Sesa's Lanjigarh expansion hinges on bauxite, costs

Sesa Sterlite's aluminium operations which have been starved of raw material linkages for a long time are finally moving in a positive direction, but analysts remained concerned about the pace of projects.

On Wednesday, the company's arm Vedanta Aluminium got the nod of affected locals to expand capacity of its Lanjigarh refinery in Odisha from one million tonne per annum (mtpa) to six mtpa.

Despite being denied access to bauxite deposits of the nearby Niyamgiri Hills on environmental issues, the Lanjigarh refinery operated at 93% of its rated capacity in the first quarter.

The refinery currently sources around 2-2.5 mt bauxite from Balco's mines and also from other states including Gujarat and Andhra Pradesh.

"This nod is definitely a positive for the company's aluminium operations but any such expansion will not be possible until bauxite linkage is available," Gautam Chakraborty, an analyst with Emkay Global Financial said. Another favourable development for the alumina refinery is a recent grant of three laterite deposits by the Odisha government, covering an area of 140 hectares near Jaipur, in Koraput district.

Laterite is used along with bauxite to make alumina, which is later used to make aluminium metal. However, even to develop these deposits, a long time will be taken as forest clearances and mining leases will have to be sought, Chakraborty said.

Despite raw material crunch and other issues, Anil Agarwal-led Vedanta has been focusing on sweating its aluminium assets. In past few quarters, it has been able to bring down aluminium production cost significantly through several measures, and bringing all its aluminium production capacities on stream has been the key priority of the natural resource major. The company declined to comment for this report.

Sesa Sterlite is continuing to struggle to keep its metal production cost competitive. Chief executive officer Tom Albanese in an earnings call indicated rise in coal costs for its power business (which could increase energy cost for aluminium operation) as the coal availability through e-auction in the country is likely to go down. This may also force the company to import more coal, adding to its woes. Prices of coal in e-auction is also seen going up by 15-20% following supply crunch.

The higher coal cost could impact Sesa's 1.25 mt expansion of Jharsugada smelter. In the earnings call, the management insisted that higher coal cost would not impact aluminium capacity expansion but analysts remained sceptical. The smelter's cost of production keeps rising as it is dependent on imported alumina.

Vedanta Aluminium plans to expand its Jharsugada smelter from 500,000 tonne per annum to 1.75 mt. The smelter currently meets its power requirement through 1,215 mw captive plant, however with the expansion it would need more power, which it hopes to source from Sterlite Energy's (another arm of Sesa Sterlite) 2,400 mw plant.

"The company has sought permission from the government to use power from this 2,400 mw for captive usage, however it has not received approval yet. This approval could be a major positive trigger for the company as it will boost both aluminium and power operations," Giriraj Daga, an analyst with Nirmal Bang Securities, said.

He said till the time aluminium prices at London Metal Exchange remains high the company may not face any problem, however if they goes down, the company could struggle with expansion. During the current fiscal, Sesa plans to start the first phase of 50 pots of the 1.25 mtpa Jharsuguda-II smelter.

"While aluminium operations are seeing some positive developments, it would contribute meaningfully in to overall operations only after 2-3 years," Chakraborty said.