Vedanta Resources--a leader with distinctive business sense: Vedanta Resources Plc...

In India, Vedanta Resources holds its interests in aluminium through the Bharat Aluminium Company (BALCO) and Madras Aluminium Company (MALCO); in copper through Sterlite Industries India Ltd (SIIL) and in zinc and lead through Hindustan Zinc Ltd. In Australia, it has two copper mines in Queensland

SHARES IN INDIAN METAL

Vedanta has grown to become one of the largest Indian mining companies producing about 21% of total aluminium output, 42% of all copper output and 75% of zinc production in the country. The Group plays a crucial role in moulding the future of the Indian metals industry with its dominant stakes in almost all metal producing companies in the country. Its metals business is broadly divided into three major segments; aluminium, copper and zinc.

Copper is taken care of by its 'red metal' producing subsidiary Sterlite Industries (India) Ltd (SIIL) with a controlling stake of 80% while the zinc business is looked after by the recently acquired Public Sector Undertaking (PSU)--Hindustan Zinc Ltd (HZL). The Group has a 64.9% stake in Hindustan Zinc Ltd--the largest of the only two zinc producers in India.

In aluminium, Vedanta holds a 51% stake in the Bharat (1) Aluminium Company Ltd (Balco)--another erstwhile public sector undertaking (PSU). Initially, Balco was acquired by Sterlite but later changed internal ownership to the parent Vedanta Group and which then also acquired the Madras (2) Aluminium Company Ltd (Malco)--from the government with a 50% stake and management control.

ALUMINIUM

Vedanta is the third largest supplier of aluminium in India, with a market share of around 20%. The aluminium division is divided between the two companies, Balco and Malco. Balco--the larger, is based in Central India while Malco operates in the south. Both are integrated operations, with their own bauxite mines, which convert bauxite to alumina and then to aluminium. The Group also has the facilities to produce rolled sheets and other value added products.

Over the next three years, Vedanta aims to invest a significant amount to expand its operations in aluminium, zinc & lead, copper and has even proposed entering the steel business with a plant in Orissa. It plans to expand through a policy of acquisitions while simultaneously developing a portfolio of attractive greenfield projects. So as to cash in on the present metals boom, the Group has chalked out major expansion plans across each of its metals groups. This will see an investment in India spending of over $2bn--one of the largest investments planned in the next three years. There is substantial expansion taking place at Balco, which will increase Vedanta's total aluminium output to 400kt/y. All these expansions aim to make the group one of the lowest cost metal producers in the world.

Balco's capacity is proposed to be increased by 250kt/y from the current capacity of 100kt/y through a greenfield smelter at Korba, Chattisgarh, Central India. Its current capacity is being expanded to include aluminium production using GAMI technology, one of the recognised technologies in the world, to enhance its total aluminium production capacity to 300t/y. Additionally, the company is also planning a 1.4Mt/y alumina refinery in Orissa, which is expected to be commissioned by the beginning of financial year 2008 (April 1st to March 31st). Alumina from this refinery will be used to feed the new smelter at Korba. The cost of the project is around $800M.

ZINC

Hindustan (3) Zinc Ltd (HZL) is the only integrated zinc producer in the country with a current capacity of 210kt/y. HZL has a high quality asset base and is also a globally cost competitive producer.

India is facing the supply deficit of around 100kt/y in zinc with a further demand growth at around 15-20% per annum due to a spurt in the consumption of galvanised steel and demand from the infrastructure sectors. The capacity of Hindustan zinc is proposed to increase to 400kt/y. This will also include increasing HZUs Chanderia, Rajasthan, Western India, smelter capacity from 97kt/y to 270kt/y as well as setting up a 154MW captive power plant. The cost of the project was originally estimated at $425M but has now been reduced by 15%. The Group has explored additional zinc reserves at this site with the result that its life has been extended by three years. Approximately 71% of zinc produced is used for galvanising steel, which is ultimately used in infrastructure and other booming sectors. As infrastructure in India is also growing at a fast rate, the expansion of its zinc interests will be beneficial for the company.

COPPER

Sterlite has a copper production capacity of 180kt/y. Over the next three years, Vedanta aims to invest a huge sum to expand current operations and drive down unit costs and to develop a portfolio of attractive greenfield projects.

As far as the expansion in copper production goes, the current installed capacity is 180kt/y of copper cathodes and 140kt/y of rods. The company is competitive in its cost and has a cost of production of 8cents/lb, which is a reduction of 34% from its cost in 2001. The company is increasing its cathode capacity to 300kt/y and output from its Tuticorin smelter in Tamil Nadu State, South India, has also been increased to 300kt/y. Apart from this the company is also planning a greenfield project of 127kt/y cathode refinery at Tuticorin. This will also entail a captive power plant of 22.5MW. The cost of the project is around $80M.

Thanks to this hectic activity on the greenfield front, the group is bracing itself to see a quantum jump in its turnover once these expansions are completed. The investment in copper output has already taken place and production is growing, the zinc and lead expansions are on schedule. The Group has already started the test run on its lead and zinc projects.

The expansion at its aluminium smelter is projected to begin production by March 2006 and the alumina capacity will be created by March 2007.

OPERATIONAL OVERVIEW

In aluminium, both Balco and Malco saw higher output in the fourth quarter 04, with production in the second half almost 7% above the first half, leading to a 5% increase over the year. This was the result of improved management of the smelter process and more stable power production.

As far as copper output goes, cathode production in the second half was at peak capacity, evenly spread over the third and fourth quarters, with an increase of 22% over the first half. The production benefited from an improvement in operational efficiencies and higher plant availability, which was affected in the first half of the year by a planned maintenance shut down, which was exacerbated by flooding at the refinery during the monsoon. Cathode production finished the year just 4% below 2004.

The data for Konkola Copper Mines in Zambia is based on five months of production, from the date of acquisition. Initial assessments indicate issues concerning plant availability, process management and maintenance. These are being addressed by a series of actions, following the appointment of a new CEO for its Zambian operations. The immediate focus is to bring about stability and consistency in operations. The company is confident to reduce costs and improve production at this plant.

Zinc ore output has improved considerably and all the mines have performed well. Rampura Agucha (Rajasthan--Western India where the mine is located) in particular did better than the previous year due to de-bottlenecking. This is reflected in an increase in mined metal content of 7% over the year. The smelter output at Chanderiyawas 4% lower than the previous year due to inconsistent qualities of metcoke caused by short supply, which impacted the production process. Sales of zinc metal at about 290kt will be about 12% higher than 2003-4 and well above the production number shown here, due to the availability of additional tonnage from tolling activities and stock reduction.

Vedanta Resources has posted a 66% increase in its attributable profit for financial year ended March 31, 2005, at $120M (Rs5.16bn). The group's turnover for the fiscal year increased 46% to $1884.2M (Rs81.02bn). Meanwhile, SIIL, Vedanta's flagship company in India, has reported a 46% fall in net profit for the financial year ended March 31, '05 at $244M (Rs1064M).

The company's turnover for the fiscal increased 30% to $983M (Rs42.79bn). SIIL posted a loss of $90M (Rs393M) in the fourth quarter of '04-05 as against a net profit of $168M (Rs733M) in the same period last year. The Q4 loss can be attributed to extraordinary items of $373M (Rs1624M), which include loss in value of non-operating fixed assets and advances to its subsidiary, Sterlite Paper and the write-off of non-recoverable loans.

A NEW VENTURE

Sterlite Iron & Steel Company has signed a memorandum of understanding (MoU) with the Orissa government to set up a 5Mt/y integrated steel plant, entailing an investment of $280M (Rs1.25bn). The steel plant project is proposed to be implemented in two phases. The first phase will entail the production of two million tonnes while the rest is proposed for the second phase of the project. The first phase is likely to be completed by 2007 and the second phase by 2009. While discussing the plant set up the Chief Minister of the state agreed to provide necessary support to the greenfield project.

FUTURE OUTLOOK

Vedanta Resources has performed well under the tutelage of its main promoter Anil Agrawal. Anil Agrawal is known for his great business sense and timely decision making in the Indian metal industry. All his companies have received distinction in their respective fields. For example, Balco is supplying 90% of its aluminium output to the defence sector with a significant contribution in the production of the missiles like Agni (fire), Prithvi (the earth) and Akaash (the sky). Aluminium demand from the defence sector has been growing steadily and in future it is expected to grow at an attractive rate of 10%/y. Demand from the defence sector will continue to grow as India is gaining momentum in this sector with increasing manufacture of arms and ammunition.

There has been a general copper and zinc supply deficit in the country as demand from household, electrical and electronic markets for copper and galvanised steel has advanced at a rapid pace. Hence, the Vedanta Group should continue to hold its leadership position in such segments as aluminium, copper, lead and zinc in the future.

REFERENCES

(1) The Hindi translation of India

(2) Madras is renamed as Chennai--a culturally and industrially developing state in South India

(3) Hindustan is the Hindi name of India

[**] AIT correspondent in India

Summary of expansion plans

                      Capacity (kt)
                                                           Cost US$ M
Base metal            From        To                       completion

Aluminium
(BALCO and MALCO)     140         390kt + a new            800
                                  power plant of 540MW

Alumina                           1400                     800

Zinc metal            210         400                      320

Lead metal            35          85

Mine output           1.3Mt/y     5.5Mt/y

Copper                180         300 + 22.5MW             80
                                  captive power plant

Total                                                      2000

Base metal          Venue                      Projected date

Aluminium
(BALCO and MALCO)   Korba (Chattisgarh--       March 2006
                    Central India) and
                    Mettur (Tamil Nadu-South
                    India)

Alumina             Onssa (Eastern India)      March 2007

Zinc metal          Chanderiya (Rajasthan--    June 2005, trial
                    North West India)          production begins

Lead metal

Mine output

Copper              Tuticorin (Tamil Nadu--    April 2005, commercial
                    South India)               production already
                                               started

Total

Production summary

                                 12 months (kt)
                                                      Change
                              2004-05     2003-05       (%)

Alumina                       278.599     269.778        4
Aluminium                     135.949     129.317        5
India
Cu--Cathode                   171.992     178.654       -4
Cu--Rod                       125.295     122.703        2
Zambia
Cu--Cathode                    67.547      67.547        -
Zinc--mined metal content     354.629     330.555        7
Zinc--refined                 212.279     220.664       -4

                                  2nd half (kt)
                                                      Change
                              2004-05     2003-04       (%)

Alumina                       148.524     136.600        9
Aluminium                      70.159      64.317        9
India
Cu--Cathode                    94.590      85.754       10
Cu--Rod                        72.041      63.503       13
Zambia
Cu--Cathode                      -           -           -
Zinc--mined metal content     187.447     178.596        5
Zinc--refined                 108.721     111.264       -2