Sesa Goa managing director Prasun Kumar Mukherjee met Suman Layak in June. That was well before Goa imposed a temporary mining ban and the central Ministry of Environment and Forests withdrew all mining licences in Goa in September in the wake of the MB Shah Commission's report. Edited excerpts from the interview: Q: Sesa Goa was started by Italians, went on to be owned by Japanese, and since 2007 has been part of Vedanta. How has it been working with each of them?
It goes without saying that everybody has his own style. When I was working with the Italians it was the first part of my life at Sesa Goa. Then came the Japanese period and then Vedanta
took over. Today I am 57 - so then I was 52. I was already managing director. When the Japanese took over I was general manager - finance. The Japanese remained for a year after I became managing director. The Italians were there for the period until I became general manager. So how closely I have seen them at work also depends on which level of hierarchy I was at. During the Italian period, everything used to be directed or implemented through the Italian boss. You did not have any interaction with the principal shareholder. It was a relaxed way of working. Those days, iron ore
was not a commodity to be looked at. It was totally a buyers' market, very small profits. People were somehow making both ends meet.
In the Japanese period...for half of the Japanese period it was a buyers' market and then it turned into a sellers' market, particularly with the advent of China. The Japanese style - very, very minute details they look into. They will not leave anything aside…each and every decision, capital expenditure, small value, big value will be looked into in the minutest detail. Then periodically they would change the people who are in charge of Sesa Goa. So every two to three years you had to educate the new people about our way of business, what are the philosophies or business peculiarities or sensitivities. And then you have to take them along.
Across the Vedanta Group too, there is a monthly review meeting. There is very focused involvement by the Vedanta group and continuous focus on growth - growth in terms of productivity, volume, profitability, retention of manpower, social impact. I think in brief this is the difference. Q: Your production has grown substantially in the last five years.
Actually if you look at it, growth is not that substantial. We had prepared ourselves to grow faster. Before Mitsui took over (in 1996), we had ended the year with 10 million tonne (for that year) and then after the Vedanta takeover we have added the Dempo acquisition. That is roughly four million tonne. So 14, that is our baseline. Sometimes we have gone to 18, we came back to 15. It is not that in five years significant growth has taken place. If you want to talk about growth potential - whether it has been created, yes - growth potential has been created. Of course in the last four-five years the business environment in India, particularly in iron ore mining has been impacted by various factors. We have recently acquired a mine in Liberia. Liberia's potential will be unleashed when the project is completed - that will be at least another two years from now if not more. Q: Is this a new direction - acquiring overseas?
As a resource company we have a huge appetite. We don't have any allergy or particular fascination for any particular geography. Opportunities will come abroad more than in India considering the current situation in India. But if one has an option obviously the preferred place would be my home country India where I am a citizen and where I understand the business much better. Q: How are you handling the logistical bottleneck in Goa?
What has happened in Goa in the last five to seven years is that while our volume has not gone up, there are people - especially who work from the dumps - whose volumes have gone up. So in the process, without any increase in infrastructure, the same roads, the village roads are taking the extra pressure of the mining traffic particularly. Also in Goa, something that is not applicable in other places of the country, mining traffic is carried by 10-tonne small trucks. So you can imagine, if 20,000 trucks are parked here - people who have bought the trucks do not have any parking space separately. They park the trucks on the road itself. The same is true of cars also. In Panjim too at night you will see a lot of cars parked on the roads because there is no parking space. So 18,000 to 20,000 trucks on the roads is a huge problem. Then the trucks want to do more and more trips, which gives them more earnings. Due to a High Court stricture, the timing of truck movement - earlier they could use the roads 24 hours, but now it is morning eight o clock to evening six o clock with a one-hour gap for school closing. So nine hours instead of 24 hours and post the Supreme Court judgement that a 10-tonner truck cannot carry more than 10-tonne - previously there was no restriction - there is significant capacity constraint. So truck capacity and timings have changed with the infrastructure remaining as it is. There is a huge issue of local infrastructure.
We had a very old plan of building our own private corridor. It would be a totally private road from the mines to the jetty - it would be away from human habitation and no other traffic will be allowed on it. That would give a lot of flexibility in transportation - make a social impact and also achieve cost reduction because of the higher volumes per truck and higher capacity truck utilisation. Another proposal was - although this has not been happening for the last two years - widening of roads, with industry spending the money and the government issuing a no-objection certificate. Two-lane roads would become three-lane and three-lane would be four-lane. Q: Activists seem to have taken the position that they want to stop iron ore mining in Goa totally. A:
The activists do not talk to us. They talk to the media, because that is how what they say gets highlighted. Yes, we are aware of their position. Ban on mining in Goa... Goa is not like Karnataka, Goa cannot afford it. This is my understanding from the state budget. Goa cannot afford to contemplate an existence without mining. I have not seen any activist saying what is to be done. I only hear activists say what should not be done.
Recently there was a news item about stopping any incremental mining of coal in Australia. It stated that one of the arguments for increasing mining in Australia was that Indian power production cannot go up without imported coal. Because Indian power producers are looking for Australian coal. So they are thinking about reducing carbon emission but fear whether it will stall the India growth story. I think the world has advanced today technologically to the extent that mining need not have adverse environmental impact or social impact. The issue is how?
But you cannot expect a robust reclamation of mining and a robust approach to the sustainable practices from a small mine owner. Various vested interests groups are continuously pressuring you - they are seeing your profitability and are looking for a easy way to earn short term gain - than to remain invested for the long term exploitation of the mine. Sesa was the first mining company in the world to get ISO14000 and till now it is maintained. Now of course we hear that some people say "It is 14000 company or 420 company?" I am not going to put a gag on them, I am not going to sue them for defamataion - that is not my job. But if people are going to that level when it is 14000 - and Bureau Veritas or somebody is certifying after doing a surveillance audit - when you don't have faith in any third party - you get British safety award - that doesn't have any meaning for you - you get various authorities' sustainability award - ITC Centre of Excellence commendation - that does not have any credibility. The only credibility I can have is by going to the activist and taking his certificate. And I know that his certificates are already pre-printed.
So I am the first iron ore company that has SA 8000 certified. Why do I have to go to SA 8000? There is no legal compulsion on me. But why am I going to SA 8000? Am I saying that I have SA 8000 so give me royalty remission or give me any benefit? Why am I investing in exploration year on year - millions of dollars where the whole country does not invest in exploration and year on year - I am getting it certified under Australian job standards and declaring it each year? Even the best of the companies in this country who are having captive mines do not declare their reserves and resources. Because there is no compulsion. Why I do that? I do that to say to the whole world that reserves and resources, although by definition finite, nobody knows how finite or how infinite they are. In last four years - excluding my Dempo acquisition - my total quantity has doubled - reserves and resources. So what… activists will say so what? But if you know what is your geology, you can better plan your mine. Otherwise tomorrow it can happen - that you know the minerals are there but they have become uneconomic to extract because your planning has gone haywire. So then millions of tonnes of material will be lying unexploitable as it is uneconomic. There is no point in saying I have so much of mineral resources if you do not economically exploit it. Q: Now that merger is happening, will you have problems with high interest costs? Loans are coming on board?A:
Now no loans are coming just like that. Loans are coming along with assets. If you compare the previous year to this year - the interest rate has gone up. Previous year we had a cash surplus. Now the cash has gone - invested in Cairn. So cash is not there. So now you are borrowing. I think all of us understand that if you do not have cash then it is better do the business by borrowing to get the leverage, than to do it through equity. Because of the tax liability of the interest. Now one can argue that previously you had 100 rupees cash in your pocket that you have invested somewhere and now you have to borrow. This is philosophical sensitivity, you know. I have no borrowing, I still stay in my rented house and that cash whatever I have I invest and also borrow to live in my own house. Somebody can always argue what is the benefit in this if you are investing so much and you have loan of so much? These are all philosophies. At the same time people borrow and go for their own houses. It may not be the same thing in case of business - but whatever I have invested in Cairn - 20 per cent -along with that 38.8 per cent I am taking in my balance sheet with the corresponding loan of $8.9 billion. So you are becoming owner of 58.8 per cent in Cairn along with the $8.9 billion. You are becoming owner of VAL and along with it, $4 to 5 billion of loans are coming. Now you can argue whether it is correct valuation or whether it is wrong valuation. That is standard debate. And that is why people go to the valuers. Two world class firms have valued it. Then valuation fairness opinion has been taken from world class bankers. Then independent directors have critically assessed these valuations and only then the boards of the individual companies have passed it. To cut the long story short, ultimately all the issues pertain to the swap ratio. And I have not come across any merger till date in India in my life where swap ratio has been accepted by both the sides willingly. One side will always say that the swap ratio is not correct or it is against this shareholder or that shareholder. Q: How will this merger help your operation?A:
The mining operation as such will not be helped by the merger. The issue is the Sesa shareholder till now were totally married to the iron ore business scenario in India. Tomorrow it is not only iron ore but the Sesa shareholder is also having a stake in other commodities. Okay… if you see globally there is no mono-commodity company. If you talk about anybody, they are all multi commodity, diversified. Whether it is BHP, whether it is Anglo, Rio, Vale.. Vale is to a great extent mono…. So Vedanta is going to be the sixth largest resource major… Q: Wasn't it anyways the sixth largest?A:
Not Vedanta - Sesa Sterlite. Normally a diversified resource major will get a higher multiple in valuation. So we think there is a direct benefit for all the shareholders of Sesa Sterlire including the shareholders of Sesa. Besides that in any merger there is always some benefit - in this case there is a huge benefit for about Rs 1000 crore per annum for the next two to three years. So that is immediately EPS accretive. Q: Where is this coming from?
A: It will come out from various things like tax. Administrative cost, tax, capital interest cost - you know based on your total balance sheet strength, your debt gets re-rated. So your borrowing is re-rated and correspondingly reduction in interest rate. Q: What about plans in steel?
A: We have already stated that to grow in the business of iron ore, particularly in India, we cannot get away from setting up value addition facilities. We have demonstrated these with positive intent by buying out the sick assets of Bellary Steel and Alloys. We invested Rs 220 crore plus taxes. No linkage of iron ore and no linkage of coal has been given. We just thought we would demonstrate our positive intent by buying this - because the land is available. Some 700 acres of land were there. And now I can say to everybody that that I have invested on the ground, now you give me the enabler. I cannot set up a steel plant without knowing where my raw material will come from. If the government declares the policy that everybody has to get the raw material at international prices then it is a different story. Q: You have iron ore.A:
The iron ore is not good enough. That iron ore is low grade 57-58 per cent in our Karnataka mine. And the world over steel is not produced from single mine iron ore. Each mine has its own characteristic and then the blast furnace people will find out what is the optimum blend. Besides iron ore we needed to see the coal - how it will come and then water is a requirement. And of course you have to find the appropriate technology. We do not claim to be masters of steel - we do not understand steel production. So we might have to tie up with somebody who understands steel.