Vedanta Ltd

NSE:VEDL

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the Vedanta Limited Q3 FY 2018 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Ashwin Bajaj, Vedanta Limited. Thank you, and over to you, sir.

[Ashwin Bajaj, Director of Investor Relations]

Thanks, operator. And a very good evening, ladies and gentlemen. This is Ashwin Bajaj, Director of Group Investor Relations. Thanks for joining us today to discuss our results for the third quarter of FY '18. We will be referring to the presentation that is available on our website.From our management team, we have with us our CEO, Kuldip Kaura; and our CFO, Arun Kumar. We also have several of our business leaders with us. We have Sudhir Mathur from Oil & Gas; Amitabh Gupta from Hindustan Zinc; Deshnee Naidoo from Zinc International; Samir Cairae and Abhijit Pati from Aluminum & Power; and Kishore Kumar from Iron Ore. So with that, let me hand it over to Mr. Kaura.

[Kuldip Kumar Kaura, Interim CE & Director]

Thank you, Ashwin. Good evening, ladies and gentlemen. I'm pleased to welcome you to Vedanta Limited's Third Quarter Earnings Conference Call. We have seen further improvements in the commodity prices in the last quarter. And that strength has continued into the New Year as well. With the sentiment around global growth remaining strong and China supply-side reforms underway, the base is set for a strong 2018.With that, let me take you through some of our third quarter performance. Numbers first, focusing on safety. Vedanta remains focused on a 0 harm, 0 waste and 0 discharge culture. But regrettably fatal accidents at 4 of our businesses overshadowed our HSE efforts in quarter 3. 3 of them were fatalities of our contract employees and relate to understanding hazards in the workplace and the effectiveness of supervision. The fourth relates to understanding and control of a critical risk in our mining operations to ensure the stability of waste dumps.Our executive committee has increased involvement in some key areas of visible leadership, risk identification and control and closure and collective actions.We have bolstered our HSE organization by induction of additional HSE experts with global experiences. We have also completed a third-party audit for tailing/ash management practices and water risk assessment to identify physical, social and economic risks across the group in India.We have put in place measures to address this and remain committed to bring Vedanta to the best HSE performance in the resource sector. Let me assure you that all of us in our executive team are committed to our safety goals.Slide on results highlights. Moving to our results highlights for the quarter. On operations, we have delivered strong volumes in the quarter and continue with production ramp-up across our portfolio.At Zinc India, we had high production and we remain on track to achieve our 1.2 million tonne target. At Zinc International, we had strong production from BMM and Skorpion. Our Gamsberg project is on track to commence production in mid-calendar year '18. At Aluminum, we're continuing to ramp-up and have a rigid quarter 3 at a run rate of 1.8 million tonnes per annum. At TSPL, we had record plant availability of 97%. At Iron Ore, we have an additional 3 million tonne of capacity allocated to us in Goa for the current financial year. The Supreme Court has also increased the mining cap for Karnataka, the company-wise allocation is in progress.We're also progressing well on our growth projects announced last quarter. Contracts have been awarded on the new projects in the Oil & Gas segment and mobilization of building rigs are in progress.On the 400,000 tonnes smelter expansion at Copper India, the EPC contract has been awarded, civil works are underway.Talking about the financial highlights. I'm happy to report that quarter 3 EBITDA was INR 6,776 crores and profit after tax was INR 2,173 crores. We have maintained a robust EBITDA margin of 35% quarter-on-quarter. We have had strong cash flows of INR 4,600 crores and have reduced our gross debt by INR 11,450 crores in the first 9 months of FY '18.We also have one of the strongest balance sheets in the sector with net debt-to-EBITDA at 0.7, one of the lowest across both our Indian and global peers.Next slide, please. As we see our assets ramping up and delivering growth, we're also focused on delivering strong shareholder returns. We aim to do this by focusing on our 4 key areas. Executing our strategy, which has been consistent over the last several years and has delivered results. Over 80% of Vedanta's EBITDA comes from commodities that are expected to grow the most over the coming years.We're ramping up our existing capacities and have taken specific actions to grow our volumes across all our businesses.India has very strong growth potential and its consumption of key commodities will increase exponentially. We are uniquely positioned to serve this demand being the only diversified natural resources company in India.We're focused on value creation for our shareholders through prudent capital allocation and we have a robust dividend policy in place, which entails a minimum 30% dividend payout.Strategic framework. Our strategic framework is quite simple. And I'm quite excited about the growth opportunities in our various businesses and being able to leverage our presence and position with our fast-growing Indian market.Our world-class clients have long life and we have been continuously adding to results through exploration. Through this rich asset base, we will grow across our portfolio both in the near and medium term.Key among that growth will be our plans in zinc and oil and gas. We're actively working on plans to expand our zinc business to 2 million tonnes of mined zinc and lead, accompanied by over 32 million ounces of silver, and our Oil & Gas business from a level of 300,000 barrels to 500,000 barrels per day of output. The growth, which I have detailed, will be funded by internal cash accruals. Our disciplined approach to capital allocation will deliver superior long-term returns to shareholders. I'll walk you through details in the following 2 slides.Near-term priorities. Next slide, please. The priority in the near term up to financial year 2020 is to ramp-up the design capacity across all our businesses. Key aspects and projects that underpin this growth are laid out on this slide. We are on track to achieve our volume growth as per our guidance. We've already witnessed the progress of our ramp-ups at Zinc India and Aluminum in quarter 3. This will accelerate as scheduled to ramp-up to respective designed capacities. At Zinc India, there will also be significant reduction in the COP as we complete our expansions and transition to the underground mining.At Zinc International, our Gamsberg project in South Africa is in erection phase. The project is on target for first production by mid-2018.In our Oil & Gas business, development partners have been finalized for our next phase of growth to get to a near-term capacity of around 300,000 barrels per day.At Copper India, the EPC contract has been awarded, double smelter capacity from 400,000 tonnes to 800,000 tonnes per annum. In our Iron Ore business, the state has already increased the mining cap in Karnataka. And we're soon expecting an increase in the mining limits at Goa too, which will enable us to swiftly ramp-up to our pre-ban levels of over 20 million tonnes per annum without any significant investments. Next slide, please. In the medium-term beyond 2020, we have carefully evaluated and conceptualized the following attractive growth options, most of which are brownfield across our existing portfolio. Some of these include expansion at Zinc India to 1.5 million tonnes of mined zinc lead, accompanied by over 32 million ounces of silver given the long mine life of over 25 years. Phase 2 and 3 of our Gamsberg zinc project, which has the potential to take total zinc concentrate production from 250,000 tonnes to 600,000 tonnes per annum. Potential at our Oil & Gas to increase output from 300,000 barrels to 500,000 barrels on the back of continued exploration as an ASP technology.We're also in the final stages of evaluating the alumina refinery expansion at Lanjigarh to 6 million tonnes. Coming to development of iron ore deposits at Jharkhand. We believe that steel is a natural bolt-on for us to our core iron ore business as the Jharkhand iron ore mining license, for example, comes with the requirement of value addition. This has been our trigger to evaluating steel assets being auctioned under the IBC. We'll participate in suitable opportunities that we believe will help strengthen our Iron Ore business provided the investment clears our capital allocation criteria and hurdle rates. I would like to emphasize that as we ramp-up to our near and medium term capacity, our assets will generate strong incremental cash flows to enable funding of all our growth through internal accruals.As an organization, we're well equipped to take up these growth projects with the requisite management bandwidth, global talent base and systems in place.I'll now hand over to Arun, who will take you through the financials.

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

Thanks, Mr. Kaura. Good evening, all. So we've delivered another steady quarter with strong set of numbers. It's driven both by higher volumes reflecting the operating performance per plan and helped along by a higher price scenario. Thus the EBITDA of INR 6,780 crores represents the 17% growth sequentially and a 13% higher year-on-year despite a couple of inflationary cost headwinds.EBITDA margin continued to be robust at 35%, which is now the sixth continuous quarter of the 35% to 40% range. Balance sheet remains strong with cash and liquid investments of nearly INR 39,000 crores. This is post-repayment of our gross debt by about INR 11,500 crores in the last 9 months. Of course, it excludes the INR 7,900 crores repaid by Zinc, which was a temporary borrowing.Our gearing continues to remain best-in-class in corporate India, whichever sector you pick, with net debt-to-EBITDA at 0.7x. We also had a CRISIL upgrade to our outlook to positive in October, as you recall. While EBITDA -- our attributable EBITDA per share improved significantly, the mark-to-market accounting on investments and the typical deferred tax accounting have led to an EPS at INR 5.86 per share, which is higher sequentially from INR 5.49 though lower on a year-to-year basis. Overall, as you heard from Mr. Kaura; A, we're on track executing our current near-term volume and ramp-up plan. B, growth projects while simultaneously starting on the path for the medium-term where zinc 2 million tonnes; oil, 300 kboepd to 500 kboepd; [ eye on ] alumina refinery in the final stages as well as iron ore in Jharkhand. C, the earnings are good. The cash is good. So it will self-fund all these brownfield growth plans. And we expect that these will be well executed through a credible track record. Those are the 3 highlights I would say of our performance so far. Moving on to the EBITDA bridge on the next page. As we said, it represents a 17% growth quarter-on-quarter. If you see, our Aluminum ramp-up on track, a run rate of 1.8 million tonnes per annum, should exit with 2 million tonnes per annum. Zinc, grew 7% on metal basis, 10% metal concentrator sequentially. So that's a strong growth. Iron ore, again, post-monsoon dispatched higher grade ore, better realizations as part of its new production and sales strategy. Oil volumes were up too sequentially, and zinc volumes at Zinc International were the highest in the last 8 quarters. Summing up, it was an outstanding quarter operationally and we help deliver about INR 400-plus crores of contribution to the EBITDA out of the total of INR 1,000 crores increase. The balance, of course, came from price as I mentioned earlier. We're lucky to have zinc at a 10-year high. Brent and aluminum at 3, 4 year high. Some of the input inflation took away the part of the price upside. Overall, resilience I would say of the diversified portfolio has been a cornerstone of our investment case or investment thesis as you would like to call it, and it's played out very well in the last 3, 4 years both in the down cycle as well as the up cycle, as is very evident. And it's probably only 1 of the 2 companies globally in the sector out of the top 25 to have a very good portfolio of diversified metals and oil and gas and even in diversified metals, the accent on base materials like zinc and aluminum and copper all of them in a sweet spot at this point of time, both from our own internal volumes and operations as well as from an external environment.Volume guidance for the year is unchanged, which means we expect the good volume performance to continue into quarter 4. And perhaps beyond that given the fact that next year we will reap the benefits of our ramped-up asset base. We also expect the cost inflation to ease soon, especially domestic coal. Our government is doing some good work to bring it down, bring the supplies up and cost down. Alumina is already easing from the peak levels that were seen in quarter 3. So with that, hint of optimism, I'll move on to the income statement on the next page.Self-explanatory, as usual. Some of the headline numbers I've already explained. The other key numbers on the page are on the finance cost, our blended cost of borrowing was 7.7% for the quarter, continued to stay below 8% for the second quarter in a row after nearly 8 quarters we achieved the target. And we expect this kind of rate to stay for the rest of the year and in the near term.The other income line, of course, represents the investment income. It was lower very clearly mark-to-market accounting, which has nothing to do with cash or economic reality as we continue to hold our investments mostly to maturity. And that's, of course, due to the 65 bps rise in the G-Sec yields over the quarter, sharp riseInvestment income for quarter 4, however, is expected more like the quarter 2 levels assuming the G-Sec would stay stable during the quarter. I'm sure that helps you model out some of the cash flows. The portfolio, of course, is outstanding, continues to be safely and conservatively invested in Tier 1 assets, very good based on CRISIL audits and rating on a monthly basis. Depreciation line FY '18 would be marginally lower compared to FY '17, nothing new in the guidance of debt. Tax line, again, well within our yearly guidance of -- we'd always said, mid-20% to 30% will probably come up at the higher end of the range. For the quarter, it's a tad higher. That's again, purely deferred tax accounting and some true-ups, but for the year, which would be in that range. With that, I'll move on to the next page.Net debt, waterfall during the quarter. As you can see, we generated a cash flow from operations of over INR 5,000 crores, clearly driven by higher EBITDA and fundamental operation performance. That helped us in reduction of the net debt to INR 14,500 crores prior to acquisition of course, despite INR 2,100 crores spent on CapEx in line again with our guidance. We continue to be disciplined in our capital allocation with all our CapEx spends having higher arch as 20% and above. We're likely to be marginally lower than our $1.1 billion CapEx guidance for the year, basically timing of a plus/minus few weeks here and there.Our zinc business CapEx program making a steady progress. We have commenced the next phase of growth program with the copper smelter project at Tuticorin, as Mr. Kaura highlighted. And Oil & Gas, again, on track of all the projects that we announced during the Capital Market Day in London, during the month of November. Working capital investments, you see on this page, is mostly driven by LME prices, few one-off items, all of which should reverse back in the coming quarters. So we feel good about the upcoming fourth quarter as usual, which last few years has also seen a strong quarter as we wind up the year in terms of cash flow.One-off investments, $158 million, about INR 1,000 crores in Japanese manufacturer of LCD glass, which you all know. Obviously on consolidation of books given the transaction is consummated, there will be the net debt, which will add on to the balance sheet. Otherwise, the net gearing at these levels as I reiterated earlier, 16% really the question is what is the right level out there.Moving on to the final page. The priorities remain consistent. Again, if I have to summarize, the focus on cash, capital allocation and volume growth, will deliver the consistent earnings into the near future. It will keep the balance sheet strong and self-fund all the growth projects. I think Mr. Kaura also made the point. And as I mentioned earlier, the diversified portfolio, especially base metals and zinc is highlight of the base material space whether it's the price side or the cost side with a handsome margin of $1,800 to $2,000 plus margin per tonne at these levels. And oil, of course, are an important part of our growth strategy and we're blessed to be in these 2 spaces as we look forward. And we continue to be a compelling investment proposition for both equity and debt investors, and with that thank you all for the patient hearing, and back to, Mr. Kaura.

[Kuldip Kumar Kaura, Interim CE & Director]

Thanks, Arun. Zinc India slide, please. Starting with Zinc India, we have achieved mined metal production of 240,000 tonnes; refined zinc-lead production of 245,000 tonnes; and refined silver production of 132,000 tonnes in quarter 3. Our CoP was higher due to high input commodity prices such as met coke and imported coal and also lower overall grades in quarter 3.We're in the last year of the transition and I'm happy to report that the underground mines have ramped up to contribute 85% of total production in the last 9 months.Rampura Agucha underground mine crossed 2 million tonne run-rate of ore production last quarter. The rate will significantly accelerate in quarter 4. SK mine has crossed the 4.5 million tonne ore production run-rate in quarter 3 with the 75% of its planned capacity.We're progressing well to achieve our FY '20 guidance of 1.2 million tonnes and significant milestones that have been achieved in this journey are as follows.At Rampura Agucha off shaft development is on track to take total production capacity to 4.5 million tonnes in quarter 3 '19. At SK Mine, equipping of main shaft is progressing as scheduled and expected to complete in quarter 4 FY '18.Shaft will take total production capacity to 6 million tonnes progressively by quarter 3 in FY '19.Also public hearing for EC enhancement from 4.5 to 6 million tonnes was successfully concluded paving the way for next phase of expansion. The new mill of 1.5 million tonne is expected to commission in quarter 2 FY '19 and will take the total milling capacity at SK to 5.8 million tonnes matching with our core production ramp-up.Post completion of the Zawar debottlenecking to 2.7 million tonnes, site construction work has commenced for the new mill of 2 million tonnes capacity, which is expected to commission by quarter 3 FY '19.We're happy to report the receipt of approval of Expert Appraisal Committee of MoEF to expand ore production at our Rajpura Dariba and Kayad mines.On the outlook, we're confident of meeting our earlier guidance of mined metal production to be higher than FY '17, refined zinc-lead metal production of around 950,000 tonnes; and silver production of over 500,000 tonnes -- silver production of over 500 tonnes, I beg your pardon. Q4 mine production to be higher than quarter 3 due to higher productions of Rampura Agucha mine and higher overall grades.We expect FY '18 cost of production to be in the range of $950 to $975 per tonne with the quarter 4 cost less than quarter 3 as it will benefit from higher volumes and cost efficiencies like usage of linkage coal, et cetera.Zinc International slide. Moving to Zinc International. We had a strong quarter with a total production of 47,000 tonnes, mainly due to higher blended grades and operating efficiencies.Cost of production was $1,383 per tonne, lower than last quarter. At Skorpion, the pit extension is progressing well with full ramp-up of contractor mining, 25% of waste stripping has been completed and full completion is expected by quarter 4 '19.We've also extracted the first ore in November 2017 slightly ahead of schedule. This project will extend the mine life to 2.5 years and produce 250,000 tonnes of metal. Our production guidance for FY '18 remains unchanged at 160,000 tonnes.Although, the 9 months cost of production has been around $1,500 in line with our full year guidance, quarter 4 cost of production will temporarily be higher at $1,700 due to reallocation of stripping costs of Pit 112.At Gamsberg project, we have Deshnee Naidoo, our CEO at Zinc International on the call, maybe I'll ask her to expand on the Gamsberg project progress.

[Deshnee Naidoo]

Sure. Thank you, Mr. Kaura. And on the Gamsberg project, we remain on track with our guidance of first ore production in the middle of this calendar year. In quarter 3, we had record excavation of about 70% of the waste rock of our total pre-stripping requirement of 60 million tonnes. We're on target for 500,000 tonnes of ore stockpile ahead of the first feed date. Construction of the concentrator is underway and we remained at peak contractor strength of around 2,500 people on site. In terms of selected highlights for the quarter, the ball mill shell and crusher mechanical erection has been completed and the power and water pipeline infrastructure is over 90% complete. We're expecting cold commissioning of the concentrator plant to start early this quarter, which is already underway.Thank you.

[Kuldip Kumar Kaura, Interim CE & Director]

So thank you, Deshnee. Now we move to Oil & Gas. I'll request Sudhir Mathur.

[Sudhir Mathur]

Thank you. Thank you, Mr. Kaura. And good day to you all. In the Oil & Gas business, we have commenced our journey towards our vision to contribute 50% of India's crude oil production. In this journey, there are 3 key elements.

[Ashwin Bajaj, Director of Investor Relations]

Mr. Sudhir, we cannot hear you very well.

[Sudhir Mathur]

Hello, Ashwin, can you hear us?

[Ashwin Bajaj, Director of Investor Relations]

Yes. Better now. Please go ahead.

[Sudhir Mathur]

I will start from the beginning. In the Oil & Gas business, we've commenced our journey towards our vision to contribute to 50% of India's crude oil production. In this journey, there are 3 key elements. Firstly, we've commenced work on the immediate opportunities to increase volumes through infill wells and debottlenecking facilities, which have the potential to add around 20,000 to 30,000 barrels per day. Secondly, for the growth projects, which we announced in Q2, we have awarded contracts to key global oilfield service providers. Thirdly, we're regenerating our exploration portfolio through investments in the prolific Barmer and KG offshore basin and participation in the OALP rounds.Let me begin with our Q3 operational performance. Our core fields continue to deliver along expected lines with growth production at 184,000 barrels. Our world-class operational capabilities have kept operating cost at the lower end amongst our global peers.Rajasthan waterflood OpEx was at $4.3 per barrel. Blended operating cost for Rajasthan was at $6.4 per barrel. In Q4 FY '18, we're targeting exit with gross production volumes of 200,000 barrels per day. This ramp-up of volume shall primarily be driven by infill and debottlenecking activity. Drilling of 15 infill wells at the prolific Mangala field is progressing as per plan with 8 wells online. The balance wells shall be drilled during the current quarter.In order to boost volumes from our satellite fields, we've commenced 8 wells during ramping.Raageshwari Deep Gas Phase I ramp-up to 45 mmscfd was completed during Q3 as per plan. We're upgrading our infrastructure at the Mangala processing terminal to increase liquid handling capacity by around 30%. We have also commenced with 3 well infill program at Cambay to monetize around 7 million barrels of reserves.The next slide, which is about investments for growth. We have a rich set of options in our portfolio ranging from enhanced oil recovery, tight oil, tight gas and exploration prospects. As in the past, our development projects generate an IRR in excess of 20% and Brent of around $40 per barrel and provide free cash flow CapEx every year.In order to execute these projects, we have awarded integrated contracts to global oilfield service companies with an inbuilt risk and award mechanism. Engagement with global oilfield service providers also brings the benefit of technology and commerciality. Moving on to individual projects. In our core MBAC we're focused on increasing recoveries. The success of the Mangala polymer EOR is being replicated in the Bhagyam and Aishwariya fields.An integrated contract for this project has been awarded with rig mobilization expected in the current quarter. In addition, we're also working on the ASP project to boost the recoveries. This project aims to monetize over 100 million barrels of oil. This contract is expected to be awarded in the current quarter.Monetization of the tight oil and tight gas prospects shall enable unlocking of the vast potential of the Barmer basin. Raageshwari tight gas project provides us with an opportunity to grow our gas business to a sizable scale. The project is expected to increase the overall Rajasthan gas production to over 150 million scf per day and condensate production to around 5,000 barrels of oil equivalent per day. In tight oil, we're on track to monetize Aishwariya Barmer Hill, the project provides an estimated ultimate recovery of 32 million barrels.The integrated contract for tight oil and tight gas wells has been awarded with rig mobilization expected in the current quarter. Exploration holds the key to ensuring sustainable growth through addition to prospective and contingent resources. The Rajasthan block provides us with a unique proposition of similar access to the full Barmer basin with this multiple play. Our partnership with global partners has enabled us to identify exploration drilling prospects.We will shortly award the contract for an integrated exploration and appraisal drilling program in Rajasthan.In the KG offshore, the contract is in place for a 2 well exploration campaign from the current quarter. The target of this program is to add another 300 million barrels of contingent resources.With that over to you, Mr. Kaura.

[Kuldip Kumar Kaura, Interim CE & Director]

Okay. So thank you, Sudhir. We'll move to aluminum. Aluminum has been a strong ramp-up story this quarter. We achieved record quarterly production of 445,000 tonnes during this quarter with a current run-rate of 1.8 million tonnes per annum. We maintained our production guidance of 1.5 to 1.6 million tonnes of aluminum, excluding trial production in FY '18. We're on track to exit FY '18 at a run rate of 2 million tonnes per annum. At the Lanjigarh alumina facility, debottlenecking initiatives were undertaken in quarter 3 to achieve designed capacity. However, alumina production this quarter totaled 287,000 tonnes due to constraints in rail logistics. With the ramp-up of refinery and expected improvement in the logistics for bauxite, we aim to achieve a stronger quarter 4 and full year alumina production of 1.2 million tonnes to 1.3 million tonnes. Moving on, the cost environment for the aluminum industry has been a point of concern, we recorded cost of production of $1,945 per tonne in quarter 3, higher input commodity inflation resulted in the $160 per tonne quarter-on-quarter increase in CoP, partially counted by the offsetting impact of revival cost and power imports cost due to operational improvements.Coal cost was higher because of lower realization from linkage coal, higher cost of e-auction and GCV slippage. Other inputs commodities like caustic and CP coke were also up 35% and 15%, respectively compared to quarter 2. Domestic coal situation is a key focus area for the management. We have secured an additional 2 million tonnes of coal linkage from the Tranche III auction where delivery should start in February. On 8th January, 2018, Coal India announced an increase in coal price across a number of grades averaging INR 0.07 per GCV. We also expect third-party quality control to eliminate GCV losses, which along with improved linkages will have to marginally reduce the coal cost. We've revised the cost guidance and expect quarter 4 cost of production to be in the range of $1,850 to $1,900 per tonne as a result of one-off elimination and anticipated metal, domestic coal situation. Power. Moving to Power and our IPPs. Our 1.9 gigawatt TSPL plant is running at record availability of 97%. We had another record quarterly EBITDA at TSPL of INR 429 crores, and maintained our target availability of $0.75 for the full year.BALCO IPP's PLF at 43% recovered quarter-on-quarter but remained low impacted by the high coal cost environment. Jharsuguda IPP continued to be adversely affected due to the closure impact related to the ash dyke incident and temporary coal shortage. This is expected to recover in quarter 4 FY '18.Moving to Iron Ore. We had sales of 1.8 million tonnes and production of $0.9 million tonnes. Production and sales volumes were lower year-on-year on account of extended monsoon and the low pricing environment.In Goa, we have commenced production of high-quality ore in quarter 3 through beneficiation and blending, which is resulting in improved realizations and margins. We sold some of this high-quality ore in quarter 3.At Karnataka, we achieved production of our annual allocation of 2.3 million tonnes. We continue to have strong realizations of $28 per tonne in quarter 3 at Karnataka. We are working towards improving these realizations in the domestic market. We continued to engage with the respective state governments for increased mining allocations in both states. In January, we were granted an additional allocation of 3 million tonnes in Goa for financial year '18. We expect to produce sellable high-quality ore of about 2 million tonnes in quarter 4 FY '18.At Karnataka, the Supreme Court has increased the state's cap from 30 to 35 million tonnes, company-wise allocation is in progress.Moving to Copper India. We produced 101,000 tonnes of cathodes in quarter 3. Production was marginally lower than the previous quarter due to an unplanned plant shutdown of about 8 days on account of a boiler leakage. The smelter is now operating at high efficiency, and we maintain our guidance of 400,000 tonnes of cathode production within fiscal 2018. TC/RCs have been marginally lower than the previous quarter at USD 0.208 per pound. This decrease was on account of lower spot TC/RCs about 90% of our concentrate requirement had sourced through long-term agreements. Benchmark TC/RC for calendar year '18 are about 10% lower than calendar year '17 at $0.216 per pound.Our net cost of conversion was higher quarter-on-quarter, mainly on account of higher coal and improved commodity prices and lower volumes.Our 400,000 tonnes expansion project is progressing well. The EPC contract has been awarded and site mobilization and civil work has commenced.Contracts for the balance construction activities will be awarded by March 2018.The project is expected to be completed by quarter 3 FY 2020. Completion of this project will place Tuticorin Smelter as one of the world's largest single location copper smelting complexes.So that covers update on all our businesses. Coming to summary. So let me once again reiterate our key messages here by saying that Vedanta has a well-invested asset base that will deliver growth. And we are committed to shareholder returns. With our prudent strategy, prudent capital allocation and growing Indian market, we're poised to grow and deliver on these priorities.With that, let me summarize by stating that our ramp-ups across all businesses are progressing well, which will lead to high volumes in quarter 4. We should especially see a good quarter at our Zinc India business as Rampura Agucha increases its production in overall production and with improved grades. Aluminum businesses, as we continue to ramp up, at Oil & Gas from our debottlenecking initiatives at our Iron Ore business with better realization as we sell higher-quality ore.Secondly, commodity markets remain robust. And we have a strong outlook for the future. Our costs are being impacted by high input commodity prices, especially in the Aluminum, but we are working relentlessly to mitigate these in line with our low-cost philosophy. These factors combined should help us deliver stronger performance in the last quarter and finish the year with excellent cash flows and shareholder returns.Going forward into FY '19, EBITDA and cash flows will continue to pick up further as our capacities ramp up. And we'll deliver our near-term growth with Zinc India racing towards 1.2 million tonnes production and at our Oil & Gas business moving to 300,000 barrels per day production. Our robust balance sheet will support us with expansion. We have one of the strongest balance sheets in the sector globally. And this will be maintained, as our growth will be funded from internal cash flows.With that, I'd like to thank everyone and pass you on to Ashwin.

[Ashwin Bajaj, Director of Investor Relations]

Thank you, Mr. Kaura. So operator, we're ready to take questions now.

[Operator]

[Operator Instructions] The first question is from the line of Sumangal Nevatia from Macquarie.

[Sumangal Nevatia, Senior Analyst]

Couple of questions. First, I'll start with more of a top-level question, sir. First one on the capital allocation strategy. In the last few months we've learned about investments in LCD, glass substrate company, a non-core area, and also about our interest in steel assets, which you did explain in your opening remarks. So the question is what's the broad capital allocation strategy we're looking at? And what further investments in these areas, say, in LCD, et cetera, do we expect in coming years?

[Kuldip Kumar Kaura, Interim CE & Director]

Yes. So I think as regards our substrate glass, this was a very small and unique technology-oriented opportunity supplying materials to fast-growing market. So this was a small one-off investment and it should be viewed as such. As regards our capital allocation strategy, as we stated earlier, that we maintain our -- basically we're on 3 pillars we maintain a strong balance sheet. We look for investing projects, which meet our hurdle rates at a strong IRR. And fundamentally...

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

Yes. Just a supplement what Mr. Kauraji is explaining. I think we've been sharing consistently over the last year. Our capital allocation very clear, maintain a strong balance sheet, allocate capital to the high-return projects. Most of them, perhaps, will be self-funded. The second point is ensuring that the gross debt comes down while we have a lot of cash, net debt is not an issue for us, and maintain a high credit rating. And last but not the least is to ensure that the dividends to the shareholders and shareholder returns is robust. So it's always going to be a sense of balance between the 3 that really the difference capital allocation exercise. And we have enough of cash and capital. It's a positive problem for us to have in a manner of speaking.

[Sumangal Nevatia, Senior Analyst]

Just continuing on that -- on this when we're looking at steel assets having significant debt. So what level of gearing are we comfortable when we're looking at these assets?

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

I think if you -- on the steel assets per se I will leave it to Kauraji. But on the balance sheet side, our gearing is 16% at this point of time. And net debt-to-EBITDA is virtually nonexistent at the Vedanta Limited consolidated basis. So I really don’t think it's much of a discussion point on what it is, it's a best-in-class balance sheet as I have always articulated, whether you compare it to our peers and probably the petroleum sector or the automobile or telecom or any sector for that matter except for mines and metals. As regards to steel, it's -- I'll leave it to Kauraji.

[Kuldip Kumar Kaura, Interim CE & Director]

Fundamentally the -- I mean, we are in the resources business and iron ore is our main business. And for the growth of iron ore business, as we are aware the governments put sometimes stipulation regarding value addition in grant of the mining licenses. So we look at our extension into steel in that light. And that is the reason we are evaluating some of these assets now. You are also perhaps aware we have 800,000 tonnes of big iron capacity at our Sesa Goa complex. So this is how -- this is our perspective really on the steel.

[Sumangal Nevatia, Senior Analyst]

Understood. Second question is with respect to the Oil & Gas division. Slide 10 near-term expectations says that we are targeting almost a 50% increase 275 to 300 kboepd per day. So how will volume growth shape up in FY '19 and '20?

[Kuldip Kumar Kaura, Interim CE & Director]

So, Sudhir, would you like to respond to this? Sudhir? Okay.

[Sudhir Mathur]

As we mentioned in the call as well as in our Capital Markets Day, we've got a line of projects, which we are working on and mentioned that the contracts have been awarded for most of them barring one, which we will do within the current quarter. And the drilling is going to start within the current quarter. The projects include starting from the beginning, we mentioned that we are debottlenecking the Mangala processing terminal to increase capacity by 30%. The fluid handling capacity what it would do is to be able to bring all our wells on line. Second, there is a infill program at Mangala that's taking place in 15 wells. We expect these to add to 20,000 to 30,000 barrels. Our key projects are Aishwarya Barmer Hill tight and the tight gas project, which the drilling is going to start within the quarter, Baghmara and Aishwariya ASP polymer and the ASP project. So all this, all in all, we expect to add more than 100,000 barrels of production equivalent per day as well as a 100 million barrels of reserves. So this will be phased out as the project -- depending on how much drilling for which we have a schedule that will play out.

[Kuldip Kumar Kaura, Interim CE & Director]

I think just supplementing Sudhir. As he said in the beginning, in India, we produce only about 15% of our total crude oil requirement. And out of that, we produce about 27% of that today. Our aim is really to take this to 50% level of crude oil production in India. And apart from the projects, which Sudhir mentioned, we are also investing in exploration at Rajasthan as well as the offshore areas. And we are looking at the possibility that we can actually take up our oil production to a level of about 500,000 barrels per day going forward in the medium term.

[Sumangal Nevatia, Senior Analyst]

Understand. If I may just ask one more question.

[Operator]

[Operator Instructions] We have the next question from the line of Vineet Maloo from Birla Sun Life Mutual Fund.

[Vineet Maloo, Fund Manager]

My question is related to Aluminum. We've seen an impressive ramp up in production. Just wanted to understand in this environment of high cost inflations, what is our marginal cost? So buying alumina from market and buying coal also from market for additional tonne. What kind of marginal costs are we working with?

[Kuldip Kumar Kaura, Interim CE & Director]

So fundamentally I think as we were saying that with the coal cost pressures sort of easing off with better coal production and distribution in India. So if you go back, last year, we were having margins in the vicinity of $400 per tonne. But with our higher volumes and some of these cost pressures decreasing and our better and higher production of alumina at our own facilities, we can expect, I mean, margins depending upon how the costs develop in the range of about $600 to $700 per tonne. So I think that is the scenario we're working in the immediate future.

[Vineet Maloo, Fund Manager]

No sir, let me just interrupt, please. Can I just interrupt, please? My question is regarding the marginal cost of production when you're buying alumina from outside, it was not about current margins on integrated production, which I'm sure are very good.

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

Yes. Let me just supplement it. It's very simple and we have reiterated in the past several times. We don't burn cash on the marginal base, very clear, very simple, right? With this kind of Aluminum price -- let's not forget that premium is also quite attractive. We have a huge domestic market to cater to. And the demand for the metal, it's a green metal and demand for the metal is very robust. So there is no cash burn if that's your question. The bigger picture here is about the 2.3 million tonnes, and how can you get to a $600, $800 margin profile and it's the potential cash cow. It's a nice place to be and that's really the big picture out here. And there is no cash burn if that's your focus was.

[Vineet Maloo, Fund Manager]

No, no, I understand. I mean, I'm sure you'll not burn any cash. I just want to get a hang of the number because as external observers we are not able to get a sense of those numbers. That's all I'm trying to understand.

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

Yes, I think it is really positive, let's move onto the next question.

[Vineet Maloo, Fund Manager]

I don't have any other question. That is all I wanted to know.

[Operator]

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

[Pinakin M. Parekh, Associate]

My first question is on Aluminum. The Aluminum cost of production has disappointed consistently on the upside through this year. And the 4Q guidance is $1,850 to $1,900 per tonne. And this is based on improved materialization of coal linkages and elimination of the one-off impacts. Just trying to understand in this current commodity price environment, is this the new normal base level cost of production in Aluminum? If assuming alumina and coal and energy prices remain or can this cost reduce from here?

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

Maybe we'll request, Samir, any comments from your side, and we can supplement.

[Samir Cairae, Chief Executive Officer of Diversified Metals]

Yes, yes, yes. I think your question is valid. But I would say that clearly these costs are not the new normal. I think, a, the last quarter why the costs have been higher not only for us, for everybody who has been using coal was, as you are quite aware of the logjam in railways as well as Coal India which starts to ease off. So that's one structural part because there are linkages which have been allotted to us and those linkages will materialize. So that is point number a. And as you are saying rightly, let's leave the commodity prices as it is for the time being and say, okay, alumina remains where it is, carbon remains where it is, I think the big swing for us is our own refinery, which as we said, has been now fully ramped up and the last quarter exit we will be producing at the full capacity of our own Lanjigarh refinery, and which is getting expanded further. So for at least, I cannot talk about other alumina peers, we can talk about Vedanta that we have an opportunity of actually reducing that cost and that cost will come down structurally, even if the commodity prices remain where they are.

[Pinakin M. Parekh, Associate]

Sure. Just to carry forward in terms of the alumina refinery, what is the expansion from wherever it is, right now, the 6 million tonnes. Would it take place only if there is bauxite security and hence without that there won't be a refinery expansion and if that does not take place then how do we lower cost structurally in Aluminum?

[Kuldip Kumar Kaura, Interim CE & Director]

Samir?

[Samir Cairae, Chief Executive Officer of Diversified Metals]

Yes. I think, look, we -- when we have decided to build and expand the refinery from 2 to 6, we have developed various scenarios of bauxite sourcing. And what I can share without divulging all what we have worked out because some of this is competitive information and clearly, we're not going to start divulging on publicly that we have various scenarios in which we will see the refinery with various sources of bauxite some of them are existing in the country, some of them might be outside the country, some of them might be in different states. But either ways, we have different scenarios, which have been tested, and we are quite confident that we will be able to fix. In first step, you have to understand 2 million to 4 million tonnes, 6 million tonnes in the second phase of the refinery. So -- but 4 million tonne is what we need today because we produce 2 million tonnes of aluminum, which is why I'm saying that, look, structurally we are quite confident that this will play out.

[Pinakin M. Parekh, Associate]

And when do we start work on the 2 million to 4 million tonne refinery expansion?

[Samir Cairae, Chief Executive Officer of Diversified Metals]

Arun, you might like to talk or Mr. Kaura. What I can say, I think this has been considered by the board. And we are in the process of working out various approvals and the packages. So I think as soon as something is officially done that will be announced publicly and public announcement shall be made. Arun, you might like to supplement.

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

I think that's well rounded up. And we are in the final stages of design, as Samir articulated. Once we are there, I think we will come and announce it.

[Operator]

The next question is from the line of Sanjay Jain from Motilal Oswal Securities Limited.

[Sanjay Jain]

One question is on Iron Ore business. On the Slide 24, you talked about that you've been granted additional allocation in Goa. But you have not quantified how much it is. And then you're saying that expect to produce high-quality ore of 2 million tonne. So if I look at 9 -- we have 5.5 million tonne capacity. But we've done 3 million tonnes sales in the 9 months. So that leaves us with 2.5 plus this enhanced production, you are talking about I don’t know how much. So what is the total volume we should expect in the fourth quarter from iron ore?

[Kuldip Kumar Kaura, Interim CE & Director]

Yes. So I think and the positive thing is that, we have started producing better blend [indiscernible] market and so that process has been established. And now there are additional allocation by the state government this year to the extent of 3 million tonne. But Kishore, would you like to come and supplement?

[Rajagopal Kishore Kumar, Chief Executive Officer of Iron Ore Business]

Yes, thank you, Kauraji. And, Mr. Sanjay, this entire 3 million tonnes, which has been allocated in Goa is -- it will be produced from the ROM perspective in terms of production. And in terms of sales, we're expecting a sale of anywhere between 2.5 million to 3 million tonnes in this quarter of both the good quality upgraded ore as well as the old 57, 58 low grade, because the China market has undergone some strategic shift in terms of the steel margins so that continues to be an opportunity that will happen post the winter session. So we are in that framework as far as Goa is concerned.

[Sanjay Jain]

Sir, I mean, you have 5.5 plus 3 that -- shouldn't that be 8.5. But...

[Rajagopal Kishore Kumar, Chief Executive Officer of Iron Ore Business]

5.5 plus 3 would be the ROM production. The sale -- we'll have to carry some inventory of the low-grade ore, which will not be consumed by China immediately.

[Sanjay Jain]

Okay. And this -- when you enhance this grade, how much, like, to the index what discounts you're getting like...

[Rajagopal Kishore Kumar, Chief Executive Officer of Iron Ore Business]

See the grades are enhanced not only in terms of Fe, but also in terms of alumina, silica and all the other impurities. So overall, the current discount that operates in the market earlier it was 45%, 46% of discounts used to go for the low grade, but currently we're at about 20s as far as the discount is concerned.

[Sanjay Jain]

You said, 20, 2 0.

[Rajagopal Kishore Kumar, Chief Executive Officer of Iron Ore Business]

Yes.

[Sanjay Jain]

To the index.

[Rajagopal Kishore Kumar, Chief Executive Officer of Iron Ore Business]

To the index.

[Sanjay Jain]

But, what is the grade like, I mean, if you -- 58 grade...

[Rajagopal Kishore Kumar, Chief Executive Officer of Iron Ore Business]

No, 58 grade with the improvement in alumina VIU discounts are reduced. so it is all about the quality improvement overall.

[Sanjay Jain]

Obviously, 20% with respect to adjusted 58.

[Rajagopal Kishore Kumar, Chief Executive Officer of Iron Ore Business]

Adjusted quality.

[Operator]

The next question is from the line of Amit Dixit from Edelweiss.

[Amit A. Dixit, Financial Analyst]

I have 2 questions. One is on copper. Since we are expanding smelting capacity from 400 kt to 800 kt. And TC/RC margins, as we know, I mean, have been negotiated at a lower base. So are we thinking at some point to go -- to do backward integration in copper as into acquire some mines or buy some inorganic means?

[Kuldip Kumar Kaura, Interim CE & Director]

Yes, so you see, this project has been conceived as a stand-alone copper smelter, basically. And we believe, we're one of the most efficient copper smelters in the world. If you are, I mean, knowledgeable about our copper business, you will also know that we have some byproducts like phosphoric acid and other lot of ways to value stream additives plus our gold slime refineries and stuff like that. So fundamentally, we are in a position to achieve net cost, which are below 0, actually, so that is the potential this plant has. And with our long-term relationships which we have built over last 20 years with the miners, we have a strong possibility to source good quality concentrates across the world. So I -- we think with these attributes, we should be actually fairly value accretive business as a stand-alone smelter.

[Amit A. Dixit, Financial Analyst]

Okay. Sure. The second question is with respect to coal sourcing since there was a lot of disruption in Coal India supplies and all. So can you just spell out that how much coal supplies was through linkage and through imports. And how it is going to change in future, particularly FY '19?

[Kuldip Kumar Kaura, Interim CE & Director]

I mean, I can give you a broad answer. Maybe, we'll ask Samir to supplement it. The -- fundamentally the coal linkages were getting realized because of low, a, lower production by the coal mines and then the logistics bottlenecks because of railways. And in both these areas, there have been improvements. And we are not only realizing our linkages now but we also plan to cover some backlogs of, I mean, supplies, which we had during this quarter and going forward. But, Samir, do you want to supplement this coal business?

[Samir Cairae, Chief Executive Officer of Diversified Metals]

Yes. So let me give you a snapshot. Of course, we have Jharsuguda, which is catered by NCL and BALCO by SECL. But I'll give you on a sector basis. For example, Q1, our linkage and linkage option constituted almost 55% of our total coal requirement, which by Q3 dropped to 37% because of the reasons Mr. Kaura just touched upon. And I'm sure you are aware of what's happening in the sector because it's not only us [ indiscernible ] and everybody else. Now what we are seeing in January some improvement, not to the full extent of going back to what we needed, but there is a significant improvement. And what we believe is that going forward, especially in the next financial year, the situation should get better than what it existed in Q3. Now how much and what exactly will it be, this is going to be looking into the crystal ball. But clearly, the indications are that we are on the right track. I mean, we as a sector, and we see that the realizations are improving even though February still continues to be a month of some struggle. So I would say, yes, I think our basic basket is comprised of 4 linkages, linkage options, which we get some options come and you participate when there are options, which are happening, and last is the imports. So for us, of course, we do an arbitrage and see clearly linkages and linkage options and the backlog is the cheapest basket. And between option and inputs, we are doing an arbitrage all the time that where is the cheapest coal, and we take the impact. As you would imagine for us to give you what exactly the numbers will be, will be taking a view on what the coal index will be on option as well as imports, which we cannot foresee. But as I said, 50% linkages so that should in the coming financial year come back to normal.

[Operator]

The next question is from the line of Saumil Mehta from BNP Paribas Mutual Fund.

[Saumil Mehta, Research Analyst of Equities]

Sir, my first question is with respect to the capital allocation, while I understand the LCD investment as of now is small and the hurdle rates are pretty stringent for us. But how should we look at the overall investment in that area and on further businesses where we find hurdle rates will be pretty attractive? And subsequent to that, promoters earlier had made some comments about Anglo American possibly getting merged with Hindustan Zinc. So as minority, how should we look at the overall corporate structure?

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

Yes. Thanks for the question. The line wasn't awfully clear, but I will try answering. I think the latter part of your question, it has nothing to do with Vedanta. It's a personal investment by the Chairman's trust. So we'd leave it at that. As regards the hurdle rates, I guess, was the first part of your question, the audio was fluctuating and the capital allocation. I think we -- as we have been articulating -- it's a very disciplined approach to evaluating a project ensuring that these certain risks are built in, ensuring the right presumptions were taken in, ensuring that there is a Plan B out there. And hence, it's much higher. If you look at our -- back in reality, it's probably between 13%, 15% depending on what sort of alpha you attach to the number. And if you are comfortably 7%, 8%, 9% above all the time in terms of targeted IRR, which is also based on fundamentally good set of numbers. Then you can be rest assured that the company will add value to the investor while delivering a superior return. And that's exactly what we do. If you see, an example is Gamsberg, right? It's a project that we completed mid-teens, if you recollect when we announced it. And the very fact that you saved project costs through some very innovative way of outsourcing the contract, which Deshnee articulated in some of the earlier investor calls, has led to a much higher IRR, not to add the zinc prices, of course, so the timing was also right. So that's how smart capital decisions reward. And also new ways of working even in the oil project that have been allocated, if you see all the big players are involved in it and it's all more or less the costs are capped and they're outcome driven. Interesting with the oil and gas team under Sudhir have been able to work out. So all these, I think, offers well for better quality return than what we would typically see in traditional way of project evaluation. As far as acquisitions, it will always be absolutely case to case and very opportunistic -- with so much brownfield opportunities in front of us that's our focus.

[Saumil Mehta, Research Analyst of Equities]

In terms of extending that further, is it fair to assume that any investment be it in LCD or any other businesses, though our IRRs will be attractive, will be in a phased manner so that the balance sheet deleveraging will not suffer. Is that a fair assumption?

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

So very clear. I think since you mentioned LCD, it's important to clarify. So nothing to do with Vedanta whatever LCD [indiscernible] enter the -- whatever little glass -- is the glass business which feeds into the LCD industry, it's not the LCD industry per se. But you're absolutely right. It will always be balanced. And our focus is brownfield. If you see what our CEO articulated, zinc 2 million tonnes. Just imagine 2 million tonnes if we can really get there in the medium-term, and we do expect zinc prices to stay firm in 18 months' time frame or even otherwise, we are the lowest cost producers in the world. With $2,000 margins, we can well imagine not to leave behind silver which can well exceed 1,000 tonnes at that level. And again, the oil and gas projects, we are making the work at $40. So obviously at $70, which it is now, I'm sure one can imagine that the returns would be far superior then what we have been articulating. That's a good portfolio. And Aluminum again, once you're scaled up the operating leverage is so high with the 2.3 million tonnes all this temporary headwinds of coal, alumina inflation we spend 90% of our time worrying about it, but really it's about 90% of the time pondering over the huge amount of operating leverage we have in alumina, it's going to be a huge cash cow in future, we've had all of this together. You have a very healthy cash flow and enough to invest in all our growth CapEx and manage all the capital allocation expectation. I really hope I was able to articulate it clearly for you.

[Operator]

The next question is from the line of Anshuman Atri from Haitong Securities.

[Anshuman Atri, Research Analyst]

My question is regarding the bauxite mines, which were recently won. And how do you see more options coming up for bauxite by Orissa Government? And in terms of availability of bauxite domestically, how do you see it span out as well as own captive bauxite by Vedanta?

[Kuldip Kumar Kaura, Interim CE & Director]

Yes. So fundamentally, I mean, the primary source for us for bauxite apart from the mines, which we have already in Chhattisgarh, which currently also supply to this, will be the further mine concession auctioned by the government. So that will become a primary source of bauxite. And as we know, I mean, we are very fortunate in India to have a very high-quality bauxite. Orissa itself sits on 1.3 billion tonnes of bauxite very high-quality low-silica bauxite. And this auction process should start soon. And in the meantime, if -- I mean, the OMC has certain mines and they get into production so we enter arrangement with them for off take of some of those bauxites. So this will become our sources for feeding to our refinery of the domestic product.

[Anshuman Atri, Research Analyst]

The recent one, which you have won, how fast can these be ramped up?

[Kuldip Kumar Kaura, Interim CE & Director]

All right. So operator any other questions?

[Operator]

Sir, that was the last question. I now hand the conference...

[Kuldip Kumar Kaura, Interim CE & Director]

Operator, back to you.

[Operator]

Yes, sir. Mr. Ashwin Bajaj, would you like to add any closing remarks.

[Ashwin Bajaj, Director of Investor Relations]

It's disconnected.

[Kuldip Kumar Kaura, Interim CE & Director]

Sudhir, are you on?

[Sudhir Mathur]

Yes, I'm on. There is some problem.

[Operator]

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