Anil Agarwal of Vedanta has found an ally in Larsen & Tourbo (L&T) to bail himself out of the raw material crisis ailing his flagship Odisha aluminium project.
The London-listed Vedanta, promoted by Agarwal, has entered into a tripartite agreement with L&T and its partner Dubai Aluminium Company (Dubal) to buy them out from their aluminium venture in Odisha, called Raykal Aluminium. Raykal was the SPV (special purpose vehicle) floated by the two partners.
In a filing with the US regulator, SEC, Vedanta has said it has already acquired 24.5 per cent stake in Raykal for Rs 200.70 crore and has the right to acquire the entire 100 per cent over a period of time for a total consideration of Rs 1,811 crore, “subject to certain milestones being achieved.”
|SECURE ORE FOR AGARWAL
- 1992: L&T gets prospecting licences for two bauxite mines in Odisha with potential reserves of 280 million tonnes
- 2005: L&T and Dubal form a 76:24 JV, Raykal, to set up a 3-Mt alumina refinery in Odisha for ~5,000 crore, which would source bauxite from L&T
- 2006-10: Project proposal expanded, but fails to take off
- 2012: Dubal exits Raykal, selling its 24% stake to Vedanta Aluminium for ~200.70 crore; VAL has option to buy out 100 per cent in Raykal
Analysts say the company’s value will rise exponentially with the progress of the mining development programme.
Since 1993, L&T has been sitting on two to three prospecting licences (PLs) for bauxite mines in Sijmali and Kurumali of Rayagad and Kalahandi districts in Odisha. Under the original agreement, the entire bauxite excavated from these mines was to be used by Raykal for its own proposed alumina refinery and smelter project in the state. But with the project not taking off due to various reasons, Dubal walked out of the venture and will now be replaced by Vedanta Aluminium (VAL).
According to the Directory of Geology in Odisha, the two mines are estimated to have 250-280 million tonnes of bauxite reserves, good enough to take care of VAL’s current requirement for 50-90 years. Such a long-term bauxite supply agreement is bound to give Vedanta’s Lanjigargh project a much needed lifeline.
Vedanta had entered into an agreement with L&T and Dubal on February 23 this year, but the disclosures were revealed only last week. There is also widespread expectation that Vedanta or its Indian arm Sterlite will make a detailed announcement this weekend, which even saw the Sterlite stock react positively by 3.5 per cent to close the day at Rs 100.60 when the Sensex ended flat. The L&T stock moved up 2.53 per cent to Rs 1,309 apiece.
When contacted, L&T’s spokesperson did not want to comment on the subject, citing compliance issues. Vedanta’s spokesperson said beyond the SEC communiqué, they had nothing to add.
Analysts cheered the positive news expected to give a major relief to Vedanta Aluminium on the raw material security front. Its massive Rs 60,000-crore project to expand its alumina refining capacity from a million tonnes to five million tonnes has been facing problems over the past few years after environment clearances were not sanctioned for its captive bauxite mines in the Niyamgiri hills. The company has already pumped in Rs 45,000 crore into the project, but with no raw material linkages it has been desperately seeking alternatives to revive sinking production.
VAL has an ambitious plan of integrated aluminium facilities, including an operating alumina refinery at Lanjigarh and an aluminium smelter at Jharsuguda.
“With this acquisition of Raykal, a major chunk of VAL’s raw material issues will get solved,” said Ravindra Deshpande, metals analyst, Elara Securities. According to his calculations, the cost of production of VAL can come down by around $150 per tonne, thanks to this strategic acquisition.
VAL, in its business plan, had said with the captive raw material, the cost of producing aluminium would be around $1,200 per tonne, one of the lowest in the world. Currently, the aluminium LME is ruling at less than $2,000 per tonne. Since VAL is now forced to buy bauxite from outside — local suppliers, BALCO and Orissa Mining Company — its cost of making one tonne of aluminium is over $2,100, causing cash losses to the company. This is the reason VAL is not running at its full capacity. But, a secure bauxite supply will help turn around VAL’s finances and bring down its $4-billion debt. These depressed numbers have also upset the Sterlite and Vedanta shareholders. They are believed to be unhappy with VAL getting merged into Sesa-Sterlite, scheduled later this month.
According to senior officers at the Odisha steel and mines department, with the change of shareholders in Raykal, L&T’s prospecting licence that has lapsed due to inactivity will get “revived” and subsequently get upgraded into a proper mining licence.
The state is also expected to earn a minimum of Rs 400 crore in mining levies. “L&T was allotted two mines nearly 20 years back for prospecting. However, a mining licence was not granted in favour of the company as it had no end-use plant at the time of expiry of the prospecting licence period. They can be renewed in favour of the company if the project gathers some pace following the restructuring of the promoter JV company.”
However, Vedanta group officials said mining would start in a few years, once the MLs were in place. The payout from Vedanta is also gradual and is based on gradual development of the mining programme. “There is still a long way to go. Both central and state clearances are required before the project can take off. So, it’s premature to say all the issues have been sorted,” an official in the know added. Parts of the land where the mines are located are also under 'village forest' category, thereby requiring forest clearance under Stage 2 of Ministry of Environment & Forests approvals.