The development of mineral-based industries in India is increasingly bringing companies in conflict with the environment and the local population. Vedanta Aluminium Ltd’s integrated aluminium project in Orissa is a key project for Vedanta Resources Plc. The government’s decision to withdraw permission for bauxite mining in Niyamgiri and a show-cause notice issued for withdrawing environmental clearance for its alumina expansion project are big setbacks. On Tuesday, Vedanta’s share price fell by around 8% on the London Stock Exchange, after the government decision. Closer home, share prices of its listed subsidiaries such as Sterlite Industries Ltdand Sesa Goa Ltd fell, too.

Impact on Vedanta

Vedanta’s major aluminium expansion projects are being implemented through Vedanta Aluminium, a 70.5% subsidiary, with Sterlite holding the rest. It is setting up two projects in Orissa, in Lanjigarh and Jharsugada, which are being commissioned in phases. Its Lanjigarh alumina refinery’s capacity is being expanded from 1.4 million tonnes (mt) to 2 mt. Another 3 mt of capacity is being added in phases. At Jharsugada, a 0.5 mt aluminium smelter is coming up, to which a 1.25 mt smelter will be added in phases.

Refusal to mine bauxite at Niyamgiri was a key risk factor in its alumina project, which will not only cause delays, but also affect its production cost. Investors may also wonder if this is an isolated incident or whether the government will be stricter in giving clearances to the group’s other projects. The group claims project execution as one of its key skills. If it can swiftly manoeuvre itself out of this corner, it can still lay claim to that tag.

Impact on group companies

Share prices of all of Vedanta’s listed subsidiaries—Sterlite, Sesa Goa and Hindustan Zinc Ltd—fell on Tuesday, but so did other metal stocks. The Sterlite stock recovered on Wednesday, but the others fell along with other metal stocks. As of March, Sterlite had invested Rs563 crore in Vedanta Aluminium’s equity, Rs1,815 crore in its debentures and Rs8,654 crore as loans. Sesa Goa has lent Rs1,000 crore to Vedanta Aluminium as inter-corporate deposits. The exposure of these firms to Vedanta Aluminium is material, more so for Sterlite.

But Vedanta’s woes do not affect them directly, as they have independent operations, expansion plans and funding, too. The key concern will be if Vedanta Aluminium suffers further setbacks and is not in a position to service its liabilities. That’s not a worry at this juncture. If the projects being implemented by these companies progress as expected, their valuations should remain unaffected. If they encounter any regulatory hiccups, however, there may be cause for concern.

In conclusion, the Vedanta case is also a wake-up call to investors on the risks faced by large industrial projects, especially those dependent on mineral resources. If the government steps up scrutiny, more projects may stumble. Environmental risk may be the new intangible for investors to consider while valuing these stocks.