Vedanta Ltd
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Vedanta Ltd
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Good day, ladies and gentlemen, and welcome to the Vedanta Limited Q2 FY '19 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rashmi Mohanty from Vedanta Limited. Thank you, and over to you.
Thanks, operator, and a very good evening, ladies and gentlemen. I'm Rashmi Mohanty, Head Group, Investor Relations, Vedanta. Thanks for joining us today to discuss our second quarter results for FY '19. 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. Venkat, as he is called, was the CEO of Johannesburg-based AngloGold Ashanti Limited and has extensive experience across several markets in U.K., India, Africa and South America. Under his leadership, AngloGold Ashanti achieved significant cost and debt reductions, saw a successful completion of new mining projects, improved overall safety and sustainability performance and had 5 consecutive years of even meeting or beating the market guidance metrics. Welcome, Venkat. We're also joined on this call by our Group CFO, Arun Kumar; several of our business leaders; Sudhir Mathur from Oil & Gas; Sunil Duggal from Hindustan Zinc; Deshnee Naidoo from Zinc International; Samir Cairae and Ajay Dixit from Aluminum and Power; Naveen Singhal from Iron Ore and Zinc; P. Ramnath from the Copper business, and Phillip Turner, Group Head, ESG PracticesLet me now hand it over to Venkat to provide an update on the company's operational performance.
Thank you, Rashmi. Good evening, everyone. This is my first results presentation since joining the group 2 months back. I'd like to share with you some of my initial impressions before we go into the detailed earnings presentation. And apologies, if this is a bit too long. It's been an exciting 2 months. I've been visiting some of the assets and I've met with the various business teams. At the outset, let me say I'm very impressed with Vedanta's vision and resources. When I refer to resources, the company has the finest resources that the world and the country has to offer in the form of some world-class deposits on one hand and, importantly, people with entrepreneurship capability, drive, energy and commitment to get the most of these deposits on the other. I've also seen strong technical expertise within the group with a keen focus on exploration. This is also evident by the fact that we are one of the largest employers of engineers and geologists in India. Our operating mantra remains: safety, volume growth and lowest cost of production. We are uniquely poised to grow in commodities that have a rising demand, especially in India, with an enviable growth pipeline, which is being brought to fruition in a very disciplined manner. At the core of this growth are long life, structurally low cost and diverse assets with excellent potential, and as we are market leaders in most of the commodities we produce. Strict discipline is inherent in our DNA. Any opportunity always gets evaluated through our values lens both in the form of financial value and returns, mainly capital discipline, and also whether it meets our principles as a company on sustainability and ethics. In my years of experience in this industry, I have seen extractive companies generally offer either dividends as an annuity or growth. We offer both, supported by our robust balance sheet. Beyond the business of mining, we are also engaged in truly important sustainability work across a broad front that is designed to improve in a tangible way, the lives of the people, particularly women and children, in the communities that host our operations. We're always striving to do better and to ensure that more people feel the positive effects of our work. We work harder to share stories of this to ensure that our efforts are well understood. Moving to this quarter's results, I'd like to begin by saying that our operations generally did well, resulting in revenue of INR 22,705 crores and EBITDA of INR 5,342 crores. Attributable profit after tax came in at INR 1,135 crores. Revenue for the 6 months rose from 10% as compared to the previous year. The second half of the year, in particular, the fourth quarter, promises to be better in both top and bottom lines across the businesses as our growth projects in both oil and zinc ramp up. At the meeting held today, the board has declared an interim dividend of INR 17 a share, or INR 6,320 crores, which, at current share price, reflects a yield of about 8%, which is industry-leading.Now if I can turn to the results presentation and start with safety. It is with deep regret that I share with you that we had 3 fatal accidents during the quarter. One life lost is one too many, and we are learning from these accidents. And have resolved to further strengthen our initiatives around safety measures with an increased emphasis on the roles and responsibilities of our senior management, their safety support team, frontline supervision, improved compliance to procedures and behavioral changes, to name a few. Moving to the broader area of ESG. It is pleasing that some of our initiatives on this front are being recognized. We're happy to announce that Hindustan Zinc was ranked #1 in the environmental category globally by the Dow Jones Sustainability World Index in the metals and mining sector and fifth in overall sustainability sector within the mining sector as well. This stands as a testimony to our commitment to 0 harm, 0 waste, 0 discharge. Separately, Vedanta topped the Bloomberg ratings for the CSR spend. We are undertaking waste-to-wealth programs that are helping recycle large quantities of high-volume, low-effects waste, like fly ash. As of the second quarter, we have recycled all of the fly ash we have generated this year by our operations against 90% for the same period previous year. We have achieved this by transferring high volumes of fly ash to the cement industry in a remunerative manner. Turning to water management. Savings and recycling, both remain focus area. Our water risk mitigation measures to make the business water self-sufficient include a variety of steps. Hindustan Zinc has built a 20 million liter a day sewage treatment plant in Udaipur, where 30% of the city sewage is being treated. Untreated water is prevented from entering the city's lakes, and the treated water is being used by our Rajpura Dariba Complex, reducing dependence on the local water body by about 85%. Our IPP plant TSPL is working on efficiency improvement and on-site water storage increases. Our initiatives for reducing our water consumption are progressing well. We have already met 40% of the savings target of 1.5 million cubic meters. Our focus on enhancing livelihood opportunities in the local communities continue. We believe that empowering women to be economically independent and self-reliant is vital for every society. Today, over 32,000 women are part of more than 2,600 self-help groups and related programs, like Sakhi at Zinc India promoted by Vedanta. Skill India is the government's initiative to bridge the skilled manpower gap by providing training to all sections of the workforce. And hence, skill development of the youth in rural areas is important for us, if we want to include them in the nation's development. Through Vedanta’s various projects, like Tamira Muthukkal at Tuticorin, over 3,400 youths have been trained in different trades. And we have recently awarded around 5,000 scholarships for education there. Now moving to the business highlights, starting with Zinc India. With 100% of our mining now underground, our volume ramp-up continues at a good pace. And we diverted 212,000 tonnes of refined zinc and lead. Sliver production at 172 tonnes was a record. The cost of production was impacted by lower volumes, higher mine development and increasing input commodity prices, especially coal and diesel. We expect that as volume ramps up in the second half of the year, these costs will reduce. At Zinc International, Skorpion and Black Mountain mines are poised for a better second half. We are pleased to report that the trial production has commenced at Gamsberg at the end of September and will be ramping up. Gamsberg is another example of strict capital discipline, as we are finishing the project within budget. In our Oil & Gas business, which delivered 186,000 barrels of oil equivalent per day, for the second quarter, our growth projects are progressing well and will pick up steam in the second half. These include additional infrastructure to bring forward gas production, drilling and hooking additional wells, improving our liquid handling capacity in a safe manner and polymer, ASP, tight oil and gas interventions, to name a few. We are excited with the opportunity offered by the 41 OALP blocks that we recently won, which, together with our current production capabilities, will get us a step closer to our aspiration of meeting 50% of the country's crude oil demand. Also pleasing is the recent grant of a 10-year extension to 14 May 2030 of the PSC contract for the Rajasthan block by the government of India. Sudhir will cover all of these in detail during his presentation. The aluminum business, which produced 494,000 tonnes of aluminum during the quarter will continue to benefit from sourcing of bauxite from Odisha as the OMC mine ramps upOn power cost this quarter, it was no different for us as compared to our industry peers. We continue to work on our plant for a structural reduction in the cost by securing additional linkages and working towards new dependency on both purchased alumina and purchased power. The TSPL plant achieved high availability of 94% during the quarter. Moving to Iron Ore. Post the Supreme Court judgment in March this year, mining operations from the state of Goa are shut and that includes us. Given our commitment to the region and the considerable favorable impact on the economy it could have if this shutdown is removed, we are continuing to engage with the government for the resumption of the mining operations there. On Electrosteel, this is the first complete quarter of operations post the merger. We have made significant progress on improving efficiencies at this effort. And I'm quite pleased that we exited the quarter with a monthly run rate of 1.3 million tonnes per annum. The EBITDA margins improved to $90 a tonne from $55 a tonne a year ago. We see scope of further improvement here as the business ramps up to 1.5 million tonnes capacity in the near-term. At Tuticorin, the company has made a representation to the National Green Tribunal, which is hearing the case on merits. The NGT has referred the matter to an independent committee to submit a report on the environmental compliances by the plant. We expect the committee to take a decision in the current quarter. Meanwhile, we continue with our engagements with the local communities and stakeholders through various outreach and CSR projects on -- and on-the-ground interactions. We are seeing more and more stakeholders supporting the appeal to reopen the plant given its compliance record and, at the macro level, the widest social and economic impact in Tuticorin by the plant being shut. Tuticorin was one of the sites I've been through this month. I visited the plant and met all of our employees there and a wide cross-section of stakeholders, who are all very supportive and keen to see the plant reopened.Our copper smelter is amongst the best copper smelters in the world in terms of environmental practices, and the plant uses best-in-class technologies to be a 0 discharge plant. I'll now hand you over to Arun for the financial updates.
Thank you, Venkat, and good evening, everyone. As outlined by Venkat, we laid a solid foundation in the first half of this fiscal by consolidating underground volumes at Zinc India, commencing almost the entire $2.5 billion growth CapEx in Oil & Gas, executing as per plan on the Gamsberg mine, aluminum seeing key [ wins ] on bauxite and coal linkage auctions and getting electricity up to current rated capacity. I believe this sets up for a strong second half across the board, in line with our growth playbook as we had laid out earlier this year. Some key highlights in the quarter that went by on Page 1 of the financial section. Sequential EBITDA maintained, subject to price movements. Price was negative. Strong delivery on free cash flow post-CapEx of nearly INR 3,500 crores. Continued delivery on ROCE at 15%-plus post tax. Net debt to EBITDA continuing at 1x backed by strong performance with volume growth, low gross margins and enhanced returns to shareholders. We have a detailed income statement in the Appendix, and key updates on income statement. Under exceptional items is largely driven by an impairment reversal in Oil & Gas business stemming from commercial production of oil from the onshore KG block by the operator ONGC. The -- on the depreciation line, it is up in line with the production volumes, especially in Zinc India. And there's no specific change in guidance. Impact, if any, with the [indiscernible] will be evaluated in the subsequent quarter. Interest costs have inched up 22 basis points with just about 8% now compared to FY '18, again, in line with our guidance as well as the market movement. On interest income, we continue to invest safely our surpluses in AA+, high-quality instruments and have a periodic internal review mechanism as well as key approvals in place. No change in the tax rate guidance at around 30%, plus/minus 2% for the FY '19. Quarter 2 has come slightly below average, its timing between the quarters as we know caused by deferred tax. The key highlight has been the declaration of an interim dividend of INR 17 per share. This is in line with the dividend policy, which has been in place for the last 2 years and represents the third consecutive year of elevated interim dividend. It also represents a dividend yield of almost 8% at current market value. The contribution to the exchequer for the first half of the year as we define may just include the dividends that were declared in Hindustan Zinc as well, though outside of the first half was approximately INR 21,000 crores and continues to be one of the highest contributions in corporate India. Moving to next page on the EBITDA walk. As we can see on this page, the volumes and costs were fairly similar to the previous quarter. As I said, the consolidation continued into quarter 2. Given our full year and second half guidance, one should expect to see more movement in the second half, especially with the zinc shafts coming up, Gamsberg coming on commercial production and oil projects driving the volume bar, and consequently lower costs. The cost bar should also get impacted positively with progressively higher levels of Odisha bauxite, which will come into play in aluminum, as well as the improving coal security mix. However, on the market and regulatory sides, you will notice that while the price of zinc and aluminum weakened during the quarter, the sharp depreciation in currency helped cut back the price losses. As you can see in the subsequent pages, we've given the impact of currency depreciation at INR 600 crores per annum EBITDA uplift for every rupee of depreciation. So theoretically, if the rupee depreciates by INR 6 or INR 7, then you can as well annualize it. Moving onto the next page on the net debt walk. Happy to report that the net debt came down by approximately INR 3,500 crores during the quarter, which is primarily a reflection of the post CapEx free cash flow that we generated. These were driven by a strong working capital performance, which we had indicated last quarter that we would reverse some of the quarter 1 trend, and that's exactly what we have done in this quarter. The company has further rolled out a huge working capital reduction program across the board and targets to reduce the level further during the year. CapEx spend was broadly in line with the guidance, albeit it will be heavier in the second half. Moving on to the details further on this CapEx on the next page. Overall, CapEx guidance for the year is around $1.5 billion. This includes the optionality around the alumina refinery, which is in the final stages of feasibility valuation. The second half spend picks up as the oil projects progress. Again, to reiterate, CapEx funding will be out of this year's cash flow hence completely self-funded. We continue to deliver mid-teens overall ROCE, about 5%. These are driven by the ever-improving returns, thanks to the zinc and the Oil & Gas sector, which we have highlighted consistently at about 30% IRR at conservative LME price assumptions. Moving on to the next page on the balance sheet. Given the current market situation and rupee depreciation and liquidity, we thought it will be good to focus on these aspects, just reiterating our strength and also the progress that we are making in these areas. Firstly, on the depreciating rupee. You will notice that we stand insulated on our debt portfolio given our policy of full hedge on any foreign currency loan. And hence, we are largely unimpacted. If at all, we are impacted positively on the P&L, as mentioned earlier, with every rupee depreciation broadly worth INR 600 crores EBITDA per annum, as I had earlier laid out.Secondly on liquidity, we continue to maintain nearly INR 40,000 crores with cash and cash equivalents, pre dividend, of course. Post dividend, we have used some cash along with a good sum of undrawn lines as a headroom, while, at the same time, all our FY '19 term maturities are largely refinanced as required well in advance. further, you would observe a constantly improving debt maturity profile with the average term debt maturity almost knocking at 4 years at this point of time, at good improvements from 12, 18 months ago. As mentioned earlier, the interest costs have increased marginally, by 22 bps from the last year and focus continues to invest in the surplus safety. Moving on to my last page on capital allocations. Over the last 2 years, I've restated our commitment to a well-balanced capital and disciplined allocation framework. Venkat also alluded to this in his opening comments. We have created value for our stakeholders and balanced out all the objectives. Most growth has been through brownfield CapEx, leading to mid-teens ROCE and robust IRR from the projects. Consistent returns to our shareholders, the dividend yield has been the -- one of the highest among the private sector companies. Yet, we have managed consistently a leverage ratio of 1 or lower. We believe this approach further enhances the value for our stakeholders backed by a strong operational performance. Vedanta continues to be an emerging leader in national resources sector and a compelling investment proposition. With that, I will pass it back to Venkat. Thank you.
Thank you, Arun. If we can then touch on the growth projects, I'll cover zinc and aluminum, and then hand you over to Sudhir in terms of oil and gas. As I mentioned, we have an enviable growth pipeline and ramping up of these projects in the correct sequence on time, within budget, with a proper stage gating process will remain a focused area for me. Turning to zinc. In Zinc India, we continue to ramp up our underground production, as we expect it to increase progressively every quarter, as you will see in the chart before you. We remain on track to deliver our guidance this year of higher MIC production as compared to last year. Silver production will be in the range of 650 tonnes to 700 tonnes for the year. Our projects are progressing in line with the expectation of reaching 1.2 million tonnes per annum of MIC capacity next year. If I can touch on some of those building blocks, at our flagship Rampura Agucha mine, the midshaft was commissioned on the 20th September for man winding and haulage, which will result in improved haulage capacity and manpower productivity. Following commissioning of the loading system, we are hoisting waste through the shaft and it will facilitate higher volumes until the shaft is fully commissioned. The ramp up of the midshaft hoisting to full capacity, the second paste fill plant enhanced mine development and improved ventilation are the other levers. Off shaft development is on track, and we should see commericial production from the main shaft from the fourth quarter of this financial year. Turning to our SK mine. The production shaft work is progressing well, and the material hoisting from the shaft is expected to start in the third quarter of this year. The new 1.5 million tonnes per annum mill is expected to be commissioned in the third quarter. At our Zawar mine, civil and direction work on the 2 million tonnes per annum mill is on track and expected to be commissioned by Q4 of this year. The [indiscernible] project in Chanderiya is expected to be commissioned in the current quarter. With these near-term milestones, we are simultaneously planning for the next phase of the expansion to 1.35 million tonnes per annum as we reported earlier. Turning to Zinc International. I'm happy to share at Gamsberg we put the first ore feed to the mill, and we have commenced trial production in September. We've been producing ore steadily to the required rate and have already stockpiled 750,000 tonnes of ore ahead of the plant. We have commissioned the plant and we have built enough crushed ore stockpile for the feed. Based on the forecast mine ore grade, mine plan and the ramp-up schedule, we are now forecasting around 75,000 tonnes of metal in concentrate in the current financial year, slightly lower than our earlier guidance. However, lower production will be offset by lower costs, ranging from $800 to $1,000 per tonne. We'll be moving to full ramp up of 250,000 tonnes by the early part of FY '20. Our plans for operational readiness have been put in place and the operational teams already mobilized. The digitization project in mining will help in great management for better process control and quality. With the construction largely complete, we're also happy to share that this project has been completed within the targeted capital of less than $400 million. In line with our modular approach of expansion and project execution, we have advanced the feasibility and design of Gamsberg Phase 2 expansion. The Phase 2 expansion of Gamsberg will increase the production to 450,000 tonnes to 500,000 tonnes per annum from Phase 1 capacity of 250,000 tonnes, which I mentioned earlier. At our Skorpion mine, the pre-stripping of Pit 112 continues in the second year of the project. Over 65% of the waste stripping has been completed with full completion expected by the fourth quarter of this year. With the ore production fully ramped up and higher grades exposed, production in the second half of the year is forecast to increase. To sum up the Zinc story, the outlook for zinc continues to remain robust on the back of low inventory levels, tightness in refined metal production and higher-demand growth projections, especially in emerging markets. We expect significant increase in volume in the second half of the year and in the coming years. And therefore, the cost of production is to reduce in both our zinc businesses. Moving on to aluminum, where I'm sure you have a lot of questions. The volatility that we witnessed in Q1 with respect to input commodity prices continued for this quarter as well. We shared our plan with you last quarter to create supply sources for our raw material to eliminate such volatility and drive a structural reduction in our costs. Despite the progress we have made on our plan, our costs for the quarter were higher at $2,000 a tonne due to market forces. Our target will eventually move to a sustainable cost of $1,500 a tonne will be driven by continuing to work on factors that we have mentioned earlier, and if I can talk on each of those blocks. Firstly on coal, we are undertaking measures to improve our coal linkage materialization. We have secured 3.2 million tonnes of additional linkages from Tranche IV coal auctions. We have this week commenced mining at the Chotia mine, which has started to supply coal to BALCO. These are 2 positive developments, which will improve our overall coal position. We will continue to work on improving materialization from the linkages with increased linkage through participation in future tranches. We will also evaluate the coal block options. I have recently notified the Ministry of Coal for improving our coal security. That is in respect of coal. Now turning to bauxite and alumina. Lanjigarh production was strong this quarter, and following our debottlenecking initiative, it's expected to move from 1.3 million tonnes per annum exit rate we had in Q1 to an exit run rate of around 2 million tonnes per annum by the end of this year. Our cost of alumina production at Lanjigarh is significantly below the current import alumina prices, and we have significant value unlocking opportunity by expanding the alumina capacity. The first phase of the Lanjigarh refinery expansion from the 2 million tonnes per annum to 4 million tonnes per annum is in the final stages of plan. On bauxite, we are working on increasing captive alumina production as simultaneously working on tying up high-quality bauxite feed. The key positive development for us this year has been the start of Odisha bauxite delivery from Odisha Mining Corporation. The mine is ramping up well, and we are targeting 250,000 tonnes per month exit run rate this quarter in order to meet half of all our Lanjigarh requirements. Other than the initiatives, we are also working on a number of other measures, including logistics, plant operating parameters, adding efficiency and achieving further cost savings. We are maximizing our inland movement by rail as opposed to road. Inside the plant, specific power consumption of smelter, power plant technical parameters and rail road turnaround times are important operational focus areas for us as well. Simultaneously, on the marketing side, we continue to focus on improving net premiums by progressively increasing value-added production. The value-added production is expected to grow by 25% in the second half from 432,000 tonnes, which we saw in the first half, driven by improved sale of wire rods in the domestic market as well as higher [ bill of sales ] internationally. On account of some of these metrics coming into fruition, in the second half of the year we expect the full-year cost of production to be in the range of $1,950 to $2,000 per tonne.Additionally, despite having sufficient domestic capacity, the Indian market is being flooded by imports on account of the U.S.-China trade war. Total aluminum imports increased by over 20% in Q1 and Q2, with the import of scrap increasing by 25% year-on-year in Q1 and 19% year-on-year in Q2. Specifically, scrap imports from the United States have significantly increased by an astonishing 158% in the first quarter of this year and a further 144% in our second quarter, over the same period last year. This is one of the areas we are taking some policy intervention and support from the government. We are certainly committed on improving the overall profitability in the aluminum business and unlocking its true potential. With that, I hand you over to Sudhir to talk through the oil and gas projects.
Good evening to you all. As Venkat mentioned, we have secured the approval for the Rajasthan PSC. With this extension, our 2P reserves in Rajasthan have jumped more than 4x from 138 million barrels to 596 million barrels. Given that -- this large reserve accretion, as well as the huge success in the acquisition of the 41 blocks in OALP, let me first lay out the strategic objectives of the Oil & Gas business. This is perhaps the first time we have a robust portfolio comprising a number of exploration blocks with promising prospects, large pool of development projects and prolific producing increase. In the next few slides, I will cover the work we are doing in each one of these aspects in order to achieve our vision of contributing 50% to India's domestic oil production. Our planning for future growth includes exploration, which we will do in 41 blocks we have been awarded under OALP. These blocks are spread across major basins and provide us with a variety of exciting opportunities. We plan to carry out seismic survey of over 10,000 square kilometers and drill over 150 wells to unlock this potential. We have already commenced global vendor outreach and plan to have vendor engagements meet in India and Houston in the third quarter of this fiscal. Moving on to the next slide. On -- the next one, exploration, our focus is to target high-impact prospects across basins. In Rajasthan, we are deploying 5 rigs in the second half for exploration and appraisal. We shall drill 7 to 18 exploration wells. We will also carry out exploration appraisal of 4 of our key fields with the potential of around 200 million barrels of resources. In KG offshore, first -- the first exploration has been a discovery. Multiple reservoir zones were encountered in the Mesozoic rift formation. The second exploration well shall be drilled in the fourth quarter. Ravva block had been a global benchmark with recovery of around 50%, and we continue our success story through exploration and development efforts to have incremental volumes and resources. The next slide. We plan to monetize our reserves through various projects across enhanced oil recovery, tight oil, tight gas and facility upgradation with a total capital investment of over $2.5 billion. Although the closure of our contracts for the risk-reward partnerships with global vendors took longer than initially envisaged impacting near-term volume, we have world class recovery rates at very low CapEx costs. With enhanced oil recovery techniques, we shall have ultimate recovery from a cold -- coal fields to around 50%, significantly higher than around 35% world average and around 40% in U.S. and 45% in North Sea. Also our capital investment cost is around $5 per barrel, which is much lower than the global average of around $5 to $7.5 for key project. On the next slide are details of each one of the projects individually, which we are working to boost production. The slides provide time line, so each project on rig availability, wells drilled and hooked. Let me highlight a few things. The second half of the year will be fairly busy with increase in rig counts, well drilling and hookups. During the second half of the year our drilling rig counts shall jump from 7 to 11. The number of wells drilled shall increase to 132, thereby drilling 100 more wells in H2. The numbers of wells hooked up shall increase to 56. The first tight oil well drilled in the second quarter was the longest horizontal section in India of around 1,294 meters. The second well surpassed this record with a lateral length of 1,315 meters. We are accelerating our tight gas project to bring incremental volumes in the near term. The GIGL pipeline is nearing completion. Facility de-bottlenecking at our end will lead to gas volumes by Q3. In addition, we are building early production facilities to increase our production by around 90 million by the end of the fiscal. We are increasing our liquid handling capacity by around 30% in a phased manner to handle incremental volumes. To conclude, our growth prospects with the Oil & Gas business with many opportunities we have are very promising. Our CapEx approach through unique integrated model did take up some additional time. However, contracts are locked and around $5 per barrel, so CapEx and world class recovery rates. Our projects will generate superior returns. With the certain drilling activity and hookups in the second half, we expect the average to be around 200,000 barrels per day. Thank you and over to you Venkat.
Thanks, Sudhir. Before I wrap up, I'd be amiss not to mention thanking Mr. -- my predecessor, Mr. Kuldip Kaura, for an excellent period holding the fort and also in helping me transition into this new role in the last 2 months. So thank you, Mr. Kaura. And let me wrap up by saying that our strategic priorities remain unchanged. We are committed to achieving our objective of 0 harms, 0 wastage and discharge, thus creating sustainable value for all of our stakeholders. Growth with an eye on strict and capital -- disciplined capital allocation will remain a focused area, whilst we continue to strive to improve our operations, stretch our assets further, optimize costs and improve realizations. With that, we open the floor up for questions.
[Operator Instructions] The first question from the line of Sumangal Nevatia from Macquarie.
First question is with respect to the oil division. Now we've got a volume guidance by almost 10% midpoint to midpoint for this financial year. So if you could just elaborate, I mean, the reason behind the delays in ramp-up, number one. And number two, how are we now placed with the medium-term target of 300 kilo barrels, which we were looking to achieve in 1 or 2 years from now?
Sudhir, do you want to pick that up?
Yes, sure. As I mentioned during the -- while I was talking earlier, the main reason for the delay was that as we went into contracting last year, we felt that the prices that we could get on the contract given that the activity had fallen when -- the service company activity had fallen during -- when the low crude price regime, we were getting better -- significantly better contracting rates than we expected, both for drilling as well as for EPC facilities. And we've -- our belief was that it was better for us to add certainty. We had committed to you that we would be doing IRRs in excess of 20% at $40 per barrel. But when we saw the CapEx rates that we could negotiate down, we felt that we would get IRRs of -- the same IRR even at $35 a barrel. And therefore, we went into a situation where we would offer all our stakeholders, shareholders a sense of greater certainty on the returns of these projects by being able to slice off from the capital expenditure costs, 5% to 7% than what we had originally conceived of. So it -- that led to the negotiations with the potential partners, creating a delay of about 1 month -- I'm sorry, about 1 quarter, which has led to us revising the guidance. But the reserves are very much in place, as I mentioned, that there are almost 600 million barrels of reserves. And on the medium-term guidance of 300 kilos, I think very much there. I think when we give our -- I'll leave that to Venkat and Arun, but I think, normally, we give out the medium-term guidance that the -- when we give out on the closure of the annual accounts.
Sudhir, if I can come in here. Really, in terms of our -- the revision to the guidance really one around timing. We are excited about the reserve growth, which we are seeing in oil. And some of these delays, when you are looking at one of the largest expansions and the capital expenditure in the oil and gas sector, a few months' delay in terms of projects coming on stream, it's not the end of the world. So from that perspective, I'm still excited in terms of the Oil & Gas business. And we will update our medium-term guidance in terms of -- when we announce our results at the end of this year. What, for me, is even more exciting is the award of the 41 blocks, which we received in terms of OALP. That's got the potential to create another [ team ] amongst itself. And our focus here is to start the prospects, some of the exploration effort to bring more value to the table and quicker.
Understand. All right. Second question at the -- is with respect to CapEx. On this Lanjigarh refinery expansion Phase 2, I think this is first time we are talking about this. Now if I look at the current bauxite, we are talking about 250,000 kt to meet around 50% of our existing requirement. So if you could share, I mean, what visibility do we have for this expansion, number one. And I mean, since we've included this in our FY '20 guidance chart of around $600 million CapEx for this, if you could share what -- how much is for Lanjigarh and how much is for Electrosteel. And what is the time line of this expansion?
Thanks, Sumangal. I think we have been flagging off for the last year or so that we have started looking at the Lanjigarh refinery expansion given the visibility that we have on bauxite. And I will leave it to Ajay to talk more about the bauxite's initial number site. In terms of guidance for next year, we have been roughly, you can say, $200 million to $300 million guidance of optionality on that. The balance being for Electrosteel, which is another story that I will deal with shortly. On Lanjigarh, it should be read as $250 million to $300 million for next year. And it should pay back perhaps within 18 to 24 months, even the potential for savings that we have there. In fact, every tonne of aluminum produced with the Odisha bauxite, which can be used in expanding refinery capacity, will give us a EBITDA advantage of $400 per tonne. So if we are able to cover the 50% or 60% of the requirement then it will extend $200 to $250 straight away move up the EBITDA margin on a permanent because the results will last for 50 million -- I mean, 15 years. and more mines are coming. So with that, I’ll hand it over to Ajay if there are any quick comments on the plan for refinery expansion because it's in the final stages of the drawing board. And when we have requisite approvals from the board we will announce it. Ajay, are there any quick comment?
Completed by, let's say, December '19, go up for production and then ramp up from there off. Bauxite is fully secured. So this is a ramp up after securing the bauxite.
And just to add, Sumangal, on the 250,000 tonnes that you mentioned, the 250 tonnes per month -- kt per month of bauxite means about 3 million tonnes per annum run rate and what Ajay and the aluminum team are doing is investing in some CapEx at the pit-head of the bauxite mine to take it up to 6 million tonnes. So that should probably coincide in terms of its output when refinery expansion also gets done. So it's all going for a certain plan and ensuring that there's a structural way ahead in the aluminum business.
Yes, yes. Understand. Just one quick question. I mean, there are a lot of media reports with respect to us thinking of spending on the zinc smelter in Africa around $600 million, $700 million. Is there any plan on that front?
Let me pick up here. It's certainly something in terms of -- if you look at any company, particularly in the extractive industry, we do have a range of projects, which are actually on the pipeline. It's in its initial stages. It'll still have to go through its full feasibility study, analysis, et cetera. So if you ask our immediate plan, probably not something, which we can announce, but it's something we will need to look at down the line.
The next question is from the line of Indrajit Agarwal from Goldman Sachs.
Two questions from my side. First on Aluminum, so this first half, we did a cost of production of ore of $1,978 a tonne. And for the full year, we are guiding at $1,950 to $2,000. So in spite of the cost saving or cost control measures that you talked about, like using more captive alumina, more linkage coal. Our guidance doesn't change from what's in the second half versus first half. So what exactly is our view over here? I mean, where could we see more cost inflation compare to this half?
Yes. Let me just -- let me introduce my topic and leave it to Samir to add any further comment. Fundamentally, the potential in the Aluminum business is that we are currently operating at more than 2 million tonnes, and you are aware of capacity is about 2.3 million tonnes. The potential there, based on those building blocks that we are putting in place that you can also see that we have referred to on our pages on Aluminum, where we are talking about 3 buckets of coal initiatives, alumina, a ramp up, which we talked about, as well as the bauxite sourcing and a few other things which are, say, more internal in terms of logistics. The broad design, which will take it to $1500 per tonne, this will be an intermediate-term journey. As I said, some of the CapEx needs to go into place to ramp up the bauxite from the mines. And as well as we just completed a really successful fourth-round of coal block auctions and supplies will start in January. So you can imagine that, from a short-term perspective, the pieces will not come through, but from a medium-term perspective, they will come through, which is why our second half guidance is what it is. At $1500 per tonne as you know we don't give specific guidance for quarter 1, but at $1500 per tonne, the business is nearly what [indiscernible] in terms of 2 million tonnes -- $2 billion in terms of EBITDA, if you add surplus power which [indiscernible] sell. But let's understand broadly the big picture in aluminum. All the 4 buckets of actions we have done and [ progressed ]. Our report card says atleast 2 ticks or 3 ticks during the quarter and during the first half of the year. Samir, would you like to add any further comments?
Thanks, Arun. I think the comment is that, structurally, actually, we have made good progress. I think we have talked about bauxite, so that is a structural change in the cost structure of aluminum, which is a very positive aspect. On the coal security, again, 2 structural changes which happened in the last half, which is additional linkages of 3.2 million tonnes, which was secured, and additionally, an old coal block in BALCO Chotia, which was started. And thirdly was more of an internal cost reduction, which we did was the GCV improvement. I think if the -- then there were other improvements in logistics and carbon, et cetera. If I put all that, actually, in last half we have saved about $90 per tonne, while still $120, which we had guided. Now what we ran into was really the headwinds of -- which, I think all of you are aware, the coal shortages and especially the coal divergence to IPP versus CPP, which hampered our cost. And of course the alumina which has been very volatile. But what I would say, frankly, that what Arun was saying structurally drives down -- driving down the cost to $1500, there has been good progress made, last half, on the bauxite, on alumina production, as well as on the coal security, of course, buffeted in the half and in the current quarter by these coal shortages and alumina, -- imported alumina price volatility. Those are timing issues, those are not structural things. So that's what I will just add to what Arun said.
Yes, I think the -- that is the -- for me it comes up very [indiscernible]. There are short-term cost pressures because of the coal situation, the global alumina supply situation, whereas the medium-term structural changes are well on track.
Sure. Thanks for the detailed answers. My second question is more of like a housekeeping question. What is the current exit rate for our oil production, say, maybe in September-end or in October, currently.
I think the exit rate for oil production is somewhere between 190 kboepd to 200 kboepd and the guidance for the second half of the year is 200 kboepd to 220 kboepd average.
[Operator Instructions] The next question is from the line of Rajesh Lachhani from HSBC.
One question on Aluminum, so you were talking about certain policy measures that the government is planning to take against Aluminum imports. Sir, can you please specify what are we seeking from the government?
Firstly, I was referring to the fact -- this is Venkat here. I was referring to the fact that the extent of scrap imports have increased. And what we are really seeing is a level playing field, wherein the domestic industry is not negatively impacted because of the scrap being landed in India. So effectively, we are asking for, potentially, an increase in duty in terms of imported aluminum scrap. It's as simple as that. So that a domestic market gets a fair share of actually participating on a level playing field.
Yes, sir. Actually we have seen some media reports of raising the import barriers to 10%. So is this the type of import duty that we are seeking from the government?
In fact, a 10% import duty, it would certainly go a long way in terms of helping the domestic sector grow up because, as I mentioned in the call, I was shocked to see the extent of U.S. scrap imports landing in India and the increase going up to around 128% to 145%.
[indiscernible]128 to 125, 145 [indiscernible].[Audio Gap]
Just to give you an idea, in China, the extent of duty which is being imposed on scrap is around 25%, so just to give you a scale of what the other countries are doing to protect their domestic industry.
The next question is from the line of Amit Dixit from Edelweiss.With no response, we'll move to our next question, which is from the line of Anshuman Atri from PremjiInvest.
My question is regarding the oil ramp up. What are the challenges of -- which has resulted in our production being in the range of 190 kboepd to 200 kboepd, so in the past also. This is a range which has been difficult to cross and so -- and at what range -- again, we are expecting it to sustain today 220 kboepd. Will it be able to sustain next 2 to 3 years? And how do we say going forward?
In fact today, we are -- we answered the question. But if you want to sort of cover it again, in terms of the challenges which were there and also in terms of the new projects coming onstream. But I think we actually did highlight it. It was a combination of the fact that some of these projects didn't come onstream quicker than what we had wanted. We're still keeping our long-term targets and vision in mind. And certainly we'll update you on the guidance in terms of next year and the medium-term guidance when we announce our results at the end of this year. But with hindsight, if those projects have come onstream earlier, it would have actually helped us ramp up our oil production.
Yes, sir, but in the 2013 annual report, we had talked about a 300,000 barrel output in near term. But we have plateaued at 200,000 barrels, so that's something which probably if -- when we see the production then probably should we get more confident?
Yes, sure. Let me take that one Anshuman. In 2013, the oil prices were at about $100 plus, and we had a lot of projects online, which, when the crude prices fell to $40 or so, we had no option but to abort them and rework them because they were done at a viability level of $65. So we went back to the drawing board, came back with the same projects and more, which is what has increased our -- the results from whatever, 138 million to 596 million barrels and made them viable at $40 a barrel, viable in the sense of ensuring a 20% IRR to all the stakeholders. So there was a gap in the investment period between 2014 to almost now, where we have just recently started that capital expenditure from here. And that is what is led to -- oil production sort of declined because we invest behind a production profile, and if you go back into the history of each one of our investments, we have beaten each one of those production profiles. So where we stand -- what led to the delay in just the recent past, as Venkat mentioned and I had mentioned earlier, was to be able to get some great contracting rates, which has made us a world-class development cost of $5 a barrel. So that negotiation with some of the vendors took -- created a lag of about 3 months over than what we had thought earlier, but gave us IRR of 20% at $35 a barrel adds to the certainty of and the robustness of the project. So now we have the momentum and, as you will see on the slide, the rigs are in place, the drilling has started. We have accelerated the drilling now that the rigs are more used to the better rate, and you would see that bump up, that Arun spoke about, in the second half of the year of production.
Thank you for a very detailed answer. My second and last question is regarding the organic versus the inorganic CapEx. So given the strong organic CapEx profile, so what kind of mix can we see in terms of the next NCLT break versus organic percentage approximately?
I think I can pick it up, actually. We are quite excited with the growth potential in our own backyard, in terms of whether it's Hindustan Zinc or whether it's Zinc International, oil and gas, whether it's Electrosteel, whether it's aluminum, whether it's copper. So from that perspective, it's meeting our investment hurdles. We are quite happy investing in and around existing projects. You never say never in terms of, effectively, other opportunities. But at this stage, the focus is getting the best out of our existing assets as we ramp up volume and reduce costs in a safe manner.
The next question is from the line of the Pinakin Parekh from JPMorgan.
My first question is on the recently production-sharing contract extension that happened now, while we understand that the press release mentions that it is subjudice. But till the court order is out, would the company have to shell out an additional 10 percentage points of profit shares to the government?
Sudhir, do you want to pick that up?
Yes, Venkat. Thank you. We foresee that the 10%, under the policy, would be applicable when the current PSC term expires, that would be May 18, 2020. The matter is our request for -- saying that the contractual sanctity be given weightage because our belief is that our contract -- the Rajasthan contract does not allow [ PP ] tranche movement in the extended period. So we are working with the government, and the matter is subjudice as well so that will continue. And there's is enough time before 2020 May to resolve this issue amicably. In Ravva and CB, of course, we believe that the contract says changing terms and conditions so we accept that policy that the government has come up with.
And my second question is on aluminum. The production release, which came out of a few days back, mentioned that, given the disruptions in domestic coal availability, there was a power import in the aluminum segment. Can you -- can the company, please, explain what power import means? Does the company have to buy power externally?
The short answer is yes, but Samir can cover it.
No, I think the fact we covered. We said what happened was that there was a sudden diversion of coal by Coal India, and you must have seen in newspapers that there were circulars issued in the sense of saying that the coal should be diverted to IPPs and no coal coming to CPPs. Now aluminum is a continuous process industry. We cannot let that pot solidify because it takes us 6 months for the pot to revive. So to keep the pots -- the aluminum pots running, if there is a sudden stoppage of coal then the only recourse we have is to buy power in the grid and keep the plant running. Coal is not a long-term solution, but short-term, that is the only solution, and worldwide that's how the aluminum industry works because it's in the nature of the technology and the process. And it's the same for [indiscernible] or anybody.
Sure. So just to strengthen the point further. Which -- where was the power purchased, in Jharsuguda or BALCO? And at what rate and how much was this power purchased?
It was at Jharsuguda. I think the impact on our cost was around $50 to $60 per tonne. The rates will vary because these are IEX rates. So I will not be able to give you a precise rate because it depends on when the power was drawn, et cetera. But the impact on us was indicated to you.
So just lastly, what we understand from various sales in the entire coal value chain is that many of the other industries are saying that Coal India, more or less, would not be able to supply coal till the next elections and power demand will remain high. So in that case, if coal supply does not improve really from here, would we expect the power purchases to continue to keep on running the smelter?
No, what we have said -- I did say, as I was telling you, there are 2 changes which have happened to us. One is that we got additional linkages of 3.2 million tonnes, which are going to come in the fourth quarter. That changes our own coal block in Chotia which is starting, so that will alleviate some part which was being bought in the auction. But primarily, when there is a shortage of coal in Coal India, the first impact is on the e-auctions and ad-hoc auctions where there are no linkages for us that cause an impact. Secondarily, it's only a materialization of the linkages itself. So that I think we have to wait and watch how the situation will evolve and, of course, as you say, that if there is a view and it turns out that these shortages are going to continue for the long-term, then, for sure, a good option is to enter into a PPA at a reasonable rate with somebody who has coal. It would primarily be IPP because CPPs are all in that same boat as us.
Just to supplement what Samir has said, a couple of other items to bear in mind, the Chotia mine has already started supplying to BALCO, that's the first aspect. Secondly, as the coal auctions come online, we would start to increase our participation here, and the other thing we also picked up is that the coal situation is slowly easing. And as I understand it, 10% has actually been allocated in terms of going to the private sector as well as our understanding from some of the news releases that have come out. So hopefully, the situation will ease, certainly pre the election period. That's what we are looking for. But certainly, we are prepared in that regard. And also, what we understand is Coal India has ramped -- is starting to ramp up production of coal, given the impact it's having across the country.
I think if I may just add onto one thing is that normally the quarter 4 is a better quarter for coal production in these patches because most of the coal because of the monsoon can get affected quite strongly, so that will play a role. And there are also now developments. We understand that there has been a committee which has been formed to look into coal swaps of imported coal versus coal which is inland. So I think all of the government is -- seems to us, is quite abreast of the situation and are looking into it quite seriously to alleviate the situation. And at that point, hopefully, that something should work out. But yes, we are ready for all eventualities that impact us.
And the problem is more a Jharsuguda versus BALCO, right?
Yes, because -- simply because BALCO has linkages up to 75%, whereas Jharsuguda have 42%, which increases up to 52% with the new coal block. And I think you are also perhaps aware that the new coal block have been put for auction for which we, of course, will be participating.
[Operator Instructions] The next question is from the line of Vineet Maloo from Birla Sun Life.
My question is related to the previous one, I just want to know, on Jharsuguda, what is the quantum of external purchases related to coal? How much tonnage are we buying from the [indiscernible] open market?
I think broadly, as Samir summed up, Vineet. I think, with the fourth round of successfully completion at the linkage auction. The linkage moves up to -- crosses 50%, which is a significant milestone. And we have -- business has also done very well in sourcing imported coal. So largely takes care of nearly 70%, 75% of the requirement. It doesn't depend on e-auctions, spot-auctions and perhaps aggregative stage. So that's what -- broadly the split at this point of time in Jharsuguda. And it's much better in terms of coal security than what it was 6 months ago or a year ago, thanks to [indiscernible] linkage auctions where we were large beneficiaries from [indiscernible] position. I hope that answers the question.
I'm sorry, just to understand, I mean, the 52% is including linkage plus the mine which you're going to start, right? This has started?
The mine, Chotia mine is in BALCO, which is why I didn't mention it. Jharsuguda or Vedanta Limited, as a legal entity, does not own any coal mines. That is in BALCO.
So for Vedanta Limited, Jharsuguda unit I mean, what is the situation, if you can just talk about that?
Right, Limited. We can verify Jharsuguda situation. About 52% would be linkage, about 20-plus percent would be imports and, broadly, 1/4 would be spot auctions and [indiscernible] sources.
On imports, do we have any long-term management or we buy on shipment-to-shipment basis?
I think, imports, we have -- we have 4 options on importing including [ miners ] when I have -- from the import sea [indiscernible] trade. But at the same time I request Samir to add anything if he likes to here.
Well, I think those imports are long term in the business. I don't know what you consider long term, but 12-month contract is what maximum we will try to ...
No, no. I mean, wherever you can lock in some kind of price. That's what I want. Quantitative commitment is not good enough, right?
Yes. I can give prices. Of course, as you say, as soon as we can lock in any price, we would try to. But same time, I think, as a policy, in Vedanta, we don't like to sort of hedge anything. So in the sense that unless a price -- I don't know whether this price is going to be the highest price or the lowest price at which I will lock in. So we have to be careful in saying that we should lock in at every price. Three months, for sure, we lock in everything so that we have our clear visibility and predictability of the costs over the next 3 months, goes for all commodities. Beyond that, it is not something which we do automatically. That is because something might be available on market that we will lock it in. No, that's not what we try to do.
What we don't want to do is end up locking in prices for a period just because there is a current potential shortage temporarily and then find that we have actually caught the wrong side of the price.
Understood. And last question is, what are your thoughts on a one-time capital return to shareholders? I understand you're giving out a dividend to -- maintaining the present payout, which is very good. I just want to understand -- so that takes care of basically cash comes from current earnings. But I want to know your thoughts on one-time cash return to shareholders..
I think those are really decisions of the board. But what we issue -- we set the capital allocation that I have covered earlier, I think third year in a row we are having nearly a 7%, 8% dividend yield, And broadly, from a Nifty 50 perspective, I can [indiscernible] the data we will probably be a top 3 company as we understand. Both from a payout ratio as well as dividend yields. So I don't think that, with our own requirements of CapEx and cash and any dividend is a return of capital [ whether ] it's buyback or dividends. And, in fact, in Vedanta Limited we pass it on, the Hindustan Zinc Limited, it is coming with dividends distribution that set off, so there is no leakage either. So that's broadly unclear at this point of time from a capital allocation point of view. Venkat, would you like to add something?
In addition to that, typically a company goes and returns capital to shareholders when it's run out of ideas, and it can't generate growth opportunities which give you 20% to 30% returns. In our case, we have got growth, very good returns, so the money is better put into place in the projects, which will then give you a perfect [ kicker ] and annuity in terms of dividends going forward.
The next question is from the line of Abhishek Poddar from Kotak Securities.
The first is regarding Zinc International. We saw in 1H the production was about 50 kt and the production cost was in the range of $2,300 to $2,400 per tonne. We're guiding for 100 kt into it with the production cost of probably $1,600 to $1,700 per tonne. Could you give more color what is gaining there?
Yes, in fact -- Deshnee can comment, but it's clearly around where the mines are in their stripping pattern and where -- the second half is going to be a more promising period. And in addition to that, the Gamsberg ramp up. But I'll pass the microphone to Deshnee. Deshnee?
Yes, thank you, Venkat. So Venkat, on the Black Mountain, we did plan a 4 equal quarter year, and we did have some setbacks on development as well as on getting copper because we get a copper credit at Black Mountain. So that explains the Black Mountain volume as well as the cost. The bigger one for us was Skorpion. But Skorpion, as you know, is busy waste stripping on Pit 112. So the first half of the year, by design, was actually planned to be a higher stripping half of the year. What we can tell you is that we are almost on target to the waste that we wanted to strip. So the ore that we are planning to expose to give us the second half tonnage is actually on plan. So yes, it does seem like a very steep second half of the year, but it was planned this way based on where we are in the shaft at Black Mountain and based on where we are in terms of the pit stripping at Skorpion. This guidance of 150 kt excludes Gamsberg, which we have guided at 75,000 tonnes of MIC for the rest of the year. In terms of cost, one of the bigger drivers for us in the first half was related to volume of cost. But when we couldn't get the volume of ore that we needed at Skorpion for the first half, instead of shutting part of the plant, which might have been an option, we didn't really have the time. So we ran blending in developed oxide, external oxide that we purchased. But of course, these prices of oxide did come at a cost. So that's the reason why the first half looks the way it looks, and that's the reason why we are confident that we can deliver a second half against the guideline volumes and costs.
The second question is regarding Gamsberg. Early the cost guidance was about $1,000 to $1,100 per tonne. This time we are seeing it to $800 to $1,000. So what has changed there?
Okay. So I mean, that's guidance. The original guidance came with the investment proposal of cost in [indiscernible] as we have done more work on the execution side. The team has also done more work on the costing side. So this will be a fully outsourced operation. So we'll have one contract, one business partner for mining and then one for the plant as well as the plant operations and maintenance. There can only be maybe 6 or 7 business partners at most. So what has changed for us? It's probably the operating philosophy that has allowed us to actually now cost a much lower rate. But in addition to that, I mean, this is a starting -- this is a plant that is in start-up. So the mining is still quite shallow, although we have stripped more than 90 million tonnes now of waste. And additionally, Gamsberg has been voted to be one of the most technologically advanced plants. So from a labor point of view, very low numbers, as well as from a maintenance point of view at least for the first 2 to 3 years, we are forecasting minimal maintenance in terms of replacements, et cetera. So we are now more confident with this guideline given the work that we've done since.
So Deshnee, on this -- the cost should go up in FY '20. If that's so, when you are going to be in the deeper part of the mine?
I think we'll provide for FY '20. Deshnee when do we release our results?
So actually -- but actually, I was just going to say, I mean, what's exciting about the outsourced model is that this -- almost the entire cost base, more than 80% of it is actually done on a variable cost basis, so only pay for the volume that we get on both the mine and the plant.
Okay. And just the last question on the aluminum side. I just want to understand the bauxite sourcing. We are now targeting 4 million tonnes of alumina, which would probably require about 11 million to 12 million tonnes of bauxite. Could you give us color that -- what would be the broader sourcing arrangement for those 12 million tonnes?
Ajay, do you want to pick that up?
Yes. So let me give you a little bit of detail what we are doing today. We are already sourcing around 5 million tonnes of bauxite. We already now ramped up Lanjigarh for another 3 million tonnes. That makes it about 8 million tonnes. And I think that you would've read some of our previous news articles that we've signed MOU with EGA for Guinea bauxites of 4 million tonnes. So this, in any case, secures 4 million tonnes. And our strategy is as more and more our own linkages of bauxite increases so we could substitute some of the existing arrangements. So already, we have this firmly in our hand. And as we continue, we would only improve on quality and cost.
Sir, what will be the cost difference of getting bauxite from Guinea versus the local sourcing?
You should practically say that it should be the freight forwarding charges.
Any ballpark number incremental cost per tonne of bauxite?
Well, that I would not like to give at the moment.
[Operator Instructions] The next question is from the line of Meera Midha from Edelweiss.
So this is Amit here. So the first question is regarding our aspirations in the steel space. So in case of Essar, we ran very close but finally, well, somebody else entered the deal. But Essar was a sizable plant of 10 million tonnes. So do we have further aspirations in the steel space as you can see the company going out for acquisition of plants outside or within India?
I think we are -- if I can pick it up. It's Venkat here. We are quite comfortable with what we have in Electrosteel. It was a very good purchase. And as I said, we are looking at -- the current exit rate is around 1.3 million tonnes per annum. The EBITDA has more than doubled already since we -- since the merger. In addition to that, we are looking at getting it to 1.5 million tonnes per annum without any capital expenditure. And the next in the expansion is 2.5 million tonnes, and that comes with not just the volume growth going from the current levels to 2.5 million tonnes, but it also comes with the improvement in margins as well. So it will be a very good cash generator and income generator for the business. So from that point of view, we're quite comfortable in terms of having Electrosteel in the family and quite content at that.
Great. The second question is on Electrosteel itself. Yesterday, Electrosteel Steels declared its results, and there is an apparent disconnect between EBITDA they reported and EBITDA that you have reported. So EBITDA that they have reported is INR 65.5 crores, while you have reported INR 168 crores for this quarter. So just wanted to tie the numbers up.
I think the IR team can tell you the calculation offline because there are ways to describe a legal entity which could be difficult from qualitative point of view. The bigger picture in Electrosteel for us, as far as volume is concerned, it is close to 1.5 million tonne run rate. And current EBITDA is around $125 million. And our target or vision -- it's not a guidance -- is to get to at least [ 200 ] by the end of this fiscal year. So that's a good $300 million, kind of, EBITDA pool for next year as we ramp it up to 2.5. So these are not guidance, but these are the broad design there. Now the difference in legal entity, could be -- there could be pre-acquisition adjustment in the legal entity statement which is more accounting which typically was the result of the timing to take over which is what the consolidated accounts could be. So that could be one reason but the specific reconciliation, I would request that our IR team to send it across to you. If it's okay with you, Amit?
No, that's perfectly fine.
The next question is from the line of Ashish Jain from Morgan Stanley.
Sir, my question, again, pertains to bauxite. I'm sorry, but I didn't get the 5 -- the 3 million tonnes bauxite number that you said we are sourcing for Lanjigarh.
That is from the Odisha mines where we have the linkage with Odisha. So if you remember, Venkat said 250,000 tonnes.
Sir, I thought that would replace the existing bauxite that we are using. So that remains 3 plus 4 is how we should see eventually when we touch 4 million tonnes of ore?
Yes, as we ramp up, you see, our priority of using the bauxite is, first, for use is Odisha. So the question is the security. So if you'll say how do I secure 12, that is the number of -- which adds up to 12. But as we get 3, we will -- since -- as long as the project ramp up doesn't go through the company's commissioning stage, we can always substitute the current one with just whatever we are having. So there are flexibility on the different bauxite source agreements where we can pull up and down. So therefore, I said that if you look at only the number 12, our ability to source 5 now, 3 from Odisha, 4 from EGA, it totals up to this. We are expecting more bauxite mines and linkages coming also additionally from Odisha. So our positive side for having more Odisha, that would fructify as the auctioning happens and as they come off for auctioning. But we are not only, let's say, waiting for that and not taking any other parallel action to cut down the risk of resources. We have agreements in place and flexibilities which we can plug in and out.
The next question is from the line of Ritesh Shah from Investec Capital.With no response, we'll move to our next question, which is from the line of Sanjay Jain from Motilal Oswal Securities.
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Yes, okay. I have 2 questions. My first question is on aluminum scrap. Could you give us some sense what's happening in the aluminum scrap market? I mean, a couple of years back, this market was pretty tight. But suddenly, like in the last 1, 1.5 years, the scrap has become oversupplied, especially in the Western hemisphere. If you have any thoughts on this, it will be really great.
I think there are 2 things happening here. It's Venkat. I'll pick it up and then pass it across to Samir. First, we obviously, with the trade war that's taking place between the U.S. and China, take that into account. People are looking for dumping ground in terms of scrap, in terms of aluminum. And certainly, when you look at the duty structure, it is very low on scrap aluminum imports. So when you take the combination of these 2, no wonder that the scrap imports have actually been going up in India. And Samir can perhaps comment on this further, but those are the 2 major things which have changed. And unless we actually have a shift in the duty you're going to see the domestic producers being impacted. Samir?
Yes, thanks, Venkat. So I think there are 2 parts to the answer. One is both happening in India, and Venkat has covered. But primarily, the trade wars and the imposition of 25% duty by China. Primarily the scrap coming from U.S. and that scrap has to find its way into India either directly or through several routes. B is, you can say, globally why is the delta between, let's say, primary and scrap. As you say why suddenly more scrap is becoming available and the delta is decreasing. I think scrap, like primary, is a cyclical market. And to understand that, we will have to look into the supply and demand of scrap in the developed markets of EU and U.S. and realize that there's a -- as the delta increases, the prices rise, it becomes more economical to collect and to increase the supply of scrap, which in turn increases the supply and again depresses the market and that's a cycle. And there's a cycle globally that has been followed by the scrap, which might be different from actually the primary material cycle. So that -- to understand in detail, you will have to look at the American and the EU scrap market. But for India, for sure, it can be what Venkat says. On the other part, I agree with you. That's happening. Now what are the exact causes? It's -- actually simple. But the details, you will have to look into those markets and there it is, understand?
Okay. The second question is on Gamsberg. This is -- first part of the question is when are we looking forward to the commercial production? You did give guidance, but I don't know if the 75 kt will come in fourth quarter or, of course, commercial production start sometime during the third quarter. And secondly, it's a repetition of question that we had asked about a year back when we had that Zinc Day in Udaipur regarding the grade of the ore. Now we are more close to the market and you will have checked the final output, what kind of discounts to LME or the premium that you are looking forward to?
Yes, it's Venkat here. Let me just kick off by saying certainly, we are expecting commercial productions to start towards the end of this month. So you will start to see production come through in this quarter with the chunk coming through in Q4. In terms of grade, again, let me pass it across to Deshnee. Deshnee, do you want to comment on the 2 questions?
Yes, thank you, Venkat. Firstly, in terms of tonnage, yes, we will be ramping up now -- from now. So commercial production will -- in fact, has started now. And what I'm measuring the team on is not necessarily metal in concentrate is how much of ore we can push to the front end. So if you look at 4 million tonnes run of mine to give us 240,000 tonnes of metal in concentrate, I'll be looking at how quickly we can ramp up to that 300, 330 mark level. By next quarter, quarter 4 of this year, we should be touching the 300 ore tonne level. So that's on ramp up. And in terms of metal, which together with your question on grade, will give us the guidance, 75,000 tonnes that we have guided for the year. That's actually a much better ramp up than we had anticipated a couple of months back. And that's simply because -- with the slight delay that we've had on startup, we've managed, as Venkat said earlier, to both build an ore stockpile as well as a crushed ore stockpile. So that is why we are confident now that we've constructed the plant, commissioned it, we've proven that it can work, then we will be able to accelerate the [ ops ] ramp up that we had originally forecast. On grade, I am seeing grade on the ground of over 5% as a start, which was the original plan. So we had guided 6% to 6.5% of an average grade over the life of mine. We're already in the -- almost now 1 million tonnes that's sitting on ground, seeing an average grade of about 5.5%. But the bigger question I suppose you were asking there is what are we seeing about the manganese. And in the areas that we've already exposed ore, the manganese grade is still what we had planned in ore. But what I'm quite liking, and I hope this trend continues, that we're seeing good concentrate grades in zinc over that 44% to 48% and the manganese for now is behaving the way it was predicted. So we are cautiously optimistic that the plants will deliver the grades that we had anticipated. So for now, no discount. We are not anticipating any discounts to LME on the metal in concentrate.
Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Mr. Rashmi Mohanty for closing comments.
Thank you, operator. As always, the IR team is available if you have any further questions on the financials or any other information you would like about the company. Thank you very much for joining us today.
Thank you. On behalf of Vedanta Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.