Message Ven 15 Mai 2015 19:46

Vedanta transcript 2015 results (KCM Part)

However, our KCM production was lower due to, as we've said, ongoing shaft remediation work on the Konkola site and lower grades in the Nchanga Complex at KCM.,
At Copper Zambia, the government has announced intention to reduce the royalty rates, which were earlier increased to 20% for open pit mines and 9% for underground mines. And we are encouraged by this government's decision and remain engaged with the government to have an enabling and stable fiscal regime in Zambia, which we believe is required to attract continuous investment in KCM and the entire Zambian copper belt.
At KCM, we’re focusing on reducing costs and improving production at Konkola to generate positive cash flow. We've optimized OpEx and CapEx across our businesses, and reduced gross debt by $600 million in the second half fiscal’ 15 and overall $200 million in the fiscal year 2015. We'll continue to focus on maintaining positive free cash flows, effectively refinance upcoming maturities and reduce the net gearing in the mid-term.KCM underground asset in Nchanga suffered a small impairment of about $52 million, due to unviable production at its Upper Ore Body. You will note that the impairment number here is higher than that in Vedanta Limited, due to differences in accounting treatment between IFRS and IGAAP, the former requires fair value upliftment at the time of acquisition on 100% basis, whereas the later showing a consolidation upliftment limited to our equity shareholding of 59%. This was also flagged in our Vedanta Limited release last month.
I'd like to spend some time talking about KCM in Zambia. At KCM, the full-year production at Konkola was affected by shaft remediation work and lower equipment availabilities. However, we are beginning to see some positive impact of the pivoting initiative we previously talked about and that we put in place about six months ago. We've prioritized mining of three of the six sections at Konkola and reorganized our resources to improve productivity and equipment availability.
The last quarter of fiscal year 2015 did see an improvement in operational efficiency and production at Konkola, and we hope to build on these small successes in fiscal year 2016 to ultimately reach the full potential of this unique ore body where we've have had 270 million tonnes of ore grading at remarkably high 3% copper.
At Nchanga, the open pit and underground resources have been progressively depleting and are now largely depleted, again putting in context the past several decades of very successful operations, so that we now have a series of legacy operations, all of them suffering from depleting grades, high strip ratios and/or uneconomic cost of operations. So we can produce copper units from Nchanga, but these are marginal high cost tonnes, and in some cases, that cause losses making due to the maturity of the assets and those lower copper prices. So as you would expect, we are carefully evaluating the future of these businesses.

The Tailings Leach Plant at Nchanga continues to bring its cathode from low-grade stockpiles and tailings dam. And to make sure we preserve the reliability of this operation, we've recently prepared 12-month preventative maintenance plan for each major unit at the TLP facility. We've also started treating of some of our COR dump rocks in addition to the LOB or to maximize the capacity utilization of these secondary recovery facilities.

Our smelter custom volumes had remained constrained by blending challenges and the old VAT regime as a consequence of not being able to bring concentrates in from the market. In February 2015, Zambian government amended the documentation requirements to reclaim VAT on future exports. And this is a huge enabler for us to increase our purchase and treatment of third-party concentrates, and thereby, increasing the smelter utilization. And we will continue to remain engaged with the government of Zambia in resolution of passed VAT refunds.

Speaking of the government of Zambia, government had announced recently the intention to reduce the royalty rates which were early increased to 20% for open pit and 9% for underground mines. And we’re encouraged by this government decision and remain engaged with the government to have an enabling and stable fiscal regime required to track continuous investments in KCM and the copper belt.

At KCM, we have focused, as we said we would, on bringing down our costs of operations along with increasing volumes. Rigorous cost savings initiatives, led by dedicated teams, are being implemented relative to reduction of power usage, fuel and chemicals consumption and repair and maintenance costs. And as a result of these initiatives, we have been seeing some reduction and a substantial reduction in quarter-on-quarter costs on an absolute and on a unit cost basis, and that’s been encouraging to the overall spend base.

At the current copper prices and with those cost reductions, we are beginning to move into positive cash flow territory at KCM. And this is a big improvement from where we were six months ago. So I'd say, on balance, progress is being made, but still a lot of work needs to be done in terms of ensuring that this large high-grade resource can be sustainably producing, well and long into the future.

So we're confident of better performance on our production cost in fiscal year 2016, and this will be the start of the turnaround of this asset, although we do realize this will be a long journey.
Q - Liam Fitzpatrick
Secondly, just on KCM
You're guiding to quite a big drop in costs for FY16. It doesn't look particularly like it’s volume-driven. So what's driving that? And then thirdly, just on the zinc royalties. What sort of visibility will you have on those going forward, and how do you budget for them?
Steven Din - Chief Executive Officer, KCM
Yes, of course. So they are very much three key legs to the stool that we're working on as part of the KCM business. The first one is very much, as we’ve spoken about, the Konkola to ramp it up to the right levels of production and keep it profitable. And the second one is to increase the utilization of our smelter business, by accessing third-party concentrates, as well as our own integrated production. And the third one is very much to look at productivity levels at Nchanga. For those of you who are not aware with Nchanga. It's a very large footprint operation which previously, over the last 70 years has been a very profitable open pit operation and underground operation, but now with the declining grades and having to mine deeper, we are very much - it's very much marginal business, but it does have a large workforce.

So as this is an area that we are looking at in parallel with the other areas to increase productivity, and we are watching very closely with government, in particularly the Ministry of Labor and the Ministry of Commerce to look to see what solutions we can find together to be able to potentially redeploy or even retrain a large part of that workforce.

And an area that we are focusing on because it's going to present possibilities to be able to take on large numbers of the workforce is developing projects outside of the mine gate, and possibly focusing these in the areas of agriculture or industrial zones, which will support the rest of the copper belt. So these projects are going to take time to crystallize. They are going to take time to actually get the buy-in from the various stakeholders. And we could be looking at two to three year time horizon to actually get the proper redeployment levels into those projects, as well as getting the projects up.

So it's a sensitive area. It's not something that we are just leaving to one side. We are working on it actively at the same time as keeping the other levels - the other projects in relation to production ramp-ups working moving ahead.

Tom Albanese - Chief Executive Officer
So fundamentally I think, bottom line is that all mines have their day and all we can do is be sensitive to the individual, the union, the community and the government stakeholder interests and create transition solution that work both from a community perspective and employment perspective, but also ensure that as a business or a business that business viable and can attract future capital investment, because ultimately that's what the copper belt needs.

Din Dayal Jalan - Chief Financial Officer
So just to answer the breakdown of $200 million. It’s royalty at Hindustan Zinc $56 million, that includes the contribution to the District Mineral Fund, and then increase in royalty at KCM that is $15 million, and the third piece is coal and power, as Tom also mentioned about, that's about $130 million.

Tom Albanese - Chief Executive Officer
Thank you. One more question in the front here.

Anna Mulholland - Deutsche Bank
Thank you. Anna Mulholland from Deutsche Bank. Two quick questions. When you restart your mining in Goa, you’ve given an interim capacity of 5.5 million tonnes per annum. How does that work in terms of when that can step-up, what's the timeframe, what are the conditions on that? And the second question. Just a reminder please of how much VAT you’re owed by the Zambian government in terms of past refund? Thanks.

Tom Albanese - Chief Executive Officer
Okay. I'll take the first question. Maybe Kishore, if you have any additional commentary on the processes for that, and then maybe D.D. and Steven you can cover the VAT issue. On the iron ore, there is a cap that's currently in place of 20 million tonnes for the district, and it's likely to be increased here in the foreseeable future. We have an allocation of that 5.5 million, assuming that all the other producers that were producing before the shutdown restart at that time. And then that would be why I'm using the 5.5 million as our capacity.

These are mines that are actually ready to go. So there is no new mine development. It’s is just basically literally turning the engine - turn the key in the trucks and begin the deliveries. So I would see the ramp-up as, from an operational perspective, expeditious. I think at that time depending on the iron ore markets and depending on the cost structure of others in the Goa district, we may find that not all the previous operators choose to be operators in this low seaborne environment. And we would certainly, in that case, be seeking to expand a larger allocation of the 20 million tonne cap, while we would be working with government to make a case for why that 20 million cap, we think should be raised.

So I see opportunities for a sequence of chances to increase our tonnage out of whatever cap is imposed at that point in time. Ultimately the cap is going to be driven by, how well can we in the industry manage road traffic in the communities, how well we can manage the environmental and the various stakeholder issues? And I do believe that we will be very - certainly from our perspective, I’ve met - and I know Kishore is spending a lot of time together with operators to recognizing all have a combined self interest to resume operations in a way which is seen as sustainable.
Tom Albanese - Chief Executive Officer
Okay. Thank you, Kishore. D.D., you want to start on VAT? And then maybe Steven if you could talk about the discussions you're having at the government level in terms of the importance of VAT recovery.

Din Dayal Jalan - Chief Financial Officer
So the total amount outstanding is somewhere around $160 million. This amount of course has been reduced because of the depreciation of the kwacha. And Steven, maybe you can talk about the recovery prospect and recovery schedule of that amount.

Steven Din - Chief Executive Officer, KCM
Yes, of course. Thank you, D.D. Thank you, Tom. Well, we are looking at the VAT very much in two parts. The backlog of the VAT, as you say D.D., is around about $160 million, but there is also an amount which is outstanding, if you like, after the VAT rules were amended in February of this year, as well as the other operational areas that we are focused on. This is a large amount of money, which if injected into the business, would allow us to look at mobile fleet replacements et cetera, as well as increased purchased concentrates from the market to be able to increase utilization. So we’re pursuing it vehemently let me say.

On the future refunds, which is from February onwards, we have now been promised in fact on Tuesday by the ZRA, which is Zambian Revenue Authority, that the refunds from March will be paid in May, which is now coming back into a normal cycle of VAT refunds.

On the backlog, of which, we have in the region of $160 million to $180 million outstanding, we are still in discussion with government, as are other mining companies. But it's progressing well. We've actually had our teams working with the ZRA teams, and they are reviewing the documentation requirements, which were there previous to the amendment. And I'm hoping that we will be able to get the substantial part of that VAT refunded in fiscal year - financial year ‘16.

Tom Albanese - Chief Executive Officer
Thank you, Steven. Maybe next question. Sorry, did you have a follow-up?

Anna Mulholland - Deutsche Bank
No. That’s it. Thank you.

Unidentified Analyst

Thank you. Elione [ph] from Bloomberg. Good morning, gentlemen. It looks like - well I've got question on your production growth. It looks like there is an upward revision on your near-term growth from 266% from about 59% from your Capital Markets Day. So my question is that if you could give us...

Tom Albanese - Chief Executive Officer
We're working on it.

Unidentified Analyst

I was wondering if you could give us some details on what has changed on your drawing board. That's my first question. And second question is that, do you have in mind the target year for your near-term? And finally, what are your expectations on the commodity market dynamics, your outlook to actually achieve the 66% production growth? Thank you.

Tom Albanese - Chief Executive Officer
Yes. I think, first of all thank you for the compliment on our production growth.

Anil Agarwal - Chairman
That's what that Tom is doing. He’s just saying, don't bother, scale up productions, just volume, volume and volume.

Tom Albanese - Chief Executive Officer
So thank you, chairman. I think what we have is huge investments we've made over the years, particular in aluminium and latent capacity with that. And that's - when you go back to what I said year ago, my first priority is we’ll look at those businesses that weren’t actually paying their way, that we had spent the money we weren’t getting the returns for so us. So aluminium was first on line. Then iron ore - well a different iron ore market then and KCM. I think a lot of the improvements you're seeing are in those particular areas.
We have a weaker premium. We have the higher LME, so we'll make an EBITDA, we'll make a cash flow out of each and every tonne, and we will spend much capital to do that. So I think it's a capital-friendly growth opportunity. Very few companies I think as I see in the mining space have it. I think that's why I want to lead that into the second question, because a year ago we all thought, we were coming off the lows in most of the markets. We thought that this was - we're beginning to see some growth in the markets, little healthier market, and bang, we saw relapses in oil prices. We saw relapses in iron ore prices. We saw relapses in, lesser extent, but relapses in aluminium and copper.

This year - so we went through a tough time early part of this calendar year as oil was in the 40s, copper was in the 5,500s, iron ore was also in the 40s. And we've now coming out of that, and I think that people are beginning to say, is this the first signs of spring? I hope it is. I hope that the capital reductions are beginning to have an effect on overall oversupply conditions in the sector, and that we can see resilience in these markets on a going forward basis. And we're very well positioned for that, because the markets that are the most doing the best now in this current environment are; oil, in terms of recovery; copper, in terms of recovery; and aluminium, in terms of recovery. But it’s certainly helped by the fact that zinc never went down in the first place, because everyone knows zinc production will be dropping over the course of this calendar year.

So in that environment, we are very well positioned. But let's just say we have another relapse like we did a year ago, because we can't predict that. And all the experts are going to convince us otherwise. We're not spending any capital. We are focusing on positive cash flow. We've shown in this second half which was a bad commodity price environment that we’re able to deleverage and increase our dividend. That's a huge combination that we’re making right now in a market that we would never have liked to have seen. But if we had the market again, we will deal with it.

So we are looking forward to a stronger more positive assessment, as some of these oversupply conditions begin to wind themselves down, and they will over time. And we’re well positioned to that period, but we will also be, as well positioned as anyone else, in any market condition.