Vedanta plans $300 mn capex on Lanjigarh alumina refinery in FY20

Vedanta hopes to recover the invested sum within two years, banking on locally sourced bauxite to trim logistics costs

Metals and mining giant Vedanta Ltd has planned a Capex (capital expenditure) of $250-300 million in the next fiscal on the ramp-up of its Lanjigarh alumina refinery in Odisha. 

Vedanta, in a staggered manner, has proposed to expand the capacity of the refinery to six million tonnes per annum (mtpa). The refinery's present bottlenecked capacity is two mtpa. 

The company hopes to recover the invested sum within two years, banking on locally sourced bauxite to trim logistics costs.

“Every tonne of aluminium produced with the Odisha sourced bauxite which can be used in expanding refinery capacity, will give us Ebitda (earnings before interest, taxes, depreciation and amortisation) advantage of $400 per tonne. So, if you are able to cover 50 per cent or 60 per cent of our requirement, then to that extent, $200 to $250 straight away goes up in the Ebitda margin on a permanent basis because reserves will last easily for 15 years and more mines will come up”, Arun Kumar, chief financial officer of Vedanta Ltd at the company's recent results conference call.

Vedanta has a long-term linkage pact with state-run miner Odisha Mining Corporation (OMC). As per the terms of this agreement, 70 per cent of bauxite extracted by OMC from its captive Kodingamali mine would be supplied to Vedanta's Lanjigarh refinery. As the mine ramps up, Vedanta expects to source 250,000 tonnes bauxite each month. 

The first phase of the Lanjigarh refinery would see the unit scaling capacity of four mtpa. By the end of this fiscal, Vedanta expects an exit run rate of two mtpa at the refinery. Since Vedanta's cost of alumina production is significantly lower than the current import prices, the company sees value in unlocking opportunity by expanding the alumina capacity.

Vedanta is investing Rs 64.83 billion on the refinery ramp-up. The refinery scale up is expected to lessen Vedanta's dependence on imported alumina and thus, cut its aluminium making costs. A drastic reduction in alumina imports will make Vedanta's aluminium cost competitive, he reasoned. Presently, Vedanta's aluminium smelting costs are hovering around $2000 per tonne in line with the production costs of its peers- National Aluminium Company (Nalco) and Hindalco Industries. But unlike the other primary producers, Vedanta is not fed by captive bauxite mines, posing a challenge to contain its metal costs.

At the end of FY18, Vedanta emerged the biggest producer of primary aluminium with an output of 1.7 million tonnes. By FY21, the Anil Agarwal controlled Group is eyeing production of 4-4.5 million tonnes of aluminium. 

To stave off vagaries of fluctuating input costs, Vedanta is aiming at upstream integration. It has proposed to install a caustic soda production unit at Dhamra with an estimated investment of Rs 65 billion. This proposal, too, has got the seal of approval from the Odisha government.

Though upstream integration, Vedanta plans to contain its alumina production cost which escalated to $358 per tonne in Q2 led by cost-push factor of ingredients like coal and caustic soda.