With L&T deal through, Vedanta’s bauxite woes in Orissa largely over

Vedanta Aluminium Ltd's (VAL) $1-billion alumina refinery project at Lanjigarh will now have access to bauxite with the Orissa government getting favourable legal opinion on VAL’s sale-purchase agreement with Larsen and Toubro (L&T). The refinery currently has a capacity of 1 million tonnes (mt). Sources said apart from the state’s advocate general, eminent lawyers like Soli Sorabjee and UU Lalit have backed the legal opinion.

L&T has a prospective licence to mine bauxite in Sijumali and Kutrumali districts. Two years ago, it had formed a special purpose vehicle (SPV) in which it holds 76%, with Vedanta holding 24%. In order to enable the SPV to apply for a mining licence and obtain other regulatory approvals, the sale-purchase agreement between the two companies required an approval from the state government. This, sources say, is no longer a problem in the light of the favourable legal opinion that has now been received.

The Sijumali mines in Rayagada district has bauxite reserves of around 245 mt while the Kutrumali mines in Kalahandi have reserves of around 40 mt. VAL requires 3 mt of bauxite to feed the 1-mt alumina refinery in Lanjigarh; the plant is currently running at 50% capacity by sourcing bauxite from Gujarat and Chhattisgarh.

With the bauxite problem resolved, VAL now needs to be able to have access to more coal from Mahanadi Coalfields for the proposed ramp-up in capacity of aluminium. However, even with some additional coal from Mahanadi and some ramp-up in production from the smelter, Ebitda (earnings before interest tax and depreciation) from VAL could treble, estimate analysts.

Currently, analysts are pencilling in operating profits from VAL of roughly R1,000 crore in FY15, but that could improve significantly now that the company will have access to bauxite and will not need to import the mineral. A turnaround in the fortunes of VAL through higher production of aluminium will help ease the company’s cash flows. Analysts observe that the debt could rise by Rs 2,000-3,000 crore over the next year or so. Consolidated sales of Sesa Sterlite are currently estimated to cross Rs 65,000 crore in FY14 while the operating profit.