Vedanta visit Imposes confidence on project delivery and Niyamgiri mine “weeks away”: Liberium Capital

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Just back from the booming India and the first two days of the Vedanta site visit. We reported briefly on Monday about the overview presentation on their activities (see attached presentation). To recap the incredible growth promised by management in copper and iron ore is much more attainable than we had previously thought and the spectacular aluminium and zinc/lead expansion plans look on time and on budget.

Just back from the booming India and the first two days of the Vedanta site visit. We reported briefly on Monday about the overview presentation on their activities (see attached presentation). To recap the incredible growth promised by management in copper and iron ore is much more attainable than we had previously thought and the spectacular aluminium and zinc/lead expansion plans look on time and on budget.
The meat of days 1 & 2 have been the visits to Vedanta Aluminium’s (VAL), Jharsuguda aluminium and power projects and the Lanjigarh alumina refinery, associated proposed power plant and Niyamgiri bauxite mine 5 kms away. In short these mega projects ($12bn of capex in total) are hugely impressive and being executed with breathtaking speed and competency and when complete will be best in class assets on a global scale. We were impressed with Vedanta’s approach to CSR in this very poor region and feel its treatment by sensationalist foreign NGOs has on balance been both unfair and regrettable.
• 1.75mtpa Jharsuguda aluminium smelter to be the biggest and lowest cost in the world. Vedanta has made huge progress in its goal to produce 1.75mt of aluminium pa from this site by mid 2012. The first 0.5mt pa line is up and running and will be fully commissioned by the end of the year and the gradual commissioning of the other 1.25mt smelter on the same site is on track. We were impressed by the levels of skills in the team with 25 expats from around the ali industry supplementing a very technically able local team. Construction, HSE and operating practices were impressive and world class operating metrics are already being attained in the first pot line which is up and running. The capital efficiency of the build is best in class ($2,311/t) and we feel they will be able to get to c.$1000/t cash costs (with their bauxite mine up and running) making it the lowest cost large smelter complex in the world.

• 3.6GW of captive and commercial power plants at Jharsuguda being built to capex and timing schedules unheard of in US/Europe. When complete VAL will have built 3.6GW of generating capacity on site (a similar size to Drax in the UK) for world beating capex/KW metrics that are c.50% of those in Europe and the US. The captive 9 x 135GW plant is already operational and the first of the 4 x 600GW commercial power plants for the soon to be IPO’ed Sterlite Energy is being commissioned at the end of March, with the rest commissioned by December. The plants are serviced by abundant local coal (the mine is 30km away) supplied under linkage contracts from Coal India (i.e. cost plus) related pricing patterns in common with the rest of the sector.



• Lanjigarh alumina refinery expansions on track: 2mtpa from Q2 2010; 5mtpa from mid 2011. Vedanta are running only one of their two 0.85mtpa alumina plants’ lines at present because of poor bauxite availability. However in anticipation of the opening of a rail route to the site which will facilitate better bauxite imports, they are debottlenecking both lines and expect to start the second line in Q2 to take productive capacity to 2mt. The expansion of the plant to 5mt is well underway and on track for completion in mid 2011. Unit costs at Lanjigarh are not good despite its world class operating metrics and state of the art design. Its remote location and the poor quality of available bauxite mean it is paying c.$180/t for its bauxite consumption ($55-60/t of bauxite delivered and usage is over 3:1 on account of its poor quality). This compares to bauxite costs of c$15/t if Niyamgiri were operational, plus substantial savings on caustic soda. On a 5mt plant capacity savings of a short $1bn are possible if bauxite can be sourced locally!

• Niyamgiri bauxite mine – ruling weeks away? Management were very open about the approvals processes for the controversial bauxite mine. The proposed mine is one of many high quality bauxite resources in the 60km radius of the site (1bnt are in this locality). The Supreme Court last year ruled that Vedanta could proceed with the mining of the deposit and the Ministry of the Environment has visited site on 23rd-28th Jan to make a final report on whether it will issue the final permit needed for commencement of mining, that of Forest Diversion. As such we expect a ruling one way or another in a matter of weeks.


• Cultural beliefs standing in the way of a greater opportunity to reduce poverty? The unoccupied mine site is located 5km over the hill from the refinery site, in steep, inhospitable terrain. The nearest dwellings are a few kms away and no resettlement is required from the site for the simple reason nobody lives in the immediate proximity. Support for the project appears strong in and around Lanjigarh and at local governmental levels where Vedanta have already introduced 2600 jobs and have brought numerous other benefits to this incredibly poor region in the form of medical, educational, environmental, water, infrastructure and social & cultural projects. Dissent to this project seems to lie solely with the hill tribe Dongria Kohndh, who have famously been celebrated by Survival International and other almost exclusively foreign NGOs. This is a thorny cultural issue (the Dongria Kohndh worship the earth or Dharini ), so attacking the mountain is said to hurt their god. How the Indian government wishes to resolve this issue will be interesting as all earth in this region could be considered sacred by this tribe and it is no coincidence that all 56 MOUs for major projects in Orissa are being objected to by the NGO community for similar reasons. On a personal level, having seen the huge positive impact that the Lanjigarh and Jharsuguda has had on reducing poverty and increasing wealth in this region it is desperate shame if the actions of a few scupper an opportunity for the wider region.

• The site visit gives us confidence on project delivery. We were conservative in our production forecasts (assuming delays & technical hiccups) and cash costs assumptions (lower than targeted productivity) in our model. However, the site visit gives us confidence that the company is well on track to deliver its growth projects especially in Konkola, Sesa and VAL. If the projects are commissioned on time, we estimate that the company would deliver 3.5x production growth by FY14 vs our ‘conservative’ estimate of 2.9x in the next four years. This implies CAGR EBITDA growth of 42% in the next four years if the company meets the production and cash cost targets vs our estimated of 32%. We estimate a fair value of £55.4 per share assuming company successfully delivers production and cash cost targets, implying 50% upside to our fair value of £36.7 per share and 116% upside to today’s share price. We believe that our fair value (43% upside to current share price) captures possible underlying delivery risks implying that there is significant upgrade potential if the management successfully delivers on its targets.
Vedanta is one of our top picks for 2010 and we see materialisation of Niyamgiri bauxite mine and Konkola expansions this year as key catalysts. Iron ore & zinc expansions, minority buyouts (HZL and Balco) and the potential IPOs of Sterlite Energy (announced by VED), KCM and VAL (as rumoured in press) are other potential catalysts to look for.

Source: Liberium Capital

e-mail:: ryangrey23@yahoo.in phone:: 00091987-6543210

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