Vedanta may spin off aluminium project

MUMBAI: Vedanta Resources — the mining major owned by London-based tycoon Anil Agarwal is likely to demerge a large aluminium project in Orissa into a separate entity to help the conglomerate get a better valuation for the aluminium business.

London-listed Vedanta has hired Morgan Stanley, Credit Suisse and JP Morgan Cazenove to put together a plan that would result? if approved by shareholders and creditors in Vedanta Aluminium, the subsidiary which has operations in Orissa, being listed on NSE and BSE. Bharat Aluminium, or Balco, another aluminium company in the Vedanta fold, is not part of this plan, since the government owns 49% of it, said people familiar with the development. This is the second major corporate restructuring proposal that Vedanta has planned in two years. It had to go back on the earlier proposal a complicated plan which proposed the unbundling of its aluminium, zinc, copper and mining businesses — due to the liquidity crisis and opposition from institutional shareholders. Vedanta Resources declined to comment for this story.

The people familiar with the matter said Vedanta wanted to make its Indian business — which are currently consolidated under Sterlite Industries which directly makes copper and holds stakes in companies smelting aluminium and zinc easier for investors to understand. If the plan is approved by shareholders and regulators, Sterlite will end up as primarily a maker of copper, zinc and lead while the bulk of the aluminium business will be with the new listed company, Vedanta Aluminium.

Both entities, Sterlite and Vedanta Aluminium, will be majority owned by the London-based parent, Vedanta Resources.

Vedanta Aluminium is 70% owned by Vedanta Resources and the rest is with Sterlite Industries.

The details of the listing plan are not available, but logically there are three ways in which Vedanta Aluminium can be listed. The company could list through an initial public offer, or IPO, in which new shares would be issued, or the owners could divest their stake. The third option is to issue new shares to existing shareholders of Sterlite on a proportionate basis by valuing the contribution of the aluminium business. Shareholders, other than the owners, have to own 10% in all listed Indian companies, and that number will go up to 25% in the new fiscal starting April 1.

Apart from shareholder approval, the demerger proposal would also require clearance from a high court, which could take about three months.

The demerger proposal comes at a time when Vedanta Aluminium’s mining project in Niyamgiri in Orissa has come under regulatory glare for alleged environmental and human rights transgressions with organisations, such as the UK-based Amnesty International and Survival, alleging that the company hasn't involved the local populace in the project, despite the fact that the project could displace them.

This narrative — popular among sections of non-governmental organisations, or NGOs, has been strongly denied by both Vedanta and the Orissa government. Both say that the mining project, currently undertaken jointly by Vedanta and the state government-owned Orissa Mining Corporation, has not violated any Act.

The demerger proposal for Vedanta Aluminium doesn’t include Bharat Aluminium, or Balco, as the Indian government owns 49% in it. Sterlite acquired a 51% stake in Balco through a divestment programme in 2001. Any consolidation of Balco into the new aluminium business would happen only if the government sells its stake. Sterlite and the government have so far not been able to agree on a price.

While Balco makes about 350,000 tonne of aluminium at its smelter in Korba, Vedanta Aluminium plans to put together an integrated aluminium operation in Orissa which would consist of a 1.75-million-tonne aluminium smelter at Jharsuguda, 5-million-tonne alumina refinery that will convert the bauxite proposed to be mined at Niyamgiri into alumina and a captive power plant of 1,215 megawatts, as the entire conversion process is done through electricity.

On completion, Vedanta Aluminium, along with Balco, will catapult the Vedanta Group into the world's fourth-largest aluminium player, behind Rusal of Russia, Alcoa of US and Chalco of China.

The valuations for Vedanta Aluminium, once the Orissa project is complete, could touch $20 billion, based on the low cost of production, said analysts. Currently, since Vedanta Aluminium buys alumina the main raw material for making aluminium from outside, its cost of production is $1,400 per tonne, which could fall to about $1,000 per tonne, once the Niyamgiri mining project takes off.

Globally, the lowest cost of production — at $1,300 per tonne is that of China's Chalco.

But it is far from clear if Vedanta will get a mining licence in Niyamgiri anytime in the near future or ever. On Friday, the government’s forest advisory committee, or FAC, submitted a lengthy report on the Vedanta project.

While the project found no major violations of environmental norms, it said the local tribal population, which is classified as a primitive tribal group, were in no position to benefit from the project. Further, the report calls for the proper implementation of a central Act called the Forest Produce Act in Niyamgiri. The environment ministry is likely to refer this to the tribal affairs ministry.

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