Vedanta says impact of copper operations shutdown in India marginal

Confirming that it has received an order from the Government of Tamil Nadu to close its copper smelter plant in Tuticorin with immediate effect, the United Kingdom-based Vedanta plc admitted that it would have a marginal impact on other business segments of the group.

In a media statement, Vedanta plc said, "The permanent closure of Vedanta's Indian copper operations is credit negative because it will reduce the company's scale and business diversity, adding pressure to its other business segments to maintain their strong performance and make up the total revenue and EBITDA decline."

The statement further said, "We expect Vedanta's other businesses - zinc, aluminium and oil and gas - to deliver a solid performance in the fiscal year ending March 2019 (fiscal 2019), mirroring strong commodity prices and higher production volumes. As such, the copper smelter shutdown has no immediate impact on Vedanta's ratings.

We expect the company's scale, as measured by pro forma revenue for fiscal 2018, to decline by 25 percent to USD 11.5 billion from USD 15.4 billion. Vedanta's reported EBITDA will decline by 5 percent to USD 3.85 billion from USD 4.1 billion pro forma for fiscal 2018. We expect the company's leverage, as measured by adjusted debt/EBITDA, to marginally decline to pro forma 3.6x for fiscal 2018 from 3.4x for the same period."

The statement also said that Vedanta's copper operations have historically generated low profitability if compared with the company's other business segments.

"The Indian copper operations generated single digit EBITDA margins, because the operational and financial performance of the copper smelter depends upon the availability and the price of the copper concentrate which is used to produce end products such as copper bars, rods and wires. As such, Vedanta's EBITDA margin, excluding the margin dilutive copper operations in India was 33 percent in fiscal 2018 versus 26 percent reported for the consolidated operations including it.

Vedanta plc, however, said it is concerned about the Tamil Nadu Government's decision to cancel "land rights" towards copper expansion in the event it is allowed to restart copper smelting operations.

"It is yet unclear to what extent the company will be compensated for the land acquired for the expansion. Only 26 percent of the USD 717 million capital spending was incurred until March 2018, but the company's ability to recoup the amount spent is likely to be difficult,"the company said in its statement.

Vedanta said it has declared a 'force majeure' clause, such that it is not able to deliver its outstanding production volumes and is not able to purchase copper concentrate.

Vedanta's copper operations had a 33 percent market share in copper bars and rods by sales volume in fiscal

2017, according to International Copper Association (India).

The Tuticorin smelter is one of the two copper smelters in India, with the second one being operated by Hindalco Industries Ltd with an annual production capacity of 500,000 tons.