MAC: Mines and Communities

London Calling on Societe Generale's disreputable Vedanta play

Published by MAC on 2014-10-13
Source: Nostromo Research

It's not a Wikileak for sure, but worrisome all the same.

Below is an "insight" into Vedanta Resources Indian operations, specifically its prospects of gaining "captive" bauxite to feed its alumina refinery in Orissa.

It comes from an analyst's report, internally circulated by major French bank, Société Générale  in March 2013.

This was four months before tribal vilagers overwhelmingly voted Vedanta out of the  bauxite-rich Nyamgiri hills - and so far it's not been allowed back in. See: Jolt for Vedanta as mining in Niyamgiri Hills voted out

Meanwhile, it's been lobbying hard to expand its current alumina capacity at the adjacent Lanjigarh refinery, no less than sixfold.

That's led to fears of Vedanta seeking a back-door re-entry to Nyamgiri. Something considerably more likely, following the election of Narendra Modi as India's prime minister. See: London Calling on Vedanta's Lanjigarh subterfuge

Société Générale is backing Modi, along with many other banks. No surprise in that.

What's outrageous is a comment by the bank, back in early 2013, on the role of indigenous communities, as their campaign against the Nyamgiri mine was reaching its height.

Totally ignoring the reality of the struggle, it had the nerve to suggest the "the possibiity" of rival alumininum companies to Vedanta "bribing some of the tribal people to keep protesting".

This kind of mendacious mud-slinging should have no place in an analyst's report.

But, there's something of a cherry on this shoddy cake.

Société Générale concludes that, even were alumininium prices to go well above $2,000 a tonne (and the London Metal Exchange cash price is substantially under that at present); and even if Vedanta secured "captive" bauxite sources by financial year 2018, this would justify the refining of only 3 million tonnes a year of alumina.

And that's only half what Vedanta now says it needs to feed Lanjigarh.

Investors might pay heed to what Société Générale has been saying, despite some of its opinions being better suited to an ill-run nursery, rather than a leading international bank.

For more on SG - see

[London Calling is published by Nostromo Research. Any opinion expressed here is that of Nostromo Research alone. Reproduction is welcomed under a Creative Commons Licence]

Aluminium victim of 2006 Forest Rights Act

Vedanta's aluminium business

Vedanta might not have made a sweet enough offer Certain portions of Dr. N C Saxena's report suggested that Vedanta was paying only INR4,000-5,000 per month (c.$100/month) to one member of the each household affected by mining. While the sum Vedanta was allegedly paying was not too far below market wages. It was hardly enticing. We think Vedanta would have been better off if they paid much more than that. When one is facing MoEF red tape, it may be better if there are 5,000 tribal members demanding the fast construction of the refinery/mine instead of 100 opposing it with the rest not bothered to protest or support.

Was Vedanta a victim of corporate feud?

We cannot rule out the possibility that some other organisations, rival to Vedanta Resources, may be bribing some of the tribal people to keep protesting. Aluminium is a global industry and if Vedanta's plants are allowed to function normally, several large aluminium companies worldwide could be negatively affected by the resultant supply glut. Several NGOs have been helping anti-Vedanta protests. It remains to be seen if some of them are secretly funded by Vedanta's business rivals with motives that are far from altruistic.

Can Vedanta make money without captive bauxite?

We discuss in the previous section why we think Vedanta is unlikely to get
captive bauxite mining rights any time soon. Therefore, the key question for investors is whether Vedanta's aluminium business can be profitable without captive bauxite. Our analysis indicates that if aluminium prices stay where they are ($1,901/tonne: not our base case), the business will barely break even at the EBITDA level and remain highly cash flow negative even with 6mtpa of captive bauxite (in the absence of any public information, we have assumed that captive bauxite will reduce the cost of bauxite by $40/tonne). However, if we assume that aluminium prices will recover to $2,200/tonne (SG base case), the company could make an EBITDA margin of c.$340/tonne without captive bauxite and alumina. With 6mtpa of captive bauxite and 3mtpa of captive alumina, the EBITDA margin is likely to expand by another $200/tonne.

In our base case model, we have assume that Vedanta will begin captive bauxite mining in FY 2018 (assuming the Indian government manages to change the law by then) but the resulting bauxite will be enough to feed only 3mtpa of alumina production.

Source: Société Générale, Analyst report March 22, 2013 pp. 40-43



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