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Business News/ Companies / Lack of supplies cripple Vedanta’s iron ore, aluminium businesses
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Lack of supplies cripple Vedanta’s iron ore, aluminium businesses

Firm's iron ore business hit as mining in Goa yet to begin; aluminium business suffers from lack of bauxite supplies

A file photo of an iron ore mine. About 12% of Vedanta’s operating profit comes from the aluminium and iron ore businesses. Photo: BloombergPremium
A file photo of an iron ore mine. About 12% of Vedanta’s operating profit comes from the aluminium and iron ore businesses. Photo: Bloomberg

After taking a massive $3 billion write-down on the value of its oil business, Vedanta Ltd, earlier known as Sesa Sterlite Ltd, may need to turn its attention to some of its smaller businesses like aluminium and iron ore, which are also struggling, say analysts.

On 29 April, Vedanta said it would take a near $3 billion non-cash charge for impairment of goodwill related to the company’s acquisition of oil and gas explorer Cairn India Ltd. The impairment of goodwill was triggered by the significant fall in crude oil prices, the company added. Goodwill is an intangible asset. It is the value of brands, patents, customer loyalty, competitive rank and other intangibles that a company owns. Goodwill is said to have been impaired if the fair market value is less than the carrying value.

Oil, gas and zinc contribute roughly two-thirds of the operating profit of the firm, while about 12% comes from the aluminium and iron ore businesses—both of which are facing their share of troubles. Copper and power account for the rest of the company’s profits. In the case of the aluminium business, the firm has been unable to secure enough bauxite supplies—it ran into tribal opposition in the Niyamgiri Hills in Orissa—constraining its ability to use facilities to the fullest. Vedanta has two main aluminium businesses in India—Balco and the erstwhile Vedanta Aluminium Ltd, which has now been merged into Vedanta Ltd.

Balco, with an installed aluminium smelter (production) capacity of 325,000 tonne per annum (tpa), is currently operating at a capacity utilization level below 60%, according to an April report from Elara Capital. One of the units at its 1.25 mtpa Jharsuguda smelter, too, has been idle for the past two years and analysts expect it to produce only up to 50% of its capacity.

“In 2012, when the merger happened, Vedanta Aluminum Ltd was valued on the assumption that a captive bauxite mine would be in place in the next three years. Three years on, the mine is still not in place. There is a case for impairment if all other factors assumed back then remain constant," said a manager with a leading fund house who tracks metals. The manager did not wish to be identified.

S.P. Tulsian, an independent investment advisor, said the company had invested close to 35,000 crore in its aluminium business under the erstwhile Vedanta Aluminium Ltd but its operating profit had been very low for almost five years. “It is like a dead investment for the company," he said.

Abhijit Pati, CEO, Aluminium Business, Vedanta Ltd, came out in strong defence of the company. “We are positive about our aluminium business and capacity-expansion plans are on track. We expect to conclude the current financial year on a good note," he said. The company, however, declined to comment on whether an impairment charge would be needed for the aluminium business, saying it would not be possible to make forward-looking statements.

It must be said that the aluminium business has begun to see some improvement with the government kicking off auction of mining leases for coal and other minerals.

“We don’t foresee Vedanta taking any further impairment of its assets. It is on the verge of starting its aluminium smelters as availability of coal and bauxite ease and profitability improves," said Rakesh Arora, head of research, Macquarie Capital Securities India.

Chirag Shah, director of equity research and head analyst of building materials, metals and mining at Barclays Capital Plc, was of the view that while there was a strong case for an impairment charge on the company’s aluminium business a few years ago, things were starting to improve. “It remains a sore point; however, the company is expecting a turnaround."

As for the company’s iron ore business, it too faces its fair share of trouble as iron ore mining in Goa is yet to resume. A slump in global iron ore prices has also impacted Vedanta’s plans in Liberia.

It acquired Liberia’s Western Clusters project for about 595 crore in 2012. An iron ore output of 30 million tonnes by 2017 was what the company budgeted for from these mines. “If there is more impairment to come, it has to be on the iron ore business — not on the entire business, but for the Western Clusters project in Liberia," said an analyst with a domestic brokerage on the condition of anonymity.

For the March quarter, Vedanta reported a production of 0.3 million tonnes of saleable iron ore from its India operations, 79% lower than a year ago, and all from its Karnataka mines. “There will be worries on iron ore despite the export duty cut as the Goa mines will not be able to restart before November. Also, the Liberian operations at current iron ore prices are not viable. We don’t expect ore prices to shoot up; they are likely to stay below $60," said Goutam Chakraborty, an analyst with Emkay Global Financial Services Ltd. The company, however, insisted that it expected to restart its operations in Goa post-monsoon.

“The recent announcement of the government to cut export duties on iron ore fines to 10% is a welcome step. It will provide some respite," said R. Kishore Kumar, CEO, Iron Ore Business, Vedanta Ltd. “With regard to operations in Liberia, the Ebola virus issue is behind us now. Feasibility studies are currently on and as stated earlier, the capital expense on the project is being phased out," Kumar added.

amrita.p@livemint.com

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Published: 06 May 2015, 12:39 AM IST
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