Sesa Sterlite merger arbitrage

According to the merger arrangement between Sesa Goa and Sterlite, every 5 shares of Sterlite industries will be exchanged for 3 shares of Sesa.

The adjusted price of Sterlite (86*5/3 = 143.3) is about 10 less than Sesa share price of 153.

I was wondering why this difference exists even though a few days remain for the ex-date.

Wouldnt it be prudent for someone byuing Sesa to buy Sterlite instead and wait for the conversion?

An arbitrage opportunity is there by buying Sterlite shares and selling Sesa in futures or selling call options.

Are there some other factors that inhibit such trades? Would there be a big delay in the conversion of shares from Sterlite to Sesa which could result in locked investment?

I had shares of both Sesa Goa. Today, I sold shares of Sesa Goa at 163.75, and for an equivalent amount, I bought shares of Sterlite at 91.4. I estimate that I will get about (163.753/91.45) 7% more Sesa Goa Shares than I had originally after the merger goes through.

Nice and easy trade. I anticipate that it even if it may take a while to get Sesa Goa shares in exchange of Sterlite, if one wants to hold on to the shares for around 30 days, it is a good call.

I did not think of the futures. Let me work on that. Thanks for pointing it out.



Sesa Goa Sep and Oct Futures are trading at a 10 Rs. discount to the spot price. So I guess, in futures, such an arbitrage opportunity does not exist.

So, this arbritrage can only be done if you own Sesa Goa shares.



To further exploit this arbitrage, I sold 165 Sept calls of Sesa Goa for Rs. 7. And I bought 1.33 times the number of Sterlite shares in cash at 90.4.

My logic is that I am acquiring Sterlite shares 7 Rs. cheaper than I would have to pay in the open market. If the price of Sesa Goa were to go up beyond 165, I already have an equivalent amount of Sterlite Shares in my possession. So I will have a profit of around 7*1.08 on Sterlite Shares in my possession.

In case the price falls, I have a cushion of 7 Rs. in the fall of Sterlite. I might also have a chance to sell the call at a profit and the sterlite shares at a loss. It is not a small risk, but the upside seemed worth it, especially if one believes in the value accretion story post the merger.

Glad it helped… What are your reasons for holding Sesa. Do you see their problems being resolved soon?

The value of Sesa Goa, when I bought them, around 125, was less than the value of its cairn stake.

At that point, it was clearly evident that the Karnataka mines issue had a clearance from the Supreme Court, and needed only a regulatory approval from the State Govt. Given the noises being made all around that the Supreme Court had goofed in Goa, and brought Iron Ore Exports to a standstill and at least partially contributed to the CAD, it is reasonable to expect that Goa will also restart soon.

So here was a company, selling at less than the value of its investments, and sitting on licenses to mine which were worth a lot (even if it was not operational). The company’s market cap was 12500 Crore, the value of 20% of Cairn was also 12500 Cr. and when the mines were operational, the company used to make cash profits of 3-4000 Crore annually. There was practically no downside, and lots of upside, so Sesa Goa was clearly a buy.

In the meantime, after I bought, the merger case got resolved, and the merger ratio is fixed, so one has to look at Sesa Sterlite, and not Sesa Goa alone in valuing the company. This makes it quite another ball game, because now one is exchanging a practically zero debt company (with a zero debt asset) with a company with lots of legal issues and high debt.

Sesa Sterlite will have a combined market cap of Rs. 45000 Crores or thereabouts. It will have some tremendous assets (Hindustan Zinc, Cairn, Sesa Goa Iron Ore, Sterlite Copper, and Sterlite Power) along with some problem cases -Vedanta Aluminium Ore problems, Sesa Goa problems- and lots and lots (15 billion $ worth) of debt. It is quite interesting to analyze this complex maze of assets, give holding company discounts, and figure out whether one has a margin of safety embedded in the holding at the current market price. The margin of safety must also take into account the possibility of a sharp deterioration in metal prices. So I have to say I am not so sure. But some of the assets are so wonderful, that it certainly warrants a much closer look. If I end up doing a detailed analysis, I will post it here.



Thanks Samir, for your overview. Yes… I was watching the price basically due to the market cap of Sesa being close to the stake in Cairn. No doubt, Sesa Goa as such was undervalued. However, the reason for not investing was the impending merger which would bring a huge amount of debt.

Besides the complexity of the new arrangement, Vendanata Sterlite group as such seems to be facing a lot of regulatory issues. Besides the Iron ore issues in Goa and Karnataka, they have been denied access to Bauxite in Odissa. Problems with their copper smelter in TN. The group is facing a lot of liquidity issues. It is to be seen how they can get access to the cash of Hindustan Zinc. Probably a huge dividend payout is a possibility before the Govt sells its stake.

Eager to know of your valuation estimates post merger.

You are right in the high debt and the regulatory complexity. But still, individually, each of these companies is highly profitable, apparently very well run, and each is quite export oriented (or has, like cairn an export parity price). I think regulatory complexity is a given for companies in this field, and the cost of the metal reflects this.

With Hindustan Zinc, again, you have a really low valuation. Company is zero debt, has cash on the books Rs.22000 Crores, and is valued at 45000 Crores. This means the core business is valued at only 25000 Crores, and has free cash flow of Rs. 2000 crores a year, after investing 1500 crores as capex. To me, this seems like a really low valuation with high margin of safety.

I have bought Hindustan Zinc, but I am a little uncertain about how it will play out. I am pretty certain that I will not lose money, but I am not sure about how much I will make.

The situation is as follows:

1). Either the government auctions off its stake, as a block. Then the buyer, (Most lIkely, Vedanta) will have to trigger an open offer. So minority shareholders can sell at the price the buyer pays.

2). The government decides to sell its stake as an FPO. Vedanta picks up only only 10% from the FPO (to get to 74%), and then merges the company with Sterlite. In this case, the merger might get done at a share swap which is not very attractive for minority shareholders.

3). The situation keeps going as such. Then a huge dividend is paid out, or a share buyback is announced(which would be more tax efficient). In this case, we don’t know the price at which such a buy back would be announced.

Like I said, the valuation gives a margin of safety. But the uncertainty of the future course might prevent one from getting a huge upside.

Highlights of the Concall by Capital Mkt

Zinc - India Business

Mined metal production was higher by 16% in Q2FY’14 to 222000 tonne and 22% in H1FY’14 to 459000 tonne, as compared with the corresponding prior periods respectively, due to higher production at Rampura Agucha and restarting of Zawar mines.

Integrated refined zinc production increased by 28% in Q2FY’14 to 195000 tonne and 19% in H1FY’14 to 368000 tonne due to improved operational efficiencies.

Production of integrated refined lead was higher by 29% in Q2FY’14 to 31000 tonne and 13% in H1FY’14 to 60000 tonne, on account of improved utilization of smelter capacity. Integrated saleable silver production was up 14% in Q2FY’12 to 83000 tonne and 12% in H1FY’14 to 160000 tonne.

The company expects to deliver approximately 950 kt of mined metal production during the year. The momentum in integrated zinc lead production in H1FY’14 is expected to continue in H2FY’14. Integrated saleable silver production is expected to be ~335 MT in FY 2014.

Zinc CoP before royalty during the quarter was 8% higher to Rs 50522 per tonne on account of currency depreciation and lower by-product credits, partly offset by higher production volume and operational efficiencies

Zinc - International Business

Total production of refined zinc and mined zinc-lead metal in concentrate (MIC) decreased 6% in Q2FY’14 to 106000 tonne as compared with Q2FY’13. The company expects to produce around 390 kt of refined zinc and mined zinc-lead metal in concentrate in FY2014.

Cost of production was marginally 3% higher in Q2FY’14 to USD 1059 per tonne and 3% in H1FY’14 to USD 1122 per tonne compared with corresponding prior periods, due to lower volumes.

Oil & Gas Business

In Q2, average gross operated production and working interest production were 213,299 barrels of oil equivalent per day (boepd) and 132,862 boepd, respectively, 3% higher than the corresponding prior period.

The gross production at the Rajasthan block was 2% higher at 175,478 boepd. Production at Cambay was 27% higher in Q2 due to new infill wells and one work over well that had been put into production in Q1. Production at Ravva was 2% higher in Q2.

With the current production ramp up, Cairn India remains on track for its FY 2013-14 exit gross production target of over 225,000 boepd from all producing assets including over 200,000 boepd from the Rajasthan block.

During the quarter Cairn India made significant progress in terms of its three key drivers for production enhancement, viz Well Construction, Facility uptime & cost efficiency and Government/JV approvals. With the focus on cost optimisation and enhanced operational efficiencies, Cairn India maintained its field direct operating cost within US$ 3/boe for the quarter.

In the Rajasthan block, Cairn India received the partner approval for the Mangala polymer Enhanced Oil Recovery (EOR) project, for which the contracting is in advanced stages and full field implementation is expected to commence in FY15. Further, the company continues to focus on the low permeability reservoirs within the Barmer Hill formation through use of advanced technology in order to monetize the significant resources.

Further on the regulatory front, the government issued a policy on the Integrated Development Plan. The prime objective of the policy is to reduce the time consumed from discovery to production.

Cairn India is actively pursuing exploration and appraisal (E&A) activities in all its assets.

Cairn India has drilled 6 E&A wells in the RJ block in H1 FY14. Out of these, 4 wells found hydrocarbons. A Declaration of potential commerciality has been submitted for one of the discoveries. In Rajasthan, Cairn India plans to drill several high impact exploration wells to drill out 50% of the 530 million barrels of gross recoverable risked prospective resources by end FY 2013-14.

The appraisal drilling in the Krishna Godavari (KG-ONN- 2003/1) block witnessed three-fold productivity increase post successful drilling and fraccing, significantly improving the commerciality of the Nagayalanka discovery. The Declaration of commerciality is expected to be submitted in this financial year. Cairn India also plans to drill an exploration well in the Ravva block within this financial year, besides further exploration activities in other blocks in the India and International portfolios.

Iron Ore Business

During Q2, iron ore operations at Goa and Karnataka continued to be suspended. Following the lifting of restriction on mining at Karnataka by the Supreme Court, the company is now awaiting final statutory clearances to restart mining. The company expects to resume mining at Karnataka soon. Regarding the suspension of mining in Goa, the hearings have now commenced at the Supreme Court.

During the quarter, production of pig iron was 57% higher as compared with the corresponding prior period, on account of the commissioning of new capacities in Q2 FY2013.

At Liberia, the company has established by extensive drilling, contours of large iron ore deposits with further upside. We are reviewing the different phased options, including the first phase of 2 mt.

Copper â India / Australia Business

Following a temporary closure in Q1, the smelter had restarted in end June and is now operating at normalized capacity. The copper anode production in Q2 was 90,000 tonne, in line with the rated capacity. Copper cathode production was 82,000 tonne in Q2 and 98,000 tonne in H1.

Mined metal production at Australia was 6,000 tonne in Q2.

Aluminium Business

The Lanjigarh alumina refinery recommenced operations in July and produced 116,000 tonne in Q2. During Q2, the refinery supplied 17% of the alumina consumed by its smelters as compared with 100% import of alumina feed by the smelters in Q1. The company expects the refinery to ramp-up to its rated capacity in Q3 FY2014.

In Q2, the Jharsuguda-I and Korba-II smelters continued to operate above their rated capacities. Around 60% of the total production was converted into value added products in Q2, in line with the corresponding prior period.

Alumina COP for the quarter at Lanjigarh was Rs. 20,471 per tonne (USD 329 per tonne).

The company continues to improve its cost performance and maintain its position is second quartile of global cost curve, despite purchased alumina and bauxite. At Jharsuguda, aluminium COP was lower due to improved coal sourcing mix and operational efficiencies partially offset by higher alumina cost. At Balco, aluminium COP was higher on account of higher alumina cost and further tapering of coal linkage, partially offset by lower specific power consumption and other operational efficiencies.

The company continues to evaluate the potential start-up date of the 1.25 million tonne smelter at Jharsuguda. It is currently working on completing the project.

The company expects to tap first metal at the 325 ktpa BALCO-III Aluminium smelter in Q3 FY2014. The first unit of the 1200 MW Power plant at BALCO is expected to be synchronized in Q4 FY2014. On receipt of remaining regulatory clearances, it expect to commence mining at its BALCO coal block in Q1 FY2015.

Power Business

Power sales were lower in Q2 and H1, primarily due to lower demand. Jharsuguda power plant operated in Q2 at a PLF of 31% for all four units as compared with 41% during the corresponding prior period.

Work at the Talwandi Sabo power project is progressing well and the first unit is expected to be synchronized in Q3 FY2014.


Gross debt at Sesa Sterlite was Rs 84,063 crore as at 30 September 2013. It increased by around Rs. 7,500 crore on account of INR currency depreciation against US dollar loan and marginally due to increase in rupee debt mainly for project finance. This comprises long term loans of Rs. 66,192 crore and short term working capital loans of Rs. 17,871 crore. Out of total loan of Rs. 84,063 crore, Rs. 41,450 crore loan is in Sesa Sterlite standalone and balance Rs. 42,613 crore in other subsidiaries. Of the total loan, 31% is in INR terms and balance 69% is in US dollar terms. On a consolidated basis the debt equity ratio is at 0.8.

The company has consolidated cash, cash equivalents and liquid investments of Rs. 48,140 crore, out of which Rs. 28,783 crore was invested in debt mutual funds, Rs. 4,657 crore in bonds, and Rs. 14,700 crore in bank deposits.

In an interview in today’s Mint, Anil Agarwal talks about the possibility of merging Cairn India with Sesa-Sterlite.

“We are debating it. Pure play E&P company has its own value. Cairn is a beautiful E and P company. Merging them together has its own value because you can use your cash flow together and do something. So we are evaluating how we can create share-holder value. There is so much excitement while doing this and we want to do the right thing. We have not taken a decision yet.”

Highlights of the Concall by Capital Mkt;

Zinc - India Business

FY'14 EBITDA was up 7% to Rs 6804 tonne due to higher integrated metal volumes and INR depreciation, partially offset by lower metal prices. Q4FY'14 EBITDA was 18% lower at Rs 1711 crore mainly due to lower volumes and lower metal prices

Mined metal production for the year was 880,000 tonne, marginally higher than the previous year of 870,000 tonne. Production in H2 was lower than what the company had planned initially due to slower than expected ramp up of underground mining projects and changes in the mining sequence, wherein preference was given to the primary mine development.

Integrated production of refined metal during the year was highest ever due to operational efficiencies and higher availability of smelters. Full year integrated production of refined zinc, lead and silver were higher by 13% (743000 tonne), 10% (118000 tonne) and 4% (301000 tonne) respectively.

The zinc metal cost of production before royalty in FY'14 was 12% higher in rupee terms to Rs 51100 per tonne and 1% higher in USD terms to USD 844 per tonne as compared with the previous year. The increase in rupee terms was driven by currency depreciation of 11%, significantly lower acid credits and higher mine development and diesel costs.

The cost of production for Q4FY'14 was 24% higher in rupee terms to Rs 55500 per tonne and 8% higher in USD terms to USD 899 per tonne as compared with the corresponding prior periods. The increase in rupee terms was due to 14% currency depreciation, lower mined metal production and higher mine development cost.

The Kayad and Rampura Agucha (RA) underground mine projects commenced commercial production during the year and after initial difficulties, are now ramping up well. The company is also evaluating optimizing the RA open pit, to ensure consistent output from the mine. The Sindesar Khurd expansion project is as per schedule.

During the year, total mine development increased by over 75%, marking the beginning of transition from open-cast to underground mining.

Capital expenditure for the year was US$243 million and is expected to be around US$250 million in FY'15.

In FY'14, there was a gross addition of 26.1 million tonne to reserves and resources, prior to a depletion of 9.3 million tonne. The contained zinc-lead metal increased by 1.1 million tonne, prior to depletion of 0.9 million tonne. Total reserves and resources at March 31, 2014 were 365.1 million tonne containing 35.2 million tonne of zinc-lead metal and 28,804 tonne of silver. Overall mine life continues to be 25+ years

The company expects mined metal and integrated refined metal production including silver in FY'15 to be marginally higher from FY'14. The cost of production is expected to remain stable.

Zinc - International Business

EBITDA for Q4FY'14 was 2% higher at Rs 441 crore despite lower production due to higher inventory sales. Full year EBITDA was 20% lower at Rs 1282 crore due to lower volumes, higher COP and marginally lower LME prices.

During Q4 FY'14, refined zinc production at Skorpion was higher than Q3FY'14 by 10,000 tonne to 33000 tonne consequent to ramp up after an unplanned shutdown in Q3FY'14. However, this was offset by lower mined metal production at BMM and Lisheen due to lower ore grades. Total production in Q4 remained in line with Q3, though the full year production was 15% lower on account of disruptions in production caused by accidents at Lisheen and BMM in Q1FY'14 and the unplanned shutdown at Skorpion in Q3FY'14. COP for the year was higher due to the lower volumes.

The company expects FY'15 volumes at Zinc International to remain in line with FY'14, with a drop in Lisheen production expected to be compensated by Skorpion and BMM.

Oil & Gas Business

Cairn achieved average gross production of 218,651 barrels of oil equivalent per day (boepd) for FY'14, 6% higher than the previous year.

In Rajasthan, the Company successfully achieved its target FY'14 exit rate of production of 200,000 boepd.

A total of 129 new wells were brought on production during the year, with 45 wells added in Q4FY'14. This has led to the Rajasthan Block achieving gross average production of 181,530 boepd for FY'14, up 7% YoY

The company continues to focus on key development projects to enhance recovery with overall planned net capex of US$3 billion by FY'17. It target to achieve reserve replacement ratio of 150% in next 3 years, subject to PSC extension till 2030, and a 3 year production CAGR of 7-10% from known discoveries with flat production in FY 2015 at Rajasthan

Iron Ore Business

The Supreme Court has lifted the ban on mining in the State of Goa subject to certain conditions; vide its order dated 21 April, 2014. The Honorable Supreme Court has imposed an interim state-wide cap of 20 mtpa, subject to determination of final capacity by an Expert Committee.

Further, in its order, the Supreme Court has held that all mining leases in the State of Goa, including those of Sesa Sterlite, have expired in 2007. Consequently, no mining operations can be carried out until renewal/execution of mining lease deeds by the State government. The company is working towards securing the necessary permissions for commencement of operations at the earliest.

The Supreme Court has also directed that the entire sale value arising out of e-auction of inventories be appropriated to various purposes specified in the order with only the average cost of excavation of iron ores paid to the mining lessees.

Further, for all fresh production of iron ore, a payment of 10% of sale price shall be made by all lessees towards the Goa Iron Ore Permanent Fund.

At Goa, the company participated in e-auctions of inventory and sold 0.3 million tonne during the quarter but these were not accounted for as sales since the dispatches did not take place during the quarter.

The company resumed mining on December 28, 2013 and optimized its approved annual capacity of 2.29 mtpa, which resulted in a production of 1.5 mt this year. However, only 27 kt was sold during the year.

Copper â India / Australia Business

The Tuticorin copper smelter has been performing well at significantly higher utilisation levels for the last two quarters. It operated at 98% utilisation in Q4. However, the full year production was 17% lower due to the temporary closure of the smelter in Q1FY'14.

In Q4, net unit cost of conversion at Copper- India was 6.0 US cents/lb compared with 10.7 US cents/lb in the prior period. Cost of production was lower due to improved operational efficiency resulting from higher volumes, lower power cost, partially offset by lower by-product (sulphuric acid) credits. Full year net unit cost of conversion was 12% higher at 9.7 US cents/lb due to temporary shutdown in Q1 and lower by product credits

Tc/Rc in the current quarter increased to 18.5 US cents/lb, which was 25% higher as compared to the corresponding prior period. Tc/Rc is expected to remain robust on the back of rising global mine supply from brownfield and greenfield expansions.

Production at Australian mine remained suspended due to a mud rush at one of the stopes in January 2014

The Tuticorin smelter is currently undergoing a planned maintenance shutdown which started on 26 April 2014 and will last for 22 days. This shutdown will improve plant availability and reliability

Aluminium Business

The Lanjigarh alumina refinery operated at 91% of its rated capacity and produced 227,000 tonne in Q4FY'14, 25% higher than Q3. Full year production was 524,000 tonne, after restarting the refinery in July 2013. This resulted in a steady increase of alumina feed from Lanjigarh to smelters, contributing to 28% of the smelters' alumina requirements in FY'14 and 49% in Q4FY'14

EBITDA was higher in Q4FY'14 and FY'14, mainly on account of lower average COP, improved premiums, higher volumes and INR depreciation, partially offset by lower LME

During FY'14, COP in rupee terms, at Jharsuguda, was 5% lower, primarily due to improved efficiencies, reduced power cost, better coal quality and higher proportion of linkage coal. COP in rupee terms, at BALCO, was 4% higher, on account of higher coal cost due to tapering of coal linkage, partially offset by operational efficiencies.

The company commenced the Korba-III 325kt smelter, achieving first metal tapping in Q4. It produced around 900 tonne of aluminium with power sourced from the BALCO 810MW power plants. Out of the first 84 pots, 36 pots had been started as of 31 March 2014. The company can facilitate upto 84 pots with the existing power plants at BALCO. It expects to commission the balance lines consequent to the commissioning of the 1,200MW power plant, for which it expect to receive regulatory approvals in Q1FY'15.

The company is working on feed stock security in terms of bauxite sourcing, alumina sourcing and the coal block start up at BALCO.

Power Business

Power sales were 21% lower in Q4 and 7% lower in FY'14, as compared with the corresponding prior periods, primarily due to lower sales at its Jharsuguda 2,400MW and BALCO 270MW power plants on account of weak market demand and evacuation constraints. The Jharsuguda 2,400MW operated at a plant load factor of 36% during the quarter.

The power generation cost at Jharsuguda during Q4FY'14 remained stable at Rs.1.76 per unit

Port Business

The company commissioned the Vizag General Cargo Berth (VGCB) in Q4FY'13. There has been a continuous increase in the tonnage handled at VGCB. During FY'14, it handled 4.7 million tonne and generated an EBITDA of Rs.24 crore

Highlights of the Concall by Capital Mkt;

Oil and Gas

  • In Q2FY'15, average gross operated production and working interest production were 9% and 7% lower year on year (yoy) at 194,508 boepd and 123,178 boepd, respectively. At Rajasthan, the company successfully completed the planned shutdown announced in Q1FY'15, for routine operational and statutory maintenance activity at the Mangala Processing Terminal, which resulted in lower production of 163,262 boepd, with Development Area (DA)-1 and DA-2 producing gross averages of 134,539 boepd and 28,723 boepd respectively.
  • At Ravva, gas sales have been suspended since 4 July 2014 on account of one of the customers undertaking a major unplanned maintenance activity within their Andhra Pradesh pipeline network. Hence, production at Ravva was lower at 20,596 boepd during the quarter despite a positive oil contribution from the 4D infill well campaign. The gas sales have recommenced on 15 October 2014
  • At Cambay, production increased by 23% yoy at 10,651 boepd during Q2FY'15 on account of successful well intervention measures undertaken in the previous quarter. Average gross production for H1FY'15 was 206,125 barrels of oil equivalent per day (boepd).EBITDA in Q2FY'15 at Rs 2701 crore was lower than Q2FY'14 due to lower volumes, lower oil prices with a higher profit petroleum tranche at the Rajasthan block in addition to one off maintenance expenses due to shutdown and higher exploration expenses. The operating expense in Rajasthan continues to be at single digit at US$ 6.3/bbl for Q2 FY2015. Sequential EBITDA is driven by the volumes and softer Brent crude oil prices in the current quarter.
  • 3 discoveries were made in Q2FY'15, taking the total to 11 new discoveries since resumption of exploration in March 2013 and a total of 36 discoveries so far.Cairn India has established 1.4 bn boe (barrel of oil equivalent) of hydrocarbons in-place to date tested and announced an additional 0.6 billion boe discovered but yet to be tested.

Zinc India

  • Mined metal production in Q2FY'15 was up 30% sequentially at 212575 tonne as compared with 163131 tonne in the previous quarter and down 4% from 221,646 tonne a year ago. For six month period, mined metal production was 375706 tonne as compared to 459471 tonne in H1 FY'14. This is in line with company's mine plan at Rampura Agucha of lower mined metal production in the first half of the year as the company excavated more waste than ore and exposed the ore body by September; this will contribute higher volumes in the ore and exposed the ore body by September; this will contribute higher volumes in the second half of the year
  • Integrated production of refined zinc, lead and silver were up sequentially by 25%, 18% and 21% respectively but were down on year on year basis due to planned lower MIC production in H1 and smelter shutdownsThe zinc metal cost of production before royalty during the quarter was Rs.55200 per tonne ($910), which is higher by 9% (12% in USD terms) from a year ago. The increase is attributed to lower production volumes smelter shutdown costs, increased one time and ongoing employee expense on account of long-term wage agreement, higher coal/power costs and higher mine development expenses, partly offset by higher credits and rupee appreciation
  • The royalty rates have been increased wef 1 September 2014 for Zinc from 8.4% to 10% and for Lead from 12.7% to 14.5%.All expansion projects are advancing well although the progress of Rampura Agucha underground was slower than expectation in H1FY'15.During the quarter, environmental clearance was received for enhancement of production capacity of Kayad mine from 0.35 MTPA to 1.0 MTPA.

Zinc International

  • Refined zinc metal production at Skorpion was lower than the corresponding prior quarter due to unplanned maintenance activities at the mill. Zinc-lead mined metal production was lower mainly at Lisheen due to lower grades as per mine plan sequencingCoP increased to USD 1,376 per tonne as compared to USD 1,059 per tonne due to reduced volumes.
  • EBITDA at Rs. 329 crore was 16% lower than the corresponding quarter due to lower volumes and shifting of sale of a metal parcel at Skorpion to Q3 affecting the EBITDA by Rs. 68 crore which is to be viewed as timing issue. Higher zinc prices though helped partially offset the adverse impact.

Iron ore

  • At Goa, the State Cabinet has approved a new policy for grant of mining leases in October. The policy states that the leases will be categorized and renewed and will not be auctioned. Earlier, the High Court of Bombay at Goa had directed the State Government to renew mining leases for the mines that have paid the stamp duty, and the company is working with the state government to resume mining in Q4FY15.
  • At Karnataka, the company had resumed production in December 2013 and since then it has produced 1.8 mt and sold 1.08 mt through e-auctions till 30 September 2014, of which 0.3mt production and 0.6mt sales were in Q2 FY2015. The mine is not producing or selling ore since August 2014 and is awaiting forest clearance and mining lease renewal, which is expected to be received in Q3. Overall, the company expects to produce at its provisional annual capacity of 2.29 million tonne during the year.Production of pig iron was 19% higher as compared to corresponding prior quarter as production ramped up.

Copper India/Australia

  • Copper cathode production was 22% higher than Q2FY'12 with the Tuticorin smelter delivering record production since its planned shutdown in Q1. In Q2FY'15 the business delivered strong operational efficiencyThe 160MW power plant at Tuticorin continued to operate efficiently at a Plant Load Factor (PLF) of 94% in Q2 and 82% in H1Fy'15.
  • Australian mine was put on care and maintenance in July 2014. The company continues to progress satisfactorily on reviewing the technical and economic feasibility of a program for additional exploration to enable re-opening after FY'16.EBITDA is higher than Q2FY'14 by Rs 45 crore due to improved volumes, better Tc/Rcs and healthier by product credits. During Q2, Tc/Rc, acid prices and premiums were strong.The Tuticorin smelter is expected to produce at over 90% capacity utilization going forward.


  • The Lanjigarh alumina refinery continues to operate at above 90% of its rated capacity and produced 226,000 tonne in Q2FY'15.CoP at Lanjigarh is impacted by the mix of bauxite, with increased reliance on imported bauxite reflecting in higher CoP compared to H1FY'14.Lanjigarh Refinery Expansion Project (1 mtpa to 6 mtpa): The Public Hearing was successfully conducted at Lanjigarh in July 2014.The Ministry of Environment and Forest's Expert Advisory Committee meeting has been conducted during the quarter. The Environmental Clearance is expected in H2FY'15, following which expansion will be undertaken in a phased manner.
  • Laterite Mines: The Government of Odisha has granted Prospecting Licenses (PLs) for three Laterite deposits. The company shall apply for Mining Lease (ML) and take environmental Clearance following exploration
  • The company is taking a number of steps to meet its coal requirements. It has replaced its large part of purchases of e-auction coal with imported coal, where global seaborne prices have reduced substantially. The company has increased its proportion of imported coal from less than 10% to 25-35%. Concurrently it is pursuing with the government to get its coal linkage restored in view of de-allocation of its coal block.

Highlights of the Concall by Capital Mkt;

Oil and Gas:

  • The company intends to double its gas production in Q4FY15 with a target of 100 mmscfd by FY17.The company has maintained low opex of $5.7/bbl at Rajasthan.

Zinc Business

  • Q3FY’15 CoP was lower on a q-o-q and y-o-y basis at $817/tonne due to higher mined metal production, lower diesel price and higher acid credits.The board approved deepening of the Rampura Agucha mine by an additional 50m which will increase the mine life by a few years. Owing to the current MMDR ordinance all zinc and lead mines have got extension upto 31st March 2030
  • Around 90% of the company’s coal requirement for the quarter was imported with landed cost at around Rs 6,500/ tonne (for 6,000 GCV). The management indicated that there has not been any meaningful benefit of lower coal prices in Q3FY15 but expect it to come in Q4
  • Approval for the 250 kt Gamsberg mine and 150 kt Skorpion zinc refinery conversion project was received in November 2014.The company’s Skorpion refinery January production has been affected due to fire in the cell house leading to 23 days shut down impacting Q4FY’15 production.Lisheen mine would be shut down in mid FY16.

Aluminium Business

  • The company has commissioned 84 pots at Korba-II and has produced 20000 tonne in Q3FY15. Around 50 pots have been commissioned in Jharsuguda and are currently under trial runs. Further pots to be commissioned in Jharsuguda by sourcing power from the 2,400 MW Jharsuguda power plant in the coming months
  • CoP at $1,753 vs $1,853 in Q2, due to improved e-auction coal availability and lower imported coal prices.Strong Ingot premiums at $415/t.The company expects Q4FY’15 production to be higher from newly ramping up potlines.

Power Business

  • PLF at the company’s Jharsuguda power plant was impacted (41% PLF in Q3FY’15) owing to lower demand and evacuation constraints.The company received approval for the 1200 MW power plant at BALCO.
  • 600 MW (out of the 1980 MW) of the Talwandi Sabo became operational during the quarter and produced 260 million units. Unit II and III of Talwandi Sabo are expected to be synchronized in Q4FY15 and Q1FY16.Availability of coal during the quarter has improved. The company is also preparing for the upcoming coal block auctions

Iron ore Business

  • The company has renewed mining lease & received forest clearance for Karnataka mines and expect to commence mining at around 2.3 mtpa in February 2015
  • Mining leases for mines in Goa has been received with awaiting other approvals. Expect to start mining in Q1FY16

Copper India

  • Tuticorin Smelter continues to operate at high capacity utilization. Going forward the company expects utilization to be more than 90%.CY15 Global TcRc settled higher; expected realizations over c.25c/lb