Message Sam 31 Jan 2015 10:21

Transcript conf call Vedanta

*Transcript from Seeking Alpha*

Moving on to our copper business in Zambia. First of all, Vedanta as well as KCM would like to congratulate the new President of the Republic of Zambia, his Excellency, Mr. Edgar C. Lunga who was inaugurated in Lusaka on January 25. The KCM business is currently in a negative cash position and we are looking at all options to generate positive cash flows.

Earlier this month, our KCM Board met and has commenced a thorough review of the profitability of all the company’s operations. The team at KCM is focused on an operational turnaround of the business. Recruitment of critical positions has continued at operational level and at the senior management posts. We’ve made recent appointments of some very senior experienced people, such as the Vice President of Local Economic Development, the Vice President for Konkola, who is responsible for the underground mine et cetera.

Rehabilitation work on the shafts at Konkola continues and we are on target to have shaft number 1 ready for hoisting by March, while works at shaft number 4 is planned to finish towards the end of 2015.
Regarding the VAT issues, KCM has continued discussions with the Zambian Government to resolve the issues related to the refund. The total outstanding is now $172 million. This is an ongoing issue, which is having a negative impact on cash flows and also on our ability to expand our custom smelting business. And this is particularly unfortunate as we have on our site available smelting capacity in a country, which is otherwise short of smelting capacity.

Following the Zambian Government changes to the fiscal regime from corporate profits-based system to a royalty-based system with effect from January 1, 2015, KCM is in discussions with the government on the negative impact this is having on the business.

Liam Fitzpatrick - Credit Suisse
Good morning, everyone. Just one question just around KCM. I mean, just looking at the numbers, even before copper fell before the royalties were introduced, the company was still bleeding cash at the cash costs that were quoted. With the royalty change and with lower copper prices, it doesn’t look like a going concern. So can you just address that point and talk about why you would keep producing unprofitable copper tonnes, if that is the strategy? Thanks.

Tom Albanese - Chief Executive Officer
Thanks, Liam. Let me just start off by talking a bit about it, because I was down in Zambia just a little over a week ago, meeting with the Board, and then I’ll just ask Steven Din as the CEO to comment further. But we are very mindful of the current cash cost of production, which is higher than the prices in an environment of dropping prices. And that’s further confronted by the non-resolution of the VAT and again the new royalty-based fiscal regime, which is, as you know, regressive where the lowest cost producers are paying the lowest percentage and the highest cost producer is paying the highest percentage.

So it is something where the Board has instructed management to look at all the options to turn this business into a cash-sustainable business. And again, it’s not just looking at the holistic number overall, but distinguishing those parts of the business which are profitable. And Konkola side with the pivot should be in that category versus those businesses, which are really struggling and maybe below cost break-even in this environment.

With that, Steven, over to you.

Steven Din

Thank you very much, Tom, and Liam, thank you for your question. In relation to whether KCM is a going concern or not, currently, it is a going concern. We have a number of initiatives in place. I mean, maybe before I talk about what those initiatives are to stop the negative cash bleed, let me just remind everybody that at Konkola, we have around about 240 million tonnes of in-situ grade 3.6% copper. And at Nchanga, ignoring the underground, we do have stockpiles of 120 million tonnes of low-grade tail material, which we are treating in the leach plant. So those are the two areas that we’re focused on right now, because those are the two areas that we want to get profitable.

We do currently have 10 sources of copper. And out of those 10 sources, with the current royalty rates and with the current prices, only half of the business is profitable. Now, I did say in our last call - our last earnings call, that management is very much focused on making sure that we only produce profitable copper units and that’s going to take time. We’re actually working towards it already as we start to pivot down of the operations at Konkola to the three profitable sections, out of the six total sections.

Other areas that we are looking at to try to maintain our going-concern status is, we are looking at deep restructuring efforts, and I’ll be speaking to Government officials on how we can try to implement some of those projects to maintain our cash flows next week. I’d just like to say those things about the going concern and the fact that we are bleeding cash.

Liam Fitzpatrick - Credit Suisse
Could I follow up, I mean, I thanks for those responses, just a brief follow up. Just from what you’ve said, can we assume that, therefore around half of your integrated production is under review, given what you said about profitability?

And then secondly, I mean, how long do you wait before you potentially need to make the difficult decisions?

Tom Albanese - Chief Executive Officer
Steve, go ahead.

Steven Din

Yes, Liam. I mean, thank you. I mean, half of the integrated production is under review, but it’s under review to be able to contract the business back into profitability. But that doesn’t mean that our integrated production in the long-term is going to be half of what it is today, because we also have plenty of sources of copper to be able to bring into production profitably. That’s the first thing.

The second thing is, I mean the copper price as I looked at it this morning was just under $5,400 a tonne, and everybody in Zambia, including the Government are aware of this. And, as I said, I’ll be speaking to members of the cabinet next week to see what we can do immediately to try to reduce the negative cash flow situation

Varun Ahuja - JPMorgan
Good morning. Thanks a lot for your time and valuable comments. I have two or three questions and I’ll be quick with that. Firstly, on KCM, given that there is usually quite limited cash, I just want to understand the additional funding that will be required. Would it be possible to take at KCM level, secured by thrown assets, or would plc need to provide any funding support for that? So that’s my first question.

Tom Albanese - Chief Executive Officer
Okay. Maybe what I like to do is, I think from the KCM question, it’s probably a combination of what Steven and D.D. can talk about. So maybe hear from both of them on that.

So maybe let’s start with, Steven, if you want to make a shot at the KCM funding followed up by D.D.

Steven Din

Yes, sure. Thank you. Thank you, Tom, and thank you Varun for the question. In relation to how we are going to manage the cash constraint which KCM is facing at the moment, as I explained earlier to Tim, we are looking at a number of restructuring projects mainly to get profitable operations up and the unprofitable operations out as well as some of the restructuring, which is going to require political support.

But rather than looking at additional funding, what we are hoping to do and we are in the business-planning process at the moment is to develop a business, which is self-sustaining, at least, before CapEx, and that self-sustaining in terms of cash, so that we do not require additional funding. That’s the first thing. It has a high degree of risk and I’m working with the management teams on how we can take that risk out of the delivery. That’s the first thing.

The second thing that we’re doing is at the end of next week, we’ll be starting discussions with our current bankers to look to see exactly what we can do in relation to the debt repayment profile, because there’s no point in us waiting until the first bullet hits. We see that there is a problem in sort of three or four months’ time, so we want to have discussions with the bankers. We’ve already initiated those and there has been the support that we need to find a solution together. So that’s really it in terms of how we are going to be looking at managing the funding position for KCM.

Tom Albanese - Chief Executive Officer
Thank you. And D.D. from you?

Din Dayal Jalan - Whole-time Director & Chief Financial Office
Thank you, Steven. And basically, I think, Varun, we have - during this financial year, we have funded $75 million [indiscernible]. And our priority, definitely we need to see that KCM turns around and we are fully supportive of KCM’s initiative to see that business turns around. And the priority will be that the loan is taken on the balance sheet of KCM with the support of Vedanta if required.

Tom Albanese - Chief Executive Officer
Thank you. I’d like to just add before you go, D.D., for the question on HCL to say that, the fact that we have VAT refunds of more than $170 million, which is growing month-to-month is having a huge, huge negative effect on all aspects of the KCM business. So it’s a real priority of the team and I hope the Governor of Zambia resolves this. It’s not just a KCM problem, but it’s a broad countrywide and copper [indiscernible] problem.

One was Mr. Jalan, if you could confirm, the total debt at KCM was still around $80 million and when does it start maturing?

Din Dayal Jalan - Whole-time Director & Chief Financial Office
So the total debt - yes, you are absolutely right, total debt at KCM is $800 million and it starts maturing from the next financial year based on [indiscernible]. And, as Steven said, he is in a dialog with the banks for the re-stressing of the repayment facilities.