Vedanta Resources is facing major operational setbacks due to low commodity prices, high debt levels, and issues securing raw materials. Revenue fell 16% in the second quarter of 2015-2016 due to low metal prices and Chinese aluminum imports. Vedanta has cut 3000 jobs and closed aluminum capacity to reduce costs. It is also trying to merge with Cairn India to gain access to cash and repay debt, but minority shareholders have concerns about the valuation. Even with cost cutting, the company's future is uncertain without solutions to high input costs and raw material shortages from the government.

1. Future of Vedanta in the face of high debt, low metal price and
raw material crisis

2. The metals and mining conglomerate Vedanta Resources is going through multiple
operational setbacks which have put the London listed heavyweight into a tough
situation.
Firstly, it is the dwindling commodity prices which are forcing aluminium producers
around the world to cut capacity and close down plants. Revenue of the Vedanta
group fell 16 percent to USD 3.02 billion in the 2nd quarter of 2015-16 from USD 3. 6
billion during the same quarter of last year. Though it’s the volatile commodity market
and the low metal price which are being blamed for the 2nd quarter results, there are
many more factors in the loop that are to be considered.
Tom Albanese, Chief Executive Officer, Vedanta Limited, said: “We are continuing to
drive efficiency improvements and optimise opex and capex across the business, taking
measured steps to reduce net debt and maximise free cash flow. While the near-term
market outlook is challenging, we believe we have the right mix of low cost assets
fuelled with new technologies to benefit from future demand in India and globally.”

3. Cheap Chinese Import & Capacity Closure
Vedanta Resources has taken up aggressive job cut and capacity closure strategies to
withstand this critical condition. About 3000 job cuts have already taken place at the
mining giant’s aluminium wings Vedanta Aluminium and Balco.
Balco started the procedure to shut down its Korba aluminium rolling mill in September
which was expected to see a 1000 job loss. The “steep fall” in the metal prices besides
dumping from China and falling margins were held accountable for the closure. The
company also called it a restructuring exercise in the face of adverse situations.
In words of Balco CEO Ramesh Nair, “The closure of the rolling mill is in the backdrop of
a crash in global aluminium prices and the prohibitive cost of coal to run our power
plants…Worldwide, there has been a fall in energy cost but for Balco, the absence of
linkage coal and regulatory issue for starting our coal mines is making operations
economically unviable.”

4. Low Metal Price and High Input Cost
Aluminium prices in the global market have fallen sharply from more than $2,200 a ton
at the beginning of 2015 to $ 1,480 $ in the current month, making exports completely
unprofitable.
Strangely, though aluminium prices have been plunging heavily since the beginning of
2015 power costs are constantly rising in India. The price of coal which is the main
energy source for Indian producers is going up like never before, at more than INR 4000
a ton (about USD 60) in the domestic auction market. Low selling price for the metal
and high input costs are making production almost unviable for the Indian companies.
“To operate at peak capacity, BALCO requires 30,000 tons of coal. While the coal
auctions have benefited the company in terms of allocation, the new block will meet
only 10 per cent of the peak capacity,” Mr. Nair added. Vedanta Ltd holds 51 per cent
stake in BALCO the government holding the remaining stake.

5. Raw Material Uncertainty
Vedanta’s Lanjigarh refinery in Odisha is working at a quarter of its actual production
capacity. Towards the end of August Vedanta announced that they had initiated “the
process of gradual closure” due to non-availability of bauxite from Odisha and the
downturn in global aluminium prices. “…with the current market turmoil, which is not
likely to improve soon, and in the absence of access to bauxite from within the state, the
plant is operating with a daily loss of INR three crore. Hence, we are forced to initiate
the process of gradual closure,” said K K Dave, Chief Operating Officer, Vedanta.

6. Vedanta has been running the refinery depending on imported bauxite and bauxite
sourced from other states. Bauxite sourced from other states costs more than three
times of the captive mined bauxite (INR 3,500 per ton vs 900 per ton). Similarly,
imported bauxite is about INR 5,000 per ton. This huge input cost has made survival
almost impossible for the Lanjigarh refinery which has incurred a cumulative loss of
INR 4299 core till date.
Though Odisha Mining Corporation (OMC) agreed to supply of 150 million tons of
bauxite to Vedanta, it has so far remained a promise in papers. Vedanta has been
urging the government for bauxite proposing 100% value addition in the state itself.
However, no solution is at sight in the near term and a huge investment is at stake.
The refinery’s closure is expected to impact directly/indirectly 10,000 people in the
region. The refinery’s closure is bound to affect Vedanta’s smelter operations at
Jharsuguda. Although Vedanta has not declared any timeline for the refinery’s closure
and is negotiating with Odisha government for bauxite, the situation around does not
seem to be positive.

7. Stock Market Downturn
It is not only the low commodity prices and higher input prices that are crippling
Vedanta Resources, but it’s the cash crunch and debt that the company is trying to cope
up with. In June, Vedanta announced the merger of Vedanta Ltd and cash-rich Cairn
India and it is now supposed to be closed by June 2016. The objective was to get access
to Cairn’s funds so that it can repay its heavy debt loads. While the deal has been
approved by the two stock exchanges, it is now awaiting a nod from the High Court
before it goes for a shareholder vote. The minority shareholders LIC and Cairn Energy
PLC were not particularly happy with one equity share offer in Vedanta as a result of the
merger. They did not consider it to be a fair valuation.
Vedanta Resources had USD 7.7 billion debt as on March 31, 2015 while its Indian arm
Vedanta Ltd had another USD 4.57 billion debt. Whereas Cairn India, on the other hand,
has USD 2.85 billion cash reserve.

8. Vedanta Ltd.’s stock price is falling much faster than Cairn’s. Already unhappy Cairn
shareholders may not vote in favour of it in time which may put Vedanta Ltd in a tough
situation all over again. During the second week of November, Vedanta was the worst
performer on the 30-share index and ended the day 4.2 per cent down. On November
16, 2015, Vedanta closed at INR 90.55, up INR 3.30, or 3.78 percent. On the other
hand, Cairns India closed at INR 132.30, up1.60 or 1.22%. On a year-to-date basis,
share price of Vedanta and Cairn India declined 62 per cent and 56 per cent.
What Lies Ahead?
Despite all the obstacles and depressing market situation Vedanta chairman Anil
Agarwal is still pinning hopes on the current government for policy reforms to attract
investment. His group is lining up sizable amount of investments in India. Vedanta has
not closed Lanjigarh refinery despite the mounting losses and urging Government to
come up with faster solutions to the raw material fiasco in the larger interest of the
families dependent on the plant and region’s development.

9. Vedanta has cut costs by as much as 25% throughout this market turmoil. Mr. Agarwal
confirmed that the company will “tighten” capital spending and “do whatever is
necessary” as far as innovation is concerned, to survive this condition profitably.
Vedanta is aiming at improving their core skill and technical expertise. “Disruptive
technologies need to be understood and learnt,” said Rajesh Padmanabhan, Vedanta’s
group chief human resource officer. The company leadership sees the solution in
innovation rather than trying to improve things in parts. The company also hopes to
settle the environmental and social issues related to its mining operations.
A number of times Mr. Agarwal has reiterated the need of developing `semis’ under
Make in India rather than exporting aluminium since value added applications would
encourage hundreds of industries and employment. However, unless the raw material
security is assured in a market situation where metal price is at rock bottom, input costs
are high and cheap imports are flooding the market, indigenous aluminium industry
cannot grow in India. India’s “rich reserve of bauxite” would just remain an entity in
research papers unless government finds a solution to the mining woes and speed up
the policy reform processes.