With L&T deal through, Vedantas bauxite woes in Orissa largely over

Written by fe Bureau | Bhubaneswar | Updated: Nov 28 2013, 11:26am hrs
Vedanta Aluminium Ltd's (VAL) $1-billion alumina refinery project at Lanjigarh will now have access to bauxite with the Orissa government getting favourable legal opinion on VALs sale-purchase agreement with Larsen and Toubro (L&T). The refinery currently has a capacity of 1 million tonnes (mt). Sources said apart from the states advocate general, eminent lawyers like Soli Sorabjee and UU Lalit have backed the legal opinion.

L&T has a prospective licence to mine bauxite in Sijumali and Kutrumali districts. Two years ago, it had formed a special purpose vehicle (SPV) in which it holds 76%, with Vedanta holding 24%. In order to enable the SPV to apply for a mining licence and obtain other regulatory approvals, the sale-purchase agreement between the two companies required an approval from the state government. This, sources say, is no longer a problem in the light of the favourable legal opinion that has now been received.

The Sijumali mines in Rayagada district has bauxite reserves of around 245 mt while the Kutrumali mines in Kalahandi have reserves of around 40 mt. VAL requires 3 mt of bauxite to feed the 1-mt alumina refinery in Lanjigarh; the plant is currently running at 50% capacity by sourcing bauxite from Gujarat and Chhattisgarh.

With the bauxite problem resolved, VAL now needs to be able to have access to more coal from Mahanadi Coalfields for the proposed ramp-up in capacity of aluminium. However, even with some additional coal from Mahanadi and some ramp-up in production from the smelter, Ebitda (earnings before interest tax and depreciation) from VAL could treble, estimate analysts.

Currently, analysts are pencilling in operating profits from VAL of roughly R1,000 crore in FY15, but that could improve significantly now that the company will have access to bauxite and will not need to import the mineral. A turnaround in the fortunes of VAL through higher production of aluminium will help ease the companys cash flows. Analysts observe that the debt could rise by Rs 2,000-3,000 crore over the next year or so. Consolidated sales of Sesa Sterlite are currently estimated to cross Rs 65,000 crore in FY14 while the operating profit is expected to come in at close to Rs 23,500 crore.

Under the agreement, the mining lease will be given to the L&T-led SPV while Vedanta Aluminium would buy the mined bauxite to feed its 1-million tonne alumina refinery. The state government's policy does not allow value addition of bauxite to happen outside the state; so, any firm having a PL for bauxite mining needs to have an arrangement for its final conversion into aluminium within the state. Vedanta earlier had a similar pact with Orissa Mining Corporation, which ran into trouble with the local tribals of Niyamgiri not giving their consent to mine from the location since it hurt their religious beliefs. The L&T mines are around 50-60 km from Niyamgiri.

Vedantas proposal to source bauxite from the Sijumali-Kutrumali bauxite mines is under consideration and a decision will be taken soon in this matter, Orissa chief minister Naveen Patnaik said.

Vedanta Group chairman Anil Agarwal and L&T chairman, AM Naik on Tuesday met the Orissa chief minister and urged him for speedy clearance to the sale-purchase agreement between the two firms and grant of a mining lease.

As per the agreement, we can source bauxite from L&T mines, Agarwal told mediapersons after the meeting. Naik said L&T would invest about Rs 4,000 crore in the Rs 12,000-crore joint venture.

In an interview with FE in September, Agarwal had exuded confidence of getting bauxite supplies, stating that the state government was seriously considering giving an alternative area for mining in the same place (near Niyamgiri). The state government is working on alternative sites. There's huge pressure on the government. The question is of expediting the whole process of clearances, Agarwal had said, adding, if the government wants, all clearances can be in place within 10 days.

Before the grant of the mining lease, stage I and II forest and environment clearance from the Ccentral government would be required. The prospecting lease of the two mines was granted to L&T way back in 1992, but the company could not get a mining lease since its sale-purchase agreement for value addition in the state with Alcoa of US and later with Dubal of Dubai failed to take off. About two years back, L&T had entered into a sale-purchase agreement with Vedanta for value addition, by picking up 24% of Dubal in the SPV.

At 2.5 billion tonnes, Orissa sits on one of the largest bauxite reserves. Industry sources say that quality-wise, it is the worlds best.

Vedanta says it has invested around Rs 50,000 crore in Orissa, including in the aluminium and the alumina plant, along with the smelter and the power plant.