Vedanta Ltd

NSE:VEDL

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, good day and welcome to the Q1 FY '20 Earnings Conference Call of Vedanta Limited. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Ms. Rashmi Mohanty from Vedanta Limited. Thank you, and over to you.

[Rashmi Mohanty]

Thank you, operator, and a very good evening, ladies and gentleman. I am Rashmi Mohanty, Head Group Investor Relations for Vedanta. Thank you for joining us today to discuss our first quarter results of fiscal 2020.We will be referring to the presentation that is available on our website. The call will be led by our group CEO, Mr. Srinivasan Venkatakrishnan. On the call, we are also joined by our group CFO, Arun Kumar; several of our business leaders, Ajay Dixit from Oil & Gas; Sunil Duggal from Hindustan Zinc; Deshnee Naidoo from Zinc International; Ajay Kapur from Aluminum and Power; and Pankaj Malhan from ESL.I now hand it over to Venkat for an update on the company's operational performance.

[Srinivasan Venkatakrishnan, CEO & Whole]

Thank you, Rashmi. Good evening, ladies and gentlemen, and welcome to Vedanta Limited First Quarter FY 2020 Earnings Conference Call.At the outset before we go into the quarter's results, if I can draw your attention to the 2 releases that went out in the last 24 hours, one came from Volcan late last night and the other was from us this morning. Volcan announced last night that it was exercising its right to call the bonds early and unwind its stake in Anglo American. Vedanta also announced that it has agreed today to entirely unwind its structured investment ahead of the originally envisaged scheduled maturity.You'll recall that this structured investment was entered into in December last year between our subsidiary and Volcan. This investment was part of our cash management activities to deliver superior returns. Following completion of this unwind and Volcan exercising its call options on the convertible bonds, neither Vedanta nor Volcan will have any exposure to the shares that were held in Anglo American.At a very high level, if I can make the following points: this investment has delivered a net gain of above $100 million for Vedanta Limited shareholders in the 8 months it was held. And if you recall, we said it would -- we went into this with an idea of generating superior returns and that objective has been met.Importantly, we had, we, meaning Vedanta Limited, didn't have a right to unwind this investment ahead of the scheduled maturities in 2020. But after discussions, Volcan has agreed in the interest of all of the shareholders of Vedanta to grant Vedanta that right, realize and pass on all of the gains arising from the transaction, and I think that's quite important and it's been appreciated by a number of our shareholders this morning.This unwind reflects our disciplined approach to treasury management and capital allocation together with our commitment at all times to act in the interest of all of our shareholders. Our strategy continues to focus on our existing businesses where we believe that there are significant opportunities to unlock their full potential.Finally on that subject, following completion of this unwind and Volcan exercising its call on the convertible bonds, I repeat neither Volcan nor Vedanta will have any exposures to the shares that were held in Anglo American. If I can then move on to some big-picture takeaways and reassurance, turning to some key takeaways from our first quarter results. Despite volatile commodity markets and price headwinds, we posted a solid operating performance with improvements across some of our key verticals. Our annual guidance for FY '20, which if you recall, projects year-on-year volume growth at 11% on Hindustan Zinc and Lead, 14% in the case of silver from Hindustan Zinc, doubling of volumes of zinc concentrated metal at Zinc International, 11% at Cairn Oil & Gas, 18% at Electrosteel, and in the case of Aluminum, a drop in unit cost of 14% are all unchanged given a strong second half to this year that we are expecting.Finally on that subject, our growth projects are on track and have started to deliver some of the initial volumes that we were expecting. Spending a bit of time on the commodity markets. This has been a weak quarter across commodities, triggered by prolonged trade tensions and a mixed outlook on global growth.Turning to our commodity basket on oil. The first half of 2019 saw supply exceeding demand. Geopolitical tensions are likely to remain high in the Middle East, which could weigh on prices even though so far impact on oil price has been minimal. Base metals, which are perhaps the ones most exposed, prices of zinc and lead remain range-bound. Aluminum prices have fallen to its lows and are likely to induce smelter cuts generating some recovery soon.We continue to be bullish on silver, and if you recall, silver has rallied by about 16%, 17%. Iron ore is fighting on continued supply disruption and record China steel output, and we expect the deficit to keep some of these prices high.We are entering the seasonally weak period of July to September, and a pickup in demand is now likely again in the second half of 2020. And when you look at the commodity cycles, which have happened in the past, the first one to rally is gold followed by silver, subsequently oil and then the other commodities start to rally. There is a lag impact, which we see coming through in the second half of this year.Turning to India. Our strong presence in India keeps us excited about the portfolio of businesses here. If we combine the enormous economic growth potential of our country together with the vast untapped and underexposed resources, it provides us with a massive opportunity being the only diversified private sector natural resources company in the subcontinent. We are pleased with a renewed focus by the Government of India on natural resources sector as an engine of economic growth. The new national mining policy and the OALP opens up the natural resources base in India, and we are best placed to benefit from this opportunity in a responsible and sustainable manner.Now turning to the key highlights in the quarterly results, starting with our aluminum business. We continue with our cost reduction trajectory for the third consecutive quarter with our cost down 8% year-on-year. This was backed by the highest ever production of alumina at our Lanjigarh refinery, which went up 37% year-on-year with the lowest cost in the last 2 years at $284 a tonne.Turning to Zinc India, mined zinc and lead production was stable year-on-year, tonnage did go up, while silver production outperformed year-on-year by 15%. More on silver in a short while. The ramp-up at our Zinc International Gamsberg Mine, given the monthly improvements in the key metrics that we are seeing, is on track. In our oil and gas business, the production has been lower by 8% year-on-year in the first quarter. The reasons include natural decline and the proactive maintenance and workovers, which are being carried out to enhance asset reliability for a smoother ramp up in the subsequent quarters. By doing this now, we are ensuring that we have a stronger second half to this year when some of those projects come on stream.We recently secured 10 additional blocks in the OALP round 2 and 3, totaling to around 10,000 square kilometers. With this acquisition, we now have 51 exploration blocks spreading over 60,000 square kilometers.Turning to our iron ore business. Our iron ore sales in Karnataka tripled year-on-year and our pig iron sales went up by 7% again year-on-year.Electrosteel continues to perform well with production up 34%. The benefits of the above volume increases were somewhat dampened by a fall in the commodity prices. Our EBITDA of INR 5,200 crores, rounded up, represents a margin of 27% and that was despite the lower commodity prices. Our balance sheet remains steady with a net debt-to-EBITDA ratio of just around 1.3x. More of these will be covered in Arun's presentation.Turning to the most important subject of safety and environmental sustainability. After a continuous run of 4 months without any fatality at any of our 41 business units, I am deeply saddened to report that we had 3 fatal accidents at the start of the first quarter, 2 at Hindustan Zinc and 1 at Cairn Oil & Gas. All 3 accidents related to our business partners, that is contractors, and none of these were directly related to the production areas. A life lost is one too many, and we have redoubled our efforts in this regard with more involvement from our side with the business partners and their safety team and ensuring compliance to our procedures. Since then, our business units have been fatality-free for over 3 months.On energy and water management, savings and recycling, we are tracking well against our annual targets of achieving energy savings of 1.75 million gigajoules and water saving of 2.5 million cubic meters, both of which remain a focus area.We continue to focus on improving the management of our tailings dam. We will be commissioning India's first-ever dry tail stacking plant at the Zawar Mine this quarter. This will increase process water recovery by 2,500 cubic meters per day, also reducing any risks associated with tailings dam. Our waste to wealth efforts continue to bear fruit, with the company recycling 107% of its high-volume low-toxic wastes.At Hindustan Zinc, we have seen a significant ramp-up in waste utilization, utilizing 175,000 tonnes in road construction versus 70,000 tonnes same time last year and sending 13,800 tonnes to the cement industry.Our business has continued to win prestigious awards this quarter. For example, Hindustan Zinc was selected as a member of the FTSE4Good Emerging Index for the third consecutive year.Now turning through to our respective business verticals, starting with Hindustan Zinc, lead and silver. Here, we are starting with our silver business, which represents significant value that has not been daylighted in our portfolio. Silver companies and silver streaming companies trade at multiples well north of 12 to 17 tonnes. In addition to us being a global leader in the zinc and lead business, we are also soon to get to a similar position in our silver business. We are the fastest-growing silver producer in the world at a cumulative annual growth rate of 18%, targeting 750 tonnes to 800 tonnes of production this year. The volumes have more than doubled in the last 5 years rendering us a place amongst the top 10 producers of silver globally. We expect to reach over 1,000 tonnes in the next 2 years. This ramp-up will be achieved through higher volumes in a silver-rich geography, implementation of Fumer technology and improved recoveries. As I said, with silver prices up 15% over the past 3 months, this business could contribute EBITDA in excess of $500 million.Zinc and lead remains a key pillar of our business, with a stable mined metal production of 213,000 tonnes for the quarter. The quarter saw a 10% higher ore production year-on-year, but it was offset by temporary geological, geotechnical issues leading to lower grades and other one-off factors. Integrated metal production for the business was up 3% year-on-year with zinc being stable, whilst the lead production jumped by 13% to 48,000 tonnes driving higher silver volumes to 159 tonnes, a jump of 15% year-on-year.Zinc cost of production before royalty during the quarter was $1,067 a tonne, higher 2% year-on-year, primarily driven by lower ore grade, higher power cost and water cost.We look at a stronger year ahead on the back of our growth projects to deliver on our market guidance of around 1 million tonnes of integrated metal for the year. These include some specific examples at Rampura Agucha Mine, the shaft project is on track and is expected to be completed by the third quarter of this year. At our SK Mine said, the shaft is commissioned and is being integrated with the mine. It is expected to completely ramp up and support the operations in the latter half of this year. The second paste fill plant will also be commissioned in June.At our Zawar Mine, in addition to the dry tail stacking plant, 2 paste fill plants are on track for completion during the third quarter, which will allow additional mining to take place.This year, there is an increased focus to ratchet up our reserve base by upgrading resources at Zawar and RA mines, in particular the Galena [ lead ] zone and enhancing our reserves and resources at the Kayad mine lease, new ore body at Balmia Kalan, near our SK mine and the new ore body below our existing SK deposits. We are leveraging advanced surface and geophysical technology to achieve these new targets. And if you recall, at our last call where we met in person, we said exploration and reserve growth is going to be a key focus area across our verticals.Now turning to Zinc International. At our newly commissioned Gamsberg mine, the mining operations are running at their designed capacity to deliver ore at 330,000 tonnes per month with available stockpile of 1 million tonnes. Our June exit throughput was at 450 tonnes per hour with a recovery of around 63%. We aim to achieve the target of 80% recovery by Q2 using advanced process controls. Continuous focus on grade, throughput and recovery optimization should help us deliver 250,000 tonnes per annum run rate by end of the fourth quarter.The first quarter production was 23,000 tonnes. With ramp-up in progress and better recovery, production will increase over the remaining quarters to meet our guidance of 180,000 tonnes to 200,000 tonnes with the cost of production of around $1,000 a tonne.Turning to our Black Mountain mine, it had the best quarter in the last 5 years with production volume of 19,000 tonnes, up 24% year-on-year. Skorpion mine production at 18,000 tonnes was up 76% year-on-year with the annual maintenance shutdown completed in April of this year. Skorpion experienced a slope failure in May and a revised workaround mining plan is being developed. Zinc International as a whole saw a 134% year-on-year increase in production to 60,000 tonnes at a cost of production of $1,597 a tonne, which represents a reduction of 32% year-on-year.Turning to our oil and gas business. We now have an optimum portfolio mix across our oil and gas life cycle to funnel our growth aspirations. In exploration, we have secured 10 additional blocks. This takes up total acreage in our portfolio to 65,000 square kilometers across 58 blocks.We have commenced an investment, if you recall, of $3.2 billion to monetize 400 million barrels across a rich set of opportunities covering enhanced oil recovery, tight oil, tight gas and exploration and appraisal projects. With this portfolio mix and CapEx investment, we intend to ramp up our production significantly.We have partnered with legal global oilfield service companies to execute our projects. Our investments generate an IRR in excess of 20% at the oil price of around $40 a barrel. We have 10 development rigs at site currently. Our work program includes drilling over 500 wells. We have already drilled 139 wells and hooked up around 46 wells.The execution of this CapEx program at site is in full swing and it shall be the key to our production ramp-up in the current fiscal year. Our production for the first quarter at 180,000 barrels per day, we intend to exit the first half of this year with around 200,000 barrels and close the financial year with an exit rate of approximately 270,000 barrels per day, thereby meeting our annual guidance of 200,000 to 220,000 barrels per day for the current year.This production increase shall come year -- by the year-end primarily on account of 2 factors: firstly, the wells drilled across the projects shall increase to 250, of this 185 shall be booked for production; secondly, our processing capacity for both oil and gas shall increase substantially by the year-end. The facility upgradation project at MPT is planned to be completed by the year-end and that shall increase our liquid handling capacity to 1.3 million barrels of liquid per day.In tight gas RDG, the early production facility commissioned earlier is being ramped up to 90 million scfs, which equals 15,000 barrels. In addition, the completion of the gas terminals by the end of the fiscal year shall add another 90 million scfs, which is around 15,000 barrels.Investment in exploration is key to generate a stable portfolio of development projects to increase production on a sustainable basis. The acquisition of 51 exploration blocks spread across India with a mix of both onshore, offshore, provides us with a unique opportunity to unlock the potential of India's basin.In order to fully exploit the potential of these blocks, we intend to carry out 2D and 3D seismics as well as drill over 190 exploratory wells during this phase. We intend to execute this work program through an integrated partnership model with global oilfield service companies. We have already shortlisted Lloyd’s Register as the integrated project manager to help drive this exploration work program across the basins in India.In addition to our efforts on OALP, we are further augmenting our resource base in Rajasthan, Ravva and the KG basin through exploratory and appraisal drilling. The drilling work program in Rajasthan and Ravva shall commence in the current year. Overall, in the Oil and Gas business, we have a robust portfolio in place. Our execution efforts across projects shall lead to a substantial increase in 2P and 2C resources and results by the end of the current fiscal year.Turning now to aluminum, we are pleased to report that the unit cost reduction trajectory continues with the first quarter CoP at $1,764 a tonne, a reduction of 8% year-on-year. We saw new records in our captive alumina production at Lanjigarh with a highest-ever production of 446,000 tonnes, up 37% year-on-year. This was very well supported by higher supply from OMC, meeting around 65% of our bauxite requirement for the quarter. Consequently, our Lanjigarh refinery saw one of the lowest cost of production, as I said earlier, of $284 a tonne, which is a significant improvement year-on-year.On the coal side, our captive Chotia mine will comfortably achieve its full capacity of 1 million tonnes per annum this year with Q1 FY '20 production at 188,000 tonnes. Further, our linkage materialization improved to 72% during the quarter. With our plans to increase coal linkages through participation in future auctions, enhancing bauxite sourcing through exploration of new resources, captive alumina ramp up and other cost reduction initiatives, we are edging closer to our target CoP of $1,500 a tonne.Turning to Electrosteel. Our plants saw production rise of 34% year-on-year, but the EBITDA margin slowed down temporarily to 5% owing to a weaker market -- slowdown by 5% to a weaker market. The business recently launched their rebranded value-added steel portfolio, TMT bar, wire rods, ductile iron pipes to reposition our products in the market. On the expansion plans, the techno-feasibility study for expansion from 1.5 million tonnes to 2.5 million tonnes plus capacity has been completed.Turning to our iron ore business. Our sales in Karnataka tripled year-on-year to 1.2 million tonnes and our pig iron production went up 7% to 178,000 tonnes.In Goa, we're continuously engaged with the state and central governments with the support of the people adversely impacted by the Supreme Court's state-wide ban for the resumption of mining in the State of Goa. The state's High Court process is currently underway in respect of our copper smelter at Tuticorin. We continue working with the local communities and various stakeholders to achieve a win-win breakthrough to reopen the plant with their support.Before I hand over to Arun, if I can recap on our strategy to enhance long-term value, as I said, there are 5 areas we are focusing on: number one, something we will not compromise is ethics, governance, safety and our social license to operate; secondly, within the natural resources business, expanding our reserves and resource base is key; third, we are a growth company, we want to continue our track record of delivering value-added growth in all of our businesses; fourthly, this growth will be achieved with strict capital allocation and a sharp balance sheet focus; and finally, delivering the best out of our assets and -- with the best teams by sweating our assets more and harder is the finally area of focus, which will provide us the cash flow to basically fulfill all of our growth expansion plans.On that note, I will hand you over to Arun.

[G. R. Arun Kumar, CFO & Whole Time Director]

Thank you, Venkat, and good evening, good morning, everyone. As outlined by Venkat, we continue to strengthen the foundation of the volume and organic growth across businesses. In Hindustan Zinc, underground operations have stabilized, the paste fill plant, shaft. Volume ramp up at Lanjigarh continues. Structural cost improvements as well in the aluminum business steadily chipping costs away. These are very encouraging. Gamsberg ramp up proceeding slowly but steadily. Oil and gas projects again proceeding well, marginal delays in commissioning. All this sets up a strong foundation for H2 of this year and hence the rest of the year performance. As Venkat already outlined, this gives us the confidence to reconfirm our guidance on volume, costs and growth CapEx investments as communicated in the May full year results.Coming to the financial performance. EBITDA for the quarter, I'm referring to the first page there in the financial section, EBITDA for the quarter was INR 5,188 crores with a margin of 27%. ROCE continues to be in the double-digit, and the balance sheet remains strong with a net debt-to-EBITDA ratio at 1.3x.We have a detailed income statement in the appendix. Some key updates on the income statement as usual are as below. One, the depreciation charge is higher Y-o-Y due to capitalization of capacities and volume ramp-up at Gamsberg. As guided earlier, this trend is expected to continue for the rest of the year.Investment income, second, is flat year-on-year. As guided, investment income should continue at the current levels of around 7.5% pretax, subject to [ mark to mark ] (sic) [ mark to market ] on the portfolio. Last quarter, we booked significant unrealized gains on the Volcan structured transaction, if you would recollect, which is now realized in the manner of speaking, which I will cover in detail shortly.Point three, finance cost is lower year-on-year due to higher capitalization. The interest rate guidance for the year remains the same at 8.2%, 8.5% range as guided earlier, could start to trend down if the interest rate scenario eases a bit.Four, the tax rate for the quarter is 27% underlying excluding the DTA recognition at Electrosteel business, which, as you heard from Venkat, stabilized quite well during the year. A detailed note on that is given in the notes to account. It essentially represents the DTA on the carryforward losses of the acquired business, now starting to be recognized in FY '20, given the reasonable certainty we have having stabilized the operations and the business model post acquisition. On a comparable basis, the FY '20 full year guidance [ was ] expected to be 30%, 32%, no change in that. Meaning that the 27% I alluded to for the first quarter underlying tax rate will go up in the subsequent quarter to get or catch up with the full year average of 30%, 32%.Moving onto the next page. I'd like to provide further details on the unwinding of the CIHL treasury investment transaction. CIHL had negotiated an early unwind of the structured investment well ahead of maturity, netting a superior return in percentage terms of around 70% IRR, a net gain of above $100 million or approximately INR 746 crores in the 8 months that the principal was invested in. The difference between the [ same, ] i.e., the unrealized gain recognized till 31st March 2019 of INR 924 crore and the INR 764 crore (sic) [ INR 746 crore ], which is the total gain, which amounts to a difference of INR 178 crore has been accounted for in the current year's quarter results as a charge.With this, Volcan exercised an early call option to settle the MXBs as well, which had exposure to the shares of Anglo American plc. Entire realization net of transaction cost has been passed on to CIHL. With this transaction, neither Volcan nor Vedanta Limited have any exposure whatsoever to Anglo American.As Venkat outlined, our strategy continues to be on focus on existing businesses and there are significant opportunities to unlock the potential. This also reflects our disciplined approach to treasury management and capital allocation together with our commitment at all times to act in the interest of all shareholders as we had outlined earlier.Moving on to the next page on EBITDA bridge. As it can be seen on this page, EBITDA for the quarter is at INR 5,200 crore, lower by 20% Y-o-Y. As you see, the controllables on the right side are pretty much constant and the only variable is really the metal prices, zinc and aluminum, which are significantly lower, partially offset by the input commodity tailwinds of alumina and coal as well as help from currency depreciation. We've seen good progress in the operational performance as outlined earlier.Further moving to the next page on net debt. Reported net debt on June was approximately INR 28,750 crores, higher by about INR 1,800 crores. This is mainly due to some unwinding or -- of working capital, repayment of buyers credit, which was normal in our first quarter, and also classification of lease liability under borrowing category pursuant to accounting changes, basically Ind AS 116 implementation. We expect the first half working capital to be a positive, and hence quarter 2 much of this INR 1,800 crores should come back.Moving on to the final page on the balance sheet. We remain focused on maintaining the balance sheet efficiently. We have manageable maturities in the current year, which are mostly in the second half. The budgetary proposals of the [ union ] government aimed at restoring liquidity and credit offtake in the markets should perhaps help refinance in a cost-effective manner. The average maturity of our term debt consistently remains above 3 years on a rolling basis with a refinancing strategy in place to further improve this in the coming year. All our cash investments are rated Tier 1 by CRISIL and with the evolving market situation, the portfolio is being monitored tightly on a regular basis. Our relationship with banks, lenders, capital market participants remains strong which ensures strong and continuous access to capital. With the strong financial and operating performance, we continue to focus to improve on all our balance sheet metrics and ratios, sound capital control and allocation, yet set aside cash for shareholder return.Thank you all and back to the operator to open the line for questions, if any.

[Srinivasan Venkatakrishnan, CEO & Whole]

Thank you, operator. We are very happy to take questions now. I've got my -- the respective CEOs of the business on the call as well. So we'll be taking questions and passing them on to the respective CEOs.

[Operator]

[Operator Instructions] The first question is from the line of Amit Dixit from Edelweiss.

[Amit A. Dixit, Financial Analyst]

I have a couple of questions. The first one is on deferred tax asset, which you have recognized in respect of Electrosteel. However, in the annual report, there was no deferred tax asset recognized with respect to losses at Electrosteel. So what has changed since then? And if you can guide us on the recognition in this year and next couple of years, that would be helpful.

[G. R. Arun Kumar, CFO & Whole Time Director]

Sure. Thank you for that. What we have done is that in FY '19, it was a year of acquisition and stability of operations. And hence now that we have reasonable certainty, as per agreement with the auditors and accounting standards, we have gone ahead and recognized -- started recognizing the deferred tax asset on the old carryforward losses. This will be trued up over the next couple of quarters. You should expect more deferred tax asset to be recognized. And with the successful turnaround as our CEO outlined, this should be quickly utilized in the coming years. And I think that reflects the strength of Vedanta's turnaround of that business.

[Amit A. Dixit, Financial Analyst]

The second question is with respect to certain restatements that we see, particularly with respect to aluminum cost. So in Q4, if you look at it, your aluminum costs around $1,770 or something, but now it has been restated upwards. Similarly, the power generation at BALCO, that is also significantly up actually. So if you can explain these numbers.

[G. R. Arun Kumar, CFO & Whole Time Director]

There is no restatement of cost, [ if any. ] There could be some minor representation of the costs, I am given to understand, which is basically some of the other costs we have included in the hot metal primarily relating to renewable power obligation liabilities. For more details, I encourage you to contact the IR team, which has all the details and can send it to you offline.

[Srinivasan Venkatakrishnan, CEO & Whole]

And I think the important point to make here is that comparing to where the overall cost of production of aluminum was 3 quarters ago to where we've got to, we are getting closer to our long-term target of getting it to $1,500 a tonne. At $1,764, we are within shooting range. There will be volatility in the costs, but certainly the direction of travel is the critical one and that's heading in the right direction for us.

[G. R. Arun Kumar, CFO & Whole Time Director]

If Ajay would like to comment on it?

[Srinivasan Venkatakrishnan, CEO & Whole]

Ajay, do you want to comment on the -- anything on the aluminum costs?

[Ajay A. Kapur]

I think -- this is Ajay Kapur here. As Arun has rightly pointed out, there is a little re-presentation, which we can take it offline. But directionally, I think we are correct. There is an impact on RPO for sure because RPO prices in the market have gone up, so that does have an impact on the power cost. Otherwise, all the KPIs, which are going in, for example, percentage of linkage at 72% for the sector as a whole is in the right direction. The production from our own captive mine Chotia is actually at 100% ramping up for 1 million capacity. So I think all KPIs are in the right direction other than the prices of commodity, alumina, which has already been explained.

[Operator]

The next question is from the line of Indrajit Agarwal from Goldman Sachs.

[Indrajit Agarwal, Equity Analyst]

Sir, I just have one question. If we look at the EBITDA per barrel and realization [ per ] barrel of oil business, it has not moved in line with the crude price increase. What has gone in there? And how should we look at it going forward?

[G. R. Arun Kumar, CFO & Whole Time Director]

I can take a stab at it and after that, Ajay Dixit, if you have any comments, feel free. The EBITDA per barrel of the oil business, if you look at over the couple of quarters, will definitely be in line with the Brent movement. Typically between quarters, it can always swing due to profit petroleum, which comes out of the cost recovery depending on how much CapEx you spend. The CapEx-heavy quarter could have little bit more EBITDA margin, a CapEx-light quarter could have less. So that's accounting anomaly in that kind of a business, given the cost recovery model. Otherwise, I think the most important is all the group projects and the volume increase that the team is planning to deliver. Ajay, would you like to comment on that?

[Ajay Kumar Dixit]

You're right, Arun. I mean as far as the per-barrel operating cost is there, it's pretty stable. It moves up and down based on whatever cash [ call ] we recover. So the variation is only on that account.

[Indrajit Agarwal, Equity Analyst]

Sure. And second question on aluminum business, actually alumina to be particular. At current alumina price level, what is the benefit that we get on say import versus own production in terms of dollar per tonne?

[Srinivasan Venkatakrishnan, CEO & Whole]

Ajay, do you want to respond to that one?

[Ajay A. Kapur]

Yes, sure. So currently, if you see, first of all, there is a lag effect because at any given point of time, by the time you buy and by the time it arrives from the port to the plant, there's a lag of 3 months. So whatever impact we'll see of the low alumina prices will have an impact in Q4 beginning. Now today, we are seeing some deals being stuck at under $300, just about $300. And if you added freight, the landed price would still be slightly higher than the price of the locally sourced bauxite, but it does help us in optimizing the overall source mix. And therefore, our guidance also for the full year, which was given last time, remains the same.

[G. R. Arun Kumar, CFO & Whole Time Director]

If I may just quickly add a bit [ update. ] At any point of time if you see the history of the business, you would always have a cost advantage of alumina produced at Lanjigarh vis-à-vis the imported alumina. It can easily vary from $60, $70 to $200, $250. But never in the history, if you see the recent history of last 5 years, you would have an opposite situation, unless alumina price really drops to $150 or $200 FOB. So I hope that answers your query.

[Operator]

The next question is from the line of Pinakin Parekh from JPMorgan.

[Pinakin M. Parekh, Associate]

Sir, just 2 quick questions. The Zinc International operations even though it has higher volumes Q-on-Q on production and LME prices are also higher, there is a very large decline in revenues, and I think that's -- it's all falling through, the EBITDA and cost of production is also higher. So what's the trend? How should we look at Zinc International going forward?

[Srinivasan Venkatakrishnan, CEO & Whole]

Deshnee, do you want to respond to that question?

[Deshnee Naidoo]

Yes, Venkat. Thank you. So in quarter 1, a lot of the cost was actually due to the increased TC/RC that we're seeing in the market right now, so the direct impact of that. In terms of the Zinc International's overall cost base, as you've indicated before, the entire cost base becomes quarter 1 as Gamsberg starts to ramp up, net forecasted for the year a Gamsberg costs of about $1,000 per tonne. This quarter because of the TC/RC, we did see a larger impact. In terms of the overall cost to Zinc International, especially Gamsberg, as we start to hit that 58,000 tonnes to 60,000 tonnes a quarter, the cost bridge will get back down to the $1,000 per tonne even at the higher TC. Just another point to make that at Skorpion, we did have some timing issues because we did take a compulsory asset plant shut at the beginning of the quarter. So we did produce less with a higher fixed cost base. And in addition, because we are behind on the ore production from the pit, we did have an impact in terms of inventory in the pit coming into the EBITDA. So by and large, metal prices linked to TC/RC impact, lower volumes at Gamsberg in the first quarter and then at Skorpion specifically, we had an issue with the shut, some cost incurred there and then lower pit inventory led to a lower impact on the EBITDA ultimately. And that's how we can reconcile the cost, Venkat.

[Srinivasan Venkatakrishnan, CEO & Whole]

Thanks, Deshnee. And Pinakin, if you still look at the big picture here with regard to Gamsberg, when you look at the potential of that particular mine, the ramping -- the ramp up coming through ending up in terms of our guidance, we have given 180,000 to 200,000 tonnes of metal concentrate coming out at a cost of around $1,000 a tonne. It's going to be a big EBITDA swing up for us given that it had nothing last year. We're getting all of the benefit this year and that changes the complexion of the overall zinc business in a big way.

[Deshnee Naidoo]

And sorry, Venkat, just one more point to add there. Of course, in quarter 1, Gamsberg would have still been largely in capital. We wouldn't have seen all of the benefit coming into the EBITDA.

[Pinakin M. Parekh, Associate]

Understood. Just moving on to second question on oil. Your JV partner, ONGC, has mentioned in the last few -- couple of quarters that there are issues regarding, I guess, payment of issues on profit petroleum and cost petroleum and there's something which needs to be paid, they say by their JV partner, which as of now is under dispute. Can you throw more light if there are any payment-related disputes on the oil segment related to ONGC, profit petroleum or cost petroleum recovery?

[G. R. Arun Kumar, CFO & Whole Time Director]

If I may chip in here and request Ajay to add, if any. So Pinakin, this -- normally in any sort of a government partnership or approval process, there will always be reconciliations, right? So there could be some pluses and minuses in the reconciliation. We are aware of some press reports. But I think we have fantastic partnership with the Government of India as represented by ONGC. And Ajay and teamwork very closely with them with the larger objective of increasing production for the country. The reconciliations will keep going on and they're a normal part of the business. Ajay, you would like to add anything further on how you work with ONGC, how closely you work with them?

[Srinivasan Venkatakrishnan, CEO & Whole]

Ajay? Okay. I can [ figure out ] actually. Certainly in terms of relationships, we have got a very good relationship with ONGC in terms of how we manage the joint venture, and importantly, alignment with regard to both the Ministry of Petroleum and also DGH in terms of actually ramping up volume production of oil and gas in India. So certainly that's commonality of interest. Certainly, these reconciliation issues will be there, as Arun mentioned, but nothing really that is cause of any substantial issue as far as we are concerned.

[Operator]

The next question is from the line of Abhijit Mitra from ICICI Securities.

[Abhijit Mitra, Analyst]

The first is on Zinc International. So a bit on the guidance as Skorpion and BMM greater than 170 kt and Gamsberg 180 kt to 200 kt. Any reason for changing those numbers now or you're sticking with it?

[Srinivasan Venkatakrishnan, CEO & Whole]

We are sticking with the guidance as we said. The only area which we have planned is the Skorpion pit where we are actually reworking the mining plan. So with regards to the guidance, we will probably look at in terms of Skorpion and Black Mountain towards the lower end of the guidance, but largely intact.

[Abhijit Mitra, Analyst]

Okay. Great. And next is on the Oil & Gas. The proposed ramp up from 180,000 barrels per day to 260,000 to 270,000 barrels per day, if you can help me understand how much will Rajasthan be contributing in that?

[Srinivasan Venkatakrishnan, CEO & Whole]

In terms of the ramp-up here, particularly the mix comes through in terms of both offshore, onshore, et cetera, Rajasthan is a big contributor as far as the ramp-up is concerned, but as we said, we are looking at an exit of around total 200,000 barrels coming through in terms of Q2, then a ramp up further in Q3 within an exit of around 270,000 barrels, but averaging to between 200,000 to 220,000 barrels a day. That's overall. But Rajasthan, MBA fields should probably contribute around roughly 60% of that -- 60% to 70% of that.

[Abhijit Mitra, Analyst]

And what about the tight oil and the tight gas because I see your presentation, and I think majority of the incremental production, which is adding up to the exit by FY '20 and majority of that is actually coming from ABH and RDG. Is that what I'm reading it -- is the reading right? And if you can help me understand what is the current RDG production also?

[Ajay Kumar Dixit]

You see as Venkat pointed out in the beginning speech that currently we are ramping up the RDG, which is the gas, 90 scfs getting stabilized. And by the end of the last quarter, an additional 90 scfs will be added, which will correspond to 15 plus 15, 30. You're right that the major part of the addition has come from ABH and RDG. But additionally, there is also our MBA, that is Mangala, Bhagyam, Aishwariya Polymer infills are also there, which is going to produce. So all in all from the current 267 kboepd, 14 kboepd comes from the off-shore and the balance is practically from Rajasthan and its projects.

[Abhijit Mitra, Analyst]

Got it. So essentially from 143 kboepd, you're looking to reach around 250 kboepd -- 245 kboepd, 250 kboepd by the end of the year, that's the key...

[G. R. Arun Kumar, CFO & Whole Time Director]

Run rate is close to 270 kboepd, as I said about what Venkat said earlier. We are exiting H1 at around 200 kboepd. That is the intent.

[Srinivasan Venkatakrishnan, CEO & Whole]

That includes all of the projects in Rajasthan. We show that separately, ongoing and adding projects [ to it ].

[Operator]

The next question is from the line of Vishal Chandak from Emkay Global.

[Vishal Chandak, Research Analyst]

Sir, just a small query. You have mentioned the total unwinding has resulted in a gain of about $100 million for the Cairn India in this entire transaction. But if I recollect in the last quarter, I think you had mentioned that the net gains over that period to the Cairn India shareholders was about $150 million. So if you could just walk us through as in how this $150 million has got reduced to $100 million? And what was the other expenditure or anything in decline in the Anglo prices or something?

[G. R. Arun Kumar, CFO & Whole Time Director]

Yes. I think what we mentioned last time was about $120 million to $130 million, if you recollect. And as one of you actually correctly reminded me that, that is only a mark-to-mark gain and it's not really an accrued gain. And every quarter, as we do, it gets valued. And when you sell, whatever is the exact price and whatever is the sort of the block discount applicable or any other deductions, the number will always be different quarter-to-quarter and that's exactly what we discussed in the last call. So cumulatively, we have made above $100 million. And as I mentioned, this is about 70% from an IRR perspective because out of the principal of approximately $550 million, we had only paid up about $300 million to $320 million original and one more installment later. So the objectives -- the alternative was a 2% [ FD ] for that money -- surplus money. So I think objective is achieved, [ roundup. ] And hopefully, this also sort of clarifies our position what we have been maintaining in the last 2 quarters.

[Vishal Chandak, Research Analyst]

Sir, I think I missed out on what you mentioned relate to a reduction of around $150 million to $100 million. I understand the objective, but if you could just walk me through the difference of $50 million in a span of 1 quarter.

[G. R. Arun Kumar, CFO & Whole Time Director]

Okay. We said $120 million to $130 million is what we said last quarter, not $150 million. It's coming down to about $110 million or so -- would be block trade discounts and any other expenses. For further details, we can always connect offline. That would be the broad reconciliation of $10 million, $15 million, $20 million.

[Operator]

The next question is from the line of Ritesh Shah from Investec.

[Ritesh Shah, Analyst]

My first question is on incremental capital allocation, there were talks about setting up a fertilizer plant at Hindustan Zinc. Has there been some progress made over there? That's the first question.

[Srinivasan Venkatakrishnan, CEO & Whole]

If I can respond and then Sunil can come in. It's very much at a design stage right now. It's currently going through its feasibility study, et cetera. It's certainly a long-term intention to set up the fertilizer plant, but basically it's something which is being reviewed. It will have to go through our capital allocation process and then get approved in terms of actually commissioning. I'm not -- so Sunil, are you on the line?

[Sunil Duggal]

Yes, I am on line. Actually, we were trying to look at the design of the plant. So the original design was 0.5 million tonne, and we did the designing with the global consultants and our own consultant. We saw that we can -- with a little incremental capital, we can increase the capacity to around 0.7 million tonne and then add some [indiscernible] into that, where apart from [indiscernible] we can add some nutrients into that. So overall, feasibility study has been revised, and we are working on that. And because of that, the IRR is improving by another 5% to 7%. And in the meantime, the presentation to MoEF for the EC clearance is also going on. We had a public hearing, so we are progressing on that.

[Ritesh Shah, Analyst]

Sir, what is the kind of investment the fertilizer plant would attract? And is it in phases or is it going to be one shot?

[Sunil Duggal]

It could be to the extent of 1,000 crores to 1,200 crores with the IRR of around -- revised IRR of around 18% to 20%.

[Ritesh Shah, Analyst]

That helps. Sir, my second question is on Electrosteel. Our stake is still at 90%. I think it needs to be merged as we need to go to 100%. So what is the status over here?

[G. R. Arun Kumar, CFO & Whole Time Director]

Yes, I'll take that. The process is on and the merger should happen soon.

[Ritesh Shah, Analyst]

Sir, any time lines over here? And what will be the outflow?

[G. R. Arun Kumar, CFO & Whole Time Director]

Outflow is about 200-odd crores as we had disclosed some time ago. It could happen in the next 90 days.

[Ritesh Shah, Analyst]

Okay. Sir, my third question is, how was Vedanta approaching the upcoming auctions? We haven't heard much about the bauxite leases, which will be auctioned. Is there something that you can help us on? And will Electrosteel also be participating in the ore auctions? And between Hindustan Zinc and Vedanta, if there are certain mineral assets, how will it be dissected between both entities when it comes to approaching the auctions?

[Srinivasan Venkatakrishnan, CEO & Whole]

If I can pick up the broader macro piece, it's Venkat here. Certainly, the new minerals policy has opened up the natural resources space. We are hugely excited with the opportunities that it provides us. Needless to say, we will approach the auction with an open mind, but we will run through that with 2 value lenses, one what does it mean in terms of adding value to Vedanta Limited, that's the first aspect in terms of its integration with our existing portfolio, in terms of returns, et cetera. But the second value lens is the bigger purpose, what does it do for the country as a whole? So in that regard, certainly, you will see us participating in the auctions in areas where we currently have existing vertical businesses, it would include bauxites and coal, for example. If the zinc mines adjacent to ours also come up, we will look at those. So certainly keeping an open mind in terms of auction. But every license, which is coming up for auction, will be looked at on a specific license by license basis, very similar to how we have evaluated [ the old assets ] as well.

[Ritesh Shah, Analyst]

Sir, specifically, can you provide color on iron ore from Electrosteel point of view and bauxite from our aluminum operations, so given we could potentially increase refining capacity. Is that something that we are eyeing for?

[Srinivasan Venkatakrishnan, CEO & Whole]

Yes. In fact, if I can pick up the iron ore one and then I'll had over the aluminum one to Ajay Kapur. Certainly, if you look at the potential of our iron ore business, if you look at Karnataka, you look at Goa and you look at our Jharkhand mine near Electrosteel, it's got a potential to generate around 50 million tonnes of iron ore. So certainly, our objective here would be in terms of Jharkhand integrating it with our Electrosteel operations and reopening of mining in terms of Goa. But if other iron ore mines come on auction, it's certainly something we'll look at. Again, it has to meet our 2 value criteria. Ajay, do you want to throw some light on aluminum, the question there in terms of refining?

[Ajay A. Kapur]

So we've already mentioned last time that we will expand our refinery in Lanjigarh in steps, first going from 1.7 to 2.7 and then going to 4. The first one, we're already working on. In terms of our bauxite security, we are also, as Venkat already mentioned, going to participate in the new auctions as and when they come up and we are hopeful that it will come up soon. Besides we continue to buy local bauxite from Odisha bauxites, and we've seen -- we've already seen in results the ramping up by 33% production from our Lanjigarh refinery. That's a direct result of getting much better local supplies. So we are very positive that in time to come, we should be able to substantially increase dispatches from locally sourced bauxite in sync with our expansion plans.

[Ritesh Shah, Analyst]

Just last question. Government has put up a very large divestment target. Are we expecting something on Hindustan Zinc to progress in forthcoming quarters or months?

[Srinivasan Venkatakrishnan, CEO & Whole]

I think this is something which they have certainly said that they would be looking at divesting stakes in public sector undertaking. We will wait for those announcements to come out, and we can actually make the call at that stage. But certainly, we'd be interested in terms of potential it offers, but we have to look at specifics as and when they are announced.

[Operator]

The next question is from the line of Ashish Kejriwal from IDFC Securities.

[Ashish Kejriwal, Research Analyst]

Sir, 2 questions. One is on aluminum. If I am looking at your cost of production besides your alumina and power cost, our other costs have, in fact, increased both on a quarter-on-quarter basis as well as on a Y-o-Y basis. So what we are doing here to minimize it? Or what led to the increase in the cost of production over here?

[Srinivasan Venkatakrishnan, CEO & Whole]

Ajay has got some very good plans in terms of reducing cost in other areas other than these 2 aspects, which you highlighted. So Ajay, do you want to pick that up?

[Ajay A. Kapur]

Sure. So as you've seen and also Arun mentioned, there were some representation issues as well here, we are ramping up our value-added product portfolio. Therefore, there are some one-offs, which happened in the cast house area, especially, but I can assure you that going forward, we see that coming back.

[Ashish Kejriwal, Research Analyst]

Is it possible to quantify what is the one-off?

[Ajay A. Kapur]

These are at BALCO as well as Jharsuguda. We have cast house and we're trying to ramp up new products including our alloys, which are eventually going to get us a very good premium. So there is some one-offs taken against those investments.

[Ashish Kejriwal, Research Analyst]

Sir, I was looking at in terms of quantum. Is it $50 per tonne, or what kind of quantum was gone in first quarter?

[Ajay A. Kapur]

About between $20 and $30.

[Ashish Kejriwal, Research Analyst]

Okay. And sir, second question is, though it's not directly related to us, but it's about the parent company, Vedanta Resources, because Vedanta Resources still has around $6.3 billion debt, and they have only Vedanta Limited as an operational entity of its [ all kind of ] cash flows. So I am sure that interest obligation can be meet from the dividend payment, but what's going to happen for the principal payment of that? So is it possible to throw some light on how we are seeing it or in future if the need arises, we can again have some kind of payment or something, which can serve as the payment obligations of Vedanta Resources, the parent company?

[Srinivasan Venkatakrishnan, CEO & Whole]

Firstly, let me answer your second question first as to whether there would be any transactions between Vedanta Limited similar to [ CSR ], the answer is no. And Arun can actually cover the aspects in terms of the balance sheet.

[G. R. Arun Kumar, CFO & Whole Time Director]

I think as you would agree Vedanta plc has been extremely valuable parent. The group would not have been what it is at this point of time, if not for all the capital market activity that it went through the fundraising in London and on the back of which many of these businesses were built. Now if you take the last 3-year trend, the debt has actually come down in the parent. And the parent resources has other ways and means also of reducing debt rather than just depend on the dividend. There can be other opportunities of monetizing assets, if any, if the need arises in future. So what we should expect broadly is gradual decline of debt including on-time interest servicing at the parent, right? And the other thing is that it has also done excellent liability management exercises and the next 2 years, there are absolutely no repayments of principal that's required at the parent. So I think that's been a well-managed sort of a balance sheet. And the focus really on this call will -- all of us are really looking at the fundamentals in operations and the growth does seem to be getting its legs in terms of solid foundation having been laid as Venkat explained, and we should look to a much better H2 and more cash generation and that's really the fundamental strength that the group will bank on.

[Ashish Kejriwal, Research Analyst]

Yes, sir, I do agree with the fundamental strength of the company and I think nobody denies to that. But the point from the investors' angle is, as we have seen in case of CIHL, though our investment has generated good returns, but market has not taken into consideration the right thing on that. So that's the reason I am asking what's going to happen for Vedanta Resources. If we don't monetize our assets, then even after 2 years down the line when there's a large bullet payment, which we have to do, how to go ahead with that. That's the only question.

[G. R. Arun Kumar, CFO & Whole Time Director]

Sure. Thanks so much for your input. And you're absolutely right. So we'll ensure that we balance all the objectives going forward and manage it proactively, so that it generates cash and allocate the capital appropriately with the right distribution as well and ensure the gradual delevering. Thank you.

[Srinivasan Venkatakrishnan, CEO & Whole]

Operator, if I can just make one clarification. There was a question that was raised by one of the participants on the fertilizer plant. Just to clarify for others on the call, this is not a greenfield project. It's really a project to improve our realization from the byproducts because we have got captive sulfuric acid and rock phosphate which we have. It just enhances the value in terms of our byproducts, just to clarify.

[Operator]

Ladies and gentlemen, that was the last question. I now hand the conference over to Ms. Rashmi Mohanty for closing comments.

[Rashmi Mohanty]

Thank you, everyone, for joining us today on this call. If there are any other questions, follow-up questions, you can reach out to the Investor Relations.

[Operator]

[Operator Instructions] I am sorry. You may go ahead.

[Rashmi Mohanty]

No. I was just saying that if there are any follow-up questions or if there are any clarifications required, you can reach out to the Investor Relations team. Thank you.

[Operator]

Thank you. Ladies and gentlemen, on behalf of Vedanta Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.