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Has Anil Agarwal gone too far, too fast in his quest to become the world's lowest-cost minerals mogul?

Has Anil Agarwal gone too far, too fast in his quest to become the world's lowest-cost minerals mogul?

Based in London, Anil Agarwal is somewhat removed from the grainy details of what is going wrong in India. Experts are wondering if the Vedanta chief too fast in his quest to become the world's lowest-cost minerals mogul.

Anil Agarwal Anil Agarwal
In the Sattari taluka of Goa, barely 34 km from the inviting waves of Calangute beach, there is a village called Pissurlem. In many ways, it is a microcosm of the challenges that the $14-billion minerals major Vedanta Resources faces in Goa and elsewhere today. There is little or no water in the village's wells. All the ground water has been sapped by the six mining companies that operate out of Pissurlem.

Coconut trees, starved of water, have fronds barely a foot or two long. Water tankers, funded by iron ore mining companies, have to supply all the water needed by the 2,000-odd people under the Pissurlem panchayat.

A mountain of soil, excavated from the mines to gain access to iron ore deposits, runs right through the village. This iron ore "overburden dump", as such sites are called, is about 80 feet tall and more than 1.7 km long. It extends through Pissurlem into the neighbouring villages of Vaghuriem and Codierm.

Codli is Sesa Goa's largest iron ore mine
Codli is Sesa Goa's largest iron ore mine, with an annual output of seven million tonnes. On September 10, the Goa government halted all iron ore mining in the state, for a review. This followed the tabling in Parliament, three days earlier, of the M.B. Shah Commission report on iron ore and manganese mining in Goa. On September 12, the Environment Ministry withdrew mining licences to all mines in Goa.

The dump has been created and is managed by Vedanta Resources' subsidiary Sesa Goa Ltd. It consists of soil from the Sonshi mining lease at Pissurlem as well as Mareto Sodo and Botvadeocho Dongor, two other mines owned by the company. The Sonshi lease is owned by Cosme Costa & Sons, and is operated by Sesa Goa, raising three million tonnes of ore every year.

From a distance, the dump in Pissurlem looks like a hill. Today, the piled up soil threatens to flow into the neighbouring agricultural lands. Local farmer Vijay Kumar Desai, 30, told Business Today he had been facing the danger of slush from the dump flowing into his agricultural fields and had been fighting the company on various forums. Desai had 29 other farmers with him when the legal battles started. Today all but two have deserted him. Even their lawyer has switched sides. "We have little option but to depend on the mining industry at Pissurlem. With the lack of groundwater, agriculture has no future here," says Desai.

On August 28, 2012, the Goa State Pollution Control Board ordered Cosme Costa to stop dumping soil at Vaghuriem and Codierm. The development was big enough to affect the Sesa stock, which fell three per cent after the news broke. There was more bad news for the mining industry on September 10, as the state government stopped all iron ore mining in Goa, for review. This followed the tabling in Parliament, on September 7, of the M.B. Shah Commission's report on iron ore and manganese ore mining in Goa. The report faulted almost every mining venture for operating outside legal boundaries. The stock fell a further 5.8 per cent on September 11. The next day, the Ministry of Environment and Forests (MoEF) withdrew mining licences for iron ore mines in Goa.

These decisions mean that Sesa Goa has no mining operations left in Goa and neighbouring Karnataka, where mining was stopped by a Supreme Court order last year. In other words, Vedanta's iron ore business, which contributes 14 per cent to the group's earnings before interest, taxes, depreciation and amortisation (EBITDA), is at a standstill.

Vedanta promoter Anil Agarwal is quick to defend his company's mining operations in India. "What we are doing is only 10 per cent of what (you will find is being done) if you go to Brazil and Australia," he told BT in an exclusive interview, implying that mining and sustainable development could go hand in hand. "Australia is a green country, Canada is a green country.

Everywhere you go, you can see the beach and water and they produce the largest amount of iron ore. Today we have technology to produce these metals in the most environmentally friendly manner."

As things stand, though, his game plan has gone awry, and not just in Goa. Take the case of Sterlite Industries' copper smelter in Tuticorin, Tamil Nadu, which is key to the group's Rs 19,514 crore copper business. In September 2010, while hearing a PIL filed in 1996 against the setting up of the smelter in this coastal town, the Madras High Court ordered the closure of the plant. The company appealed against the order in the Supreme Court, which stayed it. However, the group's hopes of quickly resolving the issue evaporated on August 27, 2012, when the apex court ordered a joint inspection by the Tamil Nadu Pollution Control Board and Central Pollution Control Board of the unit's effluent treatment and emission control measures.

Sesa Goa Managing Director P.K. Mukherjee
Sesa Goa Managing Director P.K. Mukherjee says the company has won awards for its environmental management. It is the first mining company to get ISO 14000 environmental certifications and the first iron ore company to get a SA8000 certification for social accountability.

Their report is awaited. In other words, the future of the Tuticorin smelter is in the hands of the Supreme Court - if it upholds the Madras High Court decision, it will deal a body blow to the group's copper business in India. "If we shut the smelter unit, our copper business will go down,'' admits P. Ramnath, CEO of Sterlite's copper business.

The group's aluminium business, which is worth over Rs 3,112 crore, is also facing an uncertain future. In what could be a pressure tactic, Vedanta recently announced it would shut down its alumina refinery at Lanjigarh in Orissa from December 5 this year due to non-availability of captive bauxite. The one million tonne Lanjigarh refinery was set up by Vedanta Aluminium on the premise that it would get bauxite mined from the nearby Niyamgiri Hills. But the issue of mining in the hills, considered sacred by the Dongria Kondh tribe, attracted global attention and protests. In 2010, the MOEF finally denied permission to mine the hill.

The group has been running the refinery by procuring the bulk of its needs from the open market and also diverting bauxite from its subsidiary, Bharat Aluminium Company's (BALCO) mines. Vedanta bought a 51 per cent stake in the former public sector unit (PSU) in 2001. Speaking to BT days before the group announced plans to close the refinery, Tarun Jain, Sterlite's Chief Financial Officer, said: "We are buying (bauxite) from outside. It is not economically viable. Every day is becoming difficult…in the short term we may not be left with many options,'' With captive bauxite, Vedanta can produce aluminium at $1,250 a tonne and be the cheapest in the world. Procuring it from a third party increased its cost of production to $1,850 a tonne. This was was still economical, when global prices were at over $2,000 a tonne. However, aluminium prices have since dropped to $1,800 a tonne, and the operation has startd to go against the group's credo of being a low-cost producer.

Effectively then, 55 per cent of Sterlite Industries' Rs 40,967 crore business and all of Sesa Goa's iron ore operations (Rs 7,104 crore) are under a cloud. These businesses account for almost 30 per cent of the $5.4 billion (Rs 27,470 crore) EBITDA that the Vedanta Group generated in 2011/12.

Only the oil and gas and leadzinc-silver operations, which together accounted for 68 per cent of EBITDA in 2011/12, are in good shape. Going back to Pissurlem, a question remains: why did Sesa Goa create this huge dump instead of mining in a more sustainable way? The answer is that this is the most economical way for Sesa to mine.

There is a continuous focus on costs in the entire group, and this drives crucial decisions. The focus on cost has moulded Agarwal's approach in Goa as well as in Orissa. He has tried to restructure his businesses to find more cost efficiencies in 2012 to survive a bearish commodity market. According to Alexander Malkwitz, an AT Kearney Partner based in Dusseldorf, Germany: "The aluminium installed capacities the world over are enough to meet demand up to 2020. We see a glut developing. In iron ore the China demand is no longer as strong a determinant as it was."

Tarun Jain, Sterlite CEO
It will take us two years to get captive bauxite in Orissa. We are buying (bauxite) from outside. It is not economically viable. Every day is difficul: Tarun Jain

Agarwal is fighting the crunch with a deft restructuring move. When he met BT in Mumbai on September 3, he spoke about his dream: to create a mineral resources major based out of India that can compare with the best in the world. "BHP is from Australia, Vale is from Brazil. India too must have its mineral resources major, for we have a similar geology."

Agarwal's strategy is to be the lowest cost player in every segment he is in. He says: "The biggest advantage we have is that we are the lowest-cost producer - we produce the lowest-cost copper, we produce the lowest-cost aluminium, we produce the lowest-cost iron ore, we produce oil and gas at the lowest cost. I always use this phrase that everybody is going to die, but I am going to die last."

The Vedanta boss is creating a metals and minerals behemoth - the seventh largest in the world - in India through a mega merger. Sesa Sterlite. The merged entity will encompass the current businesses of Sterlite Industries, which include copper, aluminium, power, ports and infrastructure, the iron ore business of Sesa Goa, and will have subsidiaries such as Cairn India with its oil and gas operations and Hindustan Zinc's zinc-lead-silver business.

The merger will also allow cash flows to be deployed better as funds would be fungible. In addition, the merged entity will enjoy income tax and depreciation benefits, estimated to be around Rs 1,000 crore.

"It is an institution that is being created. Vedanta is not going to remain a family (managed) company. I do not think my children are going to run this company," says Agarwal. Sesa Sterlite, says Jain, Agarwal's right-hand man since the 1980s, can easily become India's second largest private sector company. According to a Vedanta press release, in the 12 months to December 2011, Sesa Sterlite (if it had existed as an entity) would have generated revenues of Rs 66,431 crore ($14.2 billion) and EBITDA of Rs 24,953 crore ($5.3 billion), and would have a net debt of Rs 36,936 crore ($7.5 billion).

However, the series of setbacks has taken a toll on the group. The Sesa Sterlite merger was announced on February 25, 2012. Sesa's market capitalisation has fallen by 22.65 per cent to Rs 15,283.15 crore between February 24 and September 18 this year. Sterlite's market cap has fallen 14.12 per cent to Rs 34,250.7 crore over the same period. And Vedanta Resources' share price on the London Stock Exchange has dropped 28 per cent to 1,080 pence in that time.

Cairn India has increased production from its fields in Rajasthan
Cairn India has increased production from its fields in Rajasthan

The merger, too, has faced its share of challenges. Institutional Investor Advisory Services, a proxy advisory firm, did not agree with the valuation of Vedanta Aluminium Ltd, which owns the Lanjigarh refinery and Jharsuguda smelter. Amit Tandon, Managing Director of IIAS and a former MD of Fitch India, says: "Vedanta Aluminium should be valued at nil, instead of at equity book value. The Cairn stake along with its debt has been valued at $1.

The same thing should have been done with Vedanta Aluminium as it has negative equity value." He says Vedanta Resources benefited to the extent of Rs 1,640 crore in the process.

The proposed Sesa Sterlite empire in India is running on two wheels right now: the zinc-lead-silver operation of Hindustan Zinc Ltd, currently the largest producer of zinc in the world, and Cairn India's oil and gas operations in Rajasthan. Hindustan Zinc produces zinc at $900 a tonne while international costs are around $2,000 a tonne. For financial year 2011/12 the company reported revenues of Rs 11,405 crore and net profit of Rs 5,526 crore. Vedanta owns a 64.9 per cent stake in HZL, which was formerly a PSU.


  • Brings cash flows under the same roof along with debt
  • Enables scale and re-rating for lower interest rates
  • Brings tax and depreciation benefits. Depreciating assets of subsidiaries will move to Sesa Sterlite
  • Allows for effi ciencies of scale in functions like human resources and finance
  • Adds Rs 1,000 crore in savings to the bottom line

Cairn India, acquired in December 2011, is operating at $3 to $4 per barrel of crude, and enjoying good cash flows. The company reported a net profit of Rs 7,938 crore in financial year 2011/12, on revenues of Rs 11,860 crore, with an EBITDA of Rs 9,254 crore.

After the merger, Sesa Sterlite would have a debt of $7.5 billion, of which $5.9 billion would have moved as a part of the merger process. Vedanta also has around $7 billion of cash reserves along with a consolidated debt of $10 billion.

Instead of using the cash to reduce its debt, the company proposes to use around $4 billion to buy the government's remaining stake in HZL (29.5 per cent) and BALCO (49 per cent). That would allow the group to have almost 95 per cent in HZL along with access to almost $3.5 billion of cash reserves.

"The key investor concern for Sesa Sterlite has been its ability to service a large debt obligation of $7.5 billion, especially considering that cash flows from the different businesses are not strictly fungible currently," said Chirag Shah and Faisal Memon of Barclays India, in a report on August 25. "This is due to the fact that the cash generating entities of Cairn India and Hindustan Zinc are listed separately. A buyout of the government's stake (and subsequent minority buyout) for HZL would address this concern."

Vijay Desai, Farmer in Pissurlem, Goa
We have little option but to depend on the mining industry in Pissurlem. With the lack of groundwater, agriculture has no future here: Vijay Desai
What is probably frustrating for the group is that the businesses that are entangled in crises are actually doing well. For instance, the copper smelter in Tuticorin has been working at full capacity. It has achieved "zero cost of production" (the cost incurred on producing copper is lower than the price of by-products such as sulphuric acid, phosphoric acid and silver). The plant enjoys 98.4 per cent copper recovery and is considered one of the lowest cost producers of copper in the world.

This, despite the fact that it is not fully integrated, like other businesses. Sterlite does not own any copper mines in India and is predominantly a 'custom smelter'. It buys copper ore from the market and converts it into copper.

In 2009, considering the surging demand for the commodity, the group decided to double its smelting capacity in Tuticorin to 800,000 tonnes. "Indian copper demand is at present at 900,000 tonnes and expected to grow at seven to eight per cent every year. So, we planned to double capacity,'' explains CEO Ramnath. As soon as the group announced its plans, a petition was filed in 2009 in the Madras High Court against the expansion, which will now happen only if the court clears it.

In Orissa, Vedanta Aluminium had announced plans to double its Lanjigarh alumina refinery capacity to two million tonnes, apart from setting up another three million tonne refinery close by. The company has also unveiled plans to substantially expand the aluminium smelter at Korba (Chhattisgarh) and Jharsuguda (Orissa). However, effective utilisation of the smelters would again depend on availability of bauxite.

The group, though, is not giving up. It is pushing the Orissa government to supply bauxite from other mines. In February 2012 it also acquired a 24.5 per cent stake in Raykal, which was formerly a joint venture between L&T and Dubai Aluminium Company. This company has mining rights for bauxite close to Lanjigarh. "It will take us two years to get captive bauxite in Orissa," says Jain.

Today, Sesa faces its biggest risk in Goa. Claude Alvares, who heads the environmentalist group Goa Foundation, has been at the forefront of the antimining movement in Goa. He squarely blames the takeover of Sesa Goa by Vedanta in 2007 for the state's mining related woes. Of Agarwal, Alvares says: "His dreams have turned into Goa's nightmare."

P.K. Mukherjee, the company's managing director, who met BT in Panaji, points out that Sesa has won awards for its environmental management (it is the first mining company to get ISO14000 environmental certification and first iron ore company with a SA8000 certification for social accountability).

It is probably not fair to blame Agarwal for everything, as the Chinese hunger for iron ore from India started around 2005/06, and all the mining companies in Goa geared up to meet the demand. The price of ore also shot up. From around $20 to $30 per tonne at the end of 2004, prices of ore with 62 per cent iron content jumped to $180 per tonne by 2010/11. Goan ore has less iron and is cheaper.

"The China factor became so lucrative that the Goa iron ore mining industry saw profitability unheard of in the past," says Ashim Bhuwania, MD with Ambit Corporate Finance, who advised the Dempo Group when it sold its iron ore mining business to Sesa Goa in 2009.

In fact, the iron ore mining industry has been in a sort of love-hate relationship with the Goan populace. It has offered trucking contracts to locals to give them a share of the profits that the industry makes exporting 40 to 50 million tonnes of iron ore every year, mostly to China (Sesa Goa had an EBITDA margin of 56 per cent in 2010/11 and 42 per cent in 2011/12). A Sesa transport contract is sought after in the interiors of Goa and often means easy money. The company is the largest iron ore miner in the state, accounting for around a third of iron ore raised in Goa in 2011/12. At full stretch, in 2010/11, it recorded an EBITDA of Rs 5,206 crore.

Based in London, Agarwal is somewhat removed from the grainy details of what is going wrong in India. His rise from being a scrap trader in Patna to becoming the promoter of Vedanta Resources, and one of the richest men in the world, is the stuff of corporate folklore. But today, that reputation is in danger.

In a report on Sesa Goa entitled 'Goa Carnival Cut Short,' Edelweiss Capital's Prasad Baji and Navin Sahadeo said on September 13 that it may take a year for mining to resume in Goa, and that the mining limits of Sesa Goa may be reduced to half its current production of around 16 million tonnes. The future of the copper business is in court and the aluminium business may have just turned uneconomical.

However, Agarwal has fresh goals in sight. He has travelled from Patna to Mumbai and from Mumbai to London. Africa could well be the next stop. He is investing in cheap and probably more efficient assets in Africa. His Zambia operations are set to double, offsetting copper woes in India. Vedanta has also invested in zinc in Namibia and South Africa, and it is investing in Liberian iron ore.

With Sesa hampered, the Liberian investment may see more activity. Cairn India has acquired a 60 per cent stake in a South African block with Petroleum Oil & Gas Corporation of South Africa, in an arrangement where Cairn will share in future investments in the block. The Vedanta Chairman says he foresees a future where 25 per cent of his revenues will come from Africa.

Agarwal has been a gypsy of sorts all his life - hunting for opportunities at the lowest end of the value chain. At 58, he says he is ready to start afresh - he has tried to re-brand Vedanta and re-orient its image in the past year, spending around Rs 200-300 crore on corporate social responsibility initiatives.

Agarwal says he loves to teach university students - mainly to share his experiences and the story of his entrepreneurship with management graduates. He does that in India as well as abroad. "Youngsters today have no patience and want to become rich quickly," says Agarwal.

He himself is ready to be patient.