Sterlite: Mining profits

The Rs 24,705 crore Sterlite now has the approval of the courts to mine the Lanjigarh bauxite mines in Orissa. However, it is Vedanta Group, the parent of Sterlite, which stands to gain more from the ruling.

That’s because the Vedanta Group has a higher stake of 70 per cent in the alumina refinery project ---Vedanta Alumina---which has a capacity of 1.1 million tonnes in Jharsuguda, Orissa.

Sterlite has a stake of just under 30 per cent in Vedanta Alumina and analysts reckon that the profits from the sale of bauxite will account for a very small share of Sterlite’s consolidated profit in FY10 of Rs 4100 crore. Should there be no further delays, mining is expected to start in nine months.

The Lanjigarh bauxite mines have reserves estimated at 77 million tonnes and are located very close to the the refinery. Sterlite will mine the bauxite and supply to the refinery on a transfer pricing basis. The cost of production will now be far lower and is estimated by the management at $250 per tonne, compared to the $450 per tonne, without captive bauxite mines.

Sterlite, which produces zinc, copper and aluminium products, showed a 6 per cent decline in consolidated net sales to Rs 5,770 crore in the June 2008 quarter, with sales of both zinc and lead falling by nearly 40 per cent y-o-y. Zinc prices came off by 42 per cent y-o-y offsetting the robust 37 per cent volume growth.

Production of zinc has lagged expectations due to bottlenecks at the plant and could be hampered for some time in the September quarter too. Sales of aluminium were up 35.8 per cent y-o-y to Rs 398 crore, due to better realisations of 7 per cent y-o-y.

Even though the company’s total expenditure declined marginally by one per cent, operating profit margins for the quarter were down by 350 basis points y-o-y to 31.6 per cent, resulting in the net profit remaining flat at Rs 115 crore. Sterlite is expected to post revenues of around Rs 25,000--26,000 crore and a net profit of Rs 4100 crore in the current year. The stock has corrected by 42 per cent since the start of the year and trades at Rs 597.