starting the initial production without the relief we'd like to see on export duties or the double taxation between the development mineral fund, and also the permanent fund. And then, in short, we're getting positive cash flows for that. Work toward lifting the caps, so that we can increase our overall production; work so that we can take what are relatively narrow margins down and make them more comfortable margins. Because we have to recognize seaborne iron ore prices can decline, and we have to stay positive even in the face of that decline, and rebuild that position, but recognize that it's going to be a long time before we're back at the levels of production we would have been before the shutdown. It's important to recognize that this is not enough volume to change the balance in itself. A one-year expansion here is still a couple of days of production expansion in some of the other players, so we're not going to disrupt the market. What we want to do is we want to feed this material on the market, we want to make increasing cash flows and increase our [optionalities] so that when the markets are right we can be there. -------------------------------------------------------------------------------- Ashwin Bajaj, Vedanta Resources plc - Director, IR [50] -------------------------------------------------------------------------------- We have some questions on the phone lines, so over to you, operator. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- (Operator Instructions). Harsh Agarwal, Deutsche Bank. -------------------------------------------------------------------------------- Harsh Agarwal, Deutsche Bank - Analyst [52] -------------------------------------------------------------------------------- Mr. Jalan, I had two quick questions for you. One was to tie up the refinancing for Vedanta plc next year. You mentioned you're talking to banks in final stages for $700 million to $900 million of loan, can you give us a bit more color who these banks are? What exactly do you mean by final stages? Has the term sheet been signed? Have you received approval from the investment committee? I guess, a bit more color on the exact stage of this potential new money would be very helpful. The second quick question I had was how much outflow should we expect from the plc level to support KCM on a annual basis, let's say, in the next six to 12 months, from here on? Thank you. -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [53] -------------------------------------------------------------------------------- Okay, I think as I have articulated in my opening remarks, basically, this is a host of the Indian banks with whom we are talking about this facility of $700 million to $900 million. This has already been agreed in principle. Now they are just trying to lay down the complete process for themselves; and post that, the final term sheet will be signed. The second question is regarding the funding of the KCM. As Tom mentioned about, the cost of production of KCM is now $1.60 [per pound]. And that business is turning around. Given that, we expect that the business will be self-sustaining henceforward. But at the same time, during this year we have a commitment to pay around $140 million. Out of that, about $100 million has been already paid by Vedanta plc to KCM, and $40 million will be paid in the second half. -------------------------------------------------------------------------------- Harsh Agarwal, Deutsche Bank - Analyst [54] -------------------------------------------------------------------------------- Okay. All right, got it. Thank you, Mr. Jalan. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- Varun Ahuja, JPMorgan. -------------------------------------------------------------------------------- Varun Ahuja, JPMorgan - Analyst [56] -------------------------------------------------------------------------------- I have three quick questions. Firstly, the $700 million to $900 million term loan at plc level, can you guide whether that will be secured or unsecured? Also, can I confirm the $1.2 billion part of it of intra-company loan that is to be raised at Vedanta Limited, did I hear it right that you said it'll be purely from internal cash flows and net working capital inflows, rather than external debt raising? Secondly, regarding this $2.6 billion intra-company loan, is there any restriction within the Twin Star loans that are there between the two levels that they need to be repaid before you repay the $2.6 billion, or part of the $2.6 billion intra-company loan? Lastly, on Vedanta Limited results, we saw that there was INR38 billion, or $600 million, of inflow from advance on sales. Does that add up to the $1 billion working capital inflow that we saw at the consolidated number? Thank you. -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [57] -------------------------------------------------------------------------------- Okay, basically, I think as I articulated on $700 million to $900 million of plc loan, this loan is going to be largely unsecured. The second point was regarding internal cash of $1.2 billion. I think I amply narrated that -- how this $1.2 billion will be getting generated at Vedanta Limited, and how it will be upstreamed. Basically, this is going to be done over next three to four months' time. The $1 billion of free -- $1 billion of working capital initiative, that includes this advance from the customer, that is part of that. Then, the last point was regarding the inter-company loan. Basically, inter-company loan is going to be repaid by Vedanta Limited to TSMHL. The money has to be upstreamed from Vedanta Limited to TSMHL; and then, TSMHL has to repay the inter-company loan between TSMHL and Vedanta plc. That is all in the process which has to be followed. In this process, definitely, we have to take the approval of the lenders also before making -- before upstreaming the funds from Vedanta Limited to TSMHL. That will be by purchase of the shares. -------------------------------------------------------------------------------- Operator [58] -------------------------------------------------------------------------------- [Mahurkh Shekika], Standard Chartered Bank. -------------------------------------------------------------------------------- Mahurkh Shekika, Standard Chartered Bank - Analyst [59] -------------------------------------------------------------------------------- First question is if I look at the HoldCo level debt, that has increased by about [$325 million] in the first half. Can you tell me the exact terms and maturity profile of this debt, and what has this debt been used for? -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [60] -------------------------------------------------------------------------------- Basically, I think this debt is largely, as I said, that some money had been downstreamed to KCM as a part of their refinancing plan, restructuring plan. Partly, it is because of that. And partly, it is because of some of the operational needs at Vedanta plc. This is in a normal course the loan has been raised at a term of somewhere around LIBOR plus 350 to 400 basis points. -------------------------------------------------------------------------------- Mahurkh Shekika, Standard Chartered Bank - Analyst [61] -------------------------------------------------------------------------------- And what is tenure? -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [62] -------------------------------------------------------------------------------- These loans are, I believe, for a tenure of four to five years. -------------------------------------------------------------------------------- Mahurkh Shekika, Standard Chartered Bank - Analyst [63] -------------------------------------------------------------------------------- Okay. The other question is, with respect to the upstreaming of cash from the Vedanta Limited level through the inter-company loan repayment, just trying to understand what you exactly meant by the purchase of shares in the earlier answer. And are you ruling out any further inter-company loans from Cairn that you did last year? -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [64] -------------------------------------------------------------------------------- Sorry, what was the last part of your question, please? -------------------------------------------------------------------------------- Mahurkh Shekika, Standard Chartered Bank - Analyst [65] -------------------------------------------------------------------------------- Are you ruling out any further inter-company loan from Cairn India to Twin Star Mauritius, something which you did last year? -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [66] -------------------------------------------------------------------------------- Okay. As of now, there is no plan for any further inter-company loans between Cairn India and Vedanta Limited. So, that's number one. And the first part of the question was? For [upstreaming] of the fund there are various [optionalities] which is available: one, as I said, that it is a repurchase of the share, and another is the capitalization of TSMHL by sending loan from Vedanta Limited to TSMHL. Both these [optionalities] are there, so, depending on the circumstances, we will choose one of the options. -------------------------------------------------------------------------------- Mahurkh Shekika, Standard Chartered Bank - Analyst [67] -------------------------------------------------------------------------------- Okay thanks. -------------------------------------------------------------------------------- Operator [68] -------------------------------------------------------------------------------- [Entia Sulfadin], Societe Generale. -------------------------------------------------------------------------------- Entia Sulfadin, Societe Generale - Analyst [69] -------------------------------------------------------------------------------- I just have two questions. One is if I can just have a yes or no answer with regards to how you are going to raise funds at the Vedanta Limited level for the loan repayment. So, just to clarify, you are not -- Vedanta Limited is not in discussions for another loan at [DR] level in order to pay off Vedanta resources? Because there was an article recently that Vedanta Limited is in talks with Standard Chartered over a loan which carries a SBI performance guarantee; if you could just perhaps provide some clarity on that, please. Secondly, it's on the $1.25 billion Cairn loan that supposedly falls due in quarter 1, 2016. What is your thinking behind that? What if the merger does not happen by then? What is the probability of you seeking an extension on that loan rather than repaying it? Also, would you need a minority shareholder approval at Cairn if that is what you are thinking about? -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [70] -------------------------------------------------------------------------------- Basically, I think I'll tackle all your three questions. The first question was regarding the further loan at Vedanta Limited. Of course we are in discussion with loans at Vedanta Limited. And as I mentioned to you, that our main priority at Vedanta Limited is to see that how do we refinance some of our loans to see that the maturity profile gets extended. In that process, we are in discussions with the banks to see that how can we get longer term loan at Vedanta Limited, and reduce our costs of interest also. The second part of the question was regarding Standard Chartered Bank. I think if you have heard the news it was in relation to some of the customer advance, what we had been discussing with them. That transition has already been done. The third part is regarding the Cairn loan. Basically, we have got various optionality to deal with the Cairn loan, which is due in the month of May and June. So, we are evaluating all those options. But be assured that any of the option is going to be used within the framework of the law. And we will be evaluating those options, and will be dealing with it. -------------------------------------------------------------------------------- Entia Sulfadin, Societe Generale - Analyst [71] -------------------------------------------------------------------------------- Can I just have a follow up, please. The Company has indicated, on several occasions, that all options are on the table with regards to meeting your refinancing needs. Can you say that you are confident enough where you are today, in all your discussions and options that you are working on, that restructuring is not an option that you may be looking at? -------------------------------------------------------------------------------- Anil Agarwal, Vedanta Resources plc - Executive Chairman [72] -------------------------------------------------------------------------------- No, we are more than confident that we deal with each and every -- if you look in our peer groups, where other loans are very balanced with the peer groups, and we are very confident that we will deal with each of our [due payments]. -------------------------------------------------------------------------------- Entia Sulfadin, Societe Generale - Analyst [73] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [74] -------------------------------------------------------------------------------- I just want to reinforce that what we're focusing on is maximizing cash flow from operations. And the single best way to manage the balance sheet is generating cash from operations. -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [75] -------------------------------------------------------------------------------- Absolutely. -------------------------------------------------------------------------------- Entia Sulfadin, Societe Generale - Analyst [76] -------------------------------------------------------------------------------- That's a very helpful answer. Thank you. -------------------------------------------------------------------------------- Operator [77] -------------------------------------------------------------------------------- [Alex Choi], HSBC. -------------------------------------------------------------------------------- Alex Choi, HSBC - Analyst [78] -------------------------------------------------------------------------------- I've got two questions. The first one is I noticed that the timetable for Cairn India merger is actually postponed by one quarter. May I know the reason why? And the second question is on the $1.2 billion of the refinancing from the Vedanta Limited level to upstream to Vedanta plc. Just want to clarify that with the $1.2 billion will be purely based on the unlocking of working capital from the copper segment? Thank you. -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [79] -------------------------------------------------------------------------------- Can you repeat the first question, please? -------------------------------------------------------------------------------- Alex Choi, HSBC - Analyst [80] -------------------------------------------------------------------------------- The first question is on the Cairn India merger timetable. I notice that it has been delayed for one quarter, so is there any reason why? -------------------------------------------------------------------------------- Tom Albanese, Vedanta Resources plc - CEO [81] -------------------------------------------------------------------------------- I think we're just going -- it was just the normal process, going through the CB approvals and having a position. So we're looking at really a month or two. -------------------------------------------------------------------------------- Anil Agarwal, Vedanta Resources plc - Executive Chairman [82] -------------------------------------------------------------------------------- Yes, I think there was a delay in getting the CB approval for about a month, or so. I think, let's say, it's still an effect of that. And number two is that $1.2 billion loan, what you have been talking about. As I said, I'll reiterate the point that is it going to be there -- it is going to be upstream either from the cash flow which gets generated from the business, or from our working capital initiatives, and [meaning] of the working capital, at Vedanta Limited. -------------------------------------------------------------------------------- Alex Choi, HSBC - Analyst [83] -------------------------------------------------------------------------------- So Vedanta Limited, there's no need for Vedanta Limited to actually raise funds from bond issuance or bank loans to pay this $1.2 billion? Am I right? -------------------------------------------------------------------------------- Anil Agarwal, Vedanta Resources plc - Executive Chairman [84] -------------------------------------------------------------------------------- Sorry, your line seems to be bad. I think I'll have to ask you to repeat the point, please? -------------------------------------------------------------------------------- Alex Choi, HSBC - Analyst [85] -------------------------------------------------------------------------------- I mean would there be any need for Vedanta Limited to raise domestic bond or bank loan to pay this $1.2 billion? -------------------------------------------------------------------------------- D.D. Jalan, Vedanta Resources plc - CFO [86] -------------------------------------------------------------------------------- Basically, I think as a -- if I'm understanding your question right, Vedanta Limited is in discussion with some of the banks for refinancing their existing loan to extend the maturity profile. And for this $1.25 billion loan, it is not contingent upon any fresh borrowing; it is going to be there from the leaning of the working capital, as well as from the free cash flow which gets generated from the business. -------------------------------------------------------------------------------- Alex Choi, HSBC - Analyst [87] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Operator [88] -------------------------------------------------------------------------------- I now hand the floor back to the management, that was the last question. Over to you, sir. -------------------------------------------------------------------------------- Ashwin Bajaj, Vedanta Resources plc - Director, IR [89] -------------------------------------------------------------------------------- Thanks, operator. Thanks, ladies and gentlemen, for joining us today. And if anyone has further questions, please contact us at investor relations. Thank you. -------------------------------------------------------------------------------- Operator [90] -------------------------------------------------------------------------------- Thank you. Ladies and gentlemen, with that, we conclude this conference. Thank you for joining us. And you may now disconnect your lines.
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