Nalco’s aluminum production cost is high due to high overheads, employee costs, etc. We estimate FY15 production costs of aluminum at ~$1,900/tonne.
Cost reduction from captive coal mines will be limited due to the surrender of coal linkage; we estimate aluminum costs can decline by $125/tonne. Despite captive coal, we expect weak aluminum profitability; at spot all-in prices, Nalco’s aluminum operations will incur an Ebitda loss. Given the time required for mine development, we do not model the benefit of captive coal in our earnings but assign R5/share separately to SOTP; our calculation is based on 8X post tax earnings from captive coal discounted to FY17.
We incorporate our economist’s revised Fx rate and lower all-in aluminum price assumption. We estimate that Nalco will have to incur additional capex of R400 crore for the development of these mines. The government has allotted two coal mines (Utkal D & E) to Nalco. But the company will have to surrender an equal tonnage in linkages from Coal India. These two coal mines have total reserves of ~200 mt and an annual mining capacity of 4 mtpa including (1) 67.5 mt at Utkal E mine project with an annual capacity of 2 mtpa, and (2) ~138 mt at Utkal D coal mine with an annual mining capacity of 2 mtpa. While Utkal E coal mine was earlier allotted to Nalco (before cancellation following the Supreme Court order), Utkal D mine was earlier allotted to Odisha Mining Corporation and was de-allocated in 2012 by the Inter Ministerial group.
Nalco needs to ensure final MOEF clearances (forest), land acquisition and mining lease from the state government before it commences mining. These developments, together with mine infrastructure can take up to two years (and will depend on the pace of clearances).