Power Of One

Rampura Agucha, in the Bhilwara district of Rajasthan, is roughly a three-and-a-half-hour drive from Udaipur airport. As you approach the village, you are struck by the startling mix of people you encounter. Traditional Mewari villagers go about their normal routine ignoring the miners and mining engineers, from places as distant as Australia and Andhra Pradesh, who are constantly rushing about. There are over 2,500 workers and engineers, drawn from across the country and the globe, working round the clock at the Rampura Agucha mine of Hindustan Zinc (HZL). This mine has one of the largest zinc and lead deposits in the world.

Just over a decade ago — in 2002 — Anil Agarwal picked up the majority stake (64.52 per cent) in the then state-run HZL. The National Democratic Alliance (NDA) government, which was in power at that time, had embarked on an aggressive disinvestment programme, and Agarwal decided to bid for the rather sleepy and somewhat inefficient mining firm.

He had picked up 51 per cent of Bharat Aluminium Company (Balco), another public sector unit that had been offered by the NDA government the previous year, and wanted to get into another commodity. HZL used to produce 0.2 million tonne (mt) of zinc and lead per annum at that time, and it was not considered a great pick by the other commodity barons. And Agarwal was still a middle-weight businessman then who had yet to gain an entry into the big boys' club of corporate India. His business group had revenues of approximately $600 million in 2002.

In the decade that has passed, HZL's annual metal production capacity shot up to 1.06 mt, its sales grew nearly eight times from Rs 1,470 crore in 2002 to Rs 11,405 crore last year, and its profits rose over 80-fold — from Rs 68 crore in 2002 to Rs 5,526 crore currently.

But it is Agarwal who has risen at an even giddier pace up the Indian business ladder. Since the Balco and HZL acquisitions, he has picked up the iron ore exporter Sesa Goa, mining companies and mines in Zambia, Liberia and Australia, bought oil producer Cairn India, and cobbled together a commodities empire of $14 billion in revenues.


Along the way, he has courted controversy, angered groups of investors, and got into disputes with ministries of environment and forests, tribal affairs and petroleum. He has also drawn the ire of environmentalists, tribal protection groups and sundry other activist organisations. None of these has managed to slow his march, and he is dreaming even bigger now.

Now, over the next three years, Agarwal hopes to almost quadruple the size of his already formidable empire — he aims for group revenues of $50 billion by 2015. He is restructuring his motley group of companies to build a couple of simpler corporate entities. And he wants to sit in the elite club of commodity giants such as BHP Billiton and Rio Tinto.

But to be able to that, Agarwal needs to overcome even bigger obstacles than he has had to face until now. Consider these. First, he has to figure a way out of the Niyamgiri impasse. Agarwal was promised a 3 million tonne per annum (mtpa) bauxite mining deal in Niyamgiri in Orissa in 2004 as part of the package for building a 1-mtpa alumina refinery in Lanjigarh in the same state along with a 100 MW power plant and an aluminium smelter.

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But the environment and tribal affairs ministries denied Agarwal the permission to start mining even as his refinery was ready. Vedanta Aluminium, the company that was executing the project, has by now ended up with Rs 19,700 crore of debt and Rs 6,000 crore of accumulated losses on its books.

Then last year, the Supreme Court banned iron ore mining in Bellary in Karnataka. That hit one of Agarwal's biggest cash cows — Sesa Goa, which saw its iron ore production drop almost 27 per cent to 13.8 mt in FY12, as compared to 20 mt a year ago. If that was not enough, the government decided to raise the export duty on iron ore. Given that Sesa Goa exports almost 90 per cent of the iron ore it mines, that is likely to hit its profits hard.

Click On The Graph To View An Enlarged Version

Meanwhile, the bull run in commodity prices, which powered Agarwal's growth over the past decade, is slowing down. In almost every commodity — from copper to zinc to aluminium — prices have dropped quite sharply from the peaks they had scaled in the past few years. But Agarwal remains unfazed, using the analogy of another metal to explain why he will overcome all the obstacles. "When gold is put through fire, it gets purified," he says.

Luck , Timing, Genius, Hard Work
In the past decade, despite all the controversies he has courted, Agarwal has shown an amazing ability to pick up undervalued commodity companies just before the commodity boom. His critics such as Deven Choksey, managing director of K.R. Choksey Securities, a Mumbai-based brokerage, say Agarwal has an uncanny skill for de-bottlenecking inefficient plants and mines, cutting costs, and improving their productivity dramatically. One of his former associates says Agarwal is focused on the goal of becoming the lowest-cost producer in each commodity he enters. Another analyst says that almost all the risks that Agarwal has taken have paid off richly because he entered commodities just as the long bull run in most metals and minerals was starting.

He has certainly been bang on with most of his purchases. He picked up HZL when zinc was selling in the global market for $743 a tonne. Even as Agarwal was focusing on dramatically increasing the productivity of the mine, the metal's price went into a steep climb —touching $4,530 per tonne by 2006. Though prices have halved since then, zinc still sells at $2,000 a tonne in the global markets.

Silver, which Agarwal gets during the purification of zinc ore, has done even better. It jumped 11-fold from $4.5 per ounce in 2002 to touch $49.5 per ounce in 2011. Over the past year, silver prices have crashed, but they are still ruling at around $28 an ounce. Similarly, Agarwal had forked out $43.5 million in 2000 to pick up an Australian copper mine, and four years later, he picked up another mine in Zambia for $263 million. In 2001, copper prices were at $1,300 per tonne in the international market. By 2011, they had touched $10,000 per tonne. (They are currently at $8,400 per tonne).

Another bet of his — Sesa Goa for $1 billion in 2007 — also paid off richly. Iron ore was hovering around $35-40 per tonne when he made his buy. He sells iron ore today at about $140 per tonne — down from the peak of $190 a year ago. While almost every acquisition that Agarwal has made has paid off, his sole greenfield project in the past decade has not fared as well. Vedanta Aluminium (VAL), which was set up to build an aluminium plant in Orissa using bauxite from the Niyamgiri mines, has been one of the biggest capital destroyers in Agarwal's stable, accumulating debt and losses.

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Controversies And Obstacles
As Agarwal's empire has grown, so have the controversies associated with them. The Niyamgiri controversy was, in many ways, the first serious setback. Agarwal had already built his 1 mtpa plant in Lanjigarh when the issue broke out. In 2010, activists and human rights organisations (including Survival International and Amnesty International) accused Agarwal of flouting environmental norms at Lanjigarh and destroying the forest cover in Niyamgiri.

Activists also claimed an adverse impact on tribal folk who live there, calling it a human rights violation. Politicians joined in the criticism; in August 2010, Congress leader and Gandhi scion Rahul Gandhi held a rally at Lanjigarh and said Vedanta disturbed the tribal community in the name of development.

In parallel, the then environment minister Jairam Ramesh denied stage 2 environmental clearance for the $1.7 billion mining project. Influential investors in Vedanta Resources (VR), like the Church of England, the Norwegian Government Pension Fund and Dutch pension fund PGGM Investments, responded to protests by selling their stake in VR.

The Church of England's Ethical Investment Advisory Group (EIAG) visited the site and engaged with Vedanta's senior management for six months before taking the decision to pull out. The Church of England's spokesperson told BW that the EIAG had recommended disinvestment as its engagement with Vedanta had produced no substantive results. It said that it would not be averse to reinvesting if the company addressed the concerns that the EIAG had raised.

Agarwal supporters feel the activists and the government are over-reacting. P.K. Jena, former director general of the Council of Scientific and Industrial Research and chairman of the Institute of Advanced Technology and Environmental Studies in Bhubaneswar, says India has the world's fifth largest bauxite reserves of about 3.5 billion tonne, but they are unutilised because of political and administrative intervention. "Politicians and administrators have no technical expertise," he says.

"Bauxite mining is unlike that of iron ore, manganese or coal. Bauxite lies under the grass. After its extraction, the area can be used for rain water harvesting and reforestation with landfills." Niyamgiri, he adds, is an ideal location for eco-friendly bauxite mining.

For VAL, the financial costs of this environmental activism have been huge, mainly because it has had to import bauxite from several hundred miles away, besides operating at lower production capacity. Accumulated losses have mounted to nearly Rs 6,000 crore. To make matters worse, uncertainty remains on whether it will be profitable any time soon.
Even as the Orissa controversy raged, the Vedanta chief sealed a deal to acquire 38.5 per cent in Cairn India for $8.67 billion through VR; in addition, Sesa Goa bought another 20 per cent through an open offer to shareholders in Cairn India, taking the stake to 58.5 per cent.

The deal was finalised in December 2011, after months of wrangling over royalty payments to the government, which until then was paid by ONGC, an equity partner in Cairn's oilfields at Barmer in Rajasthan. Cairn had kept royalties out of the production-sharing contract. After more than a year of negotiations with ONGC and the government, Vedanta agreed to contribute to the royalty. "I wanted to move on," says Agarwal.

Despite the additional costs, the deal is a good one. Already, production has increased from 125,000 barrels per day (bpd) to 175,000 bpd, and could soon go up to 240,000 bpd. The Cairn acquisition marks an inflection point, where oil and gas will become the biggest contributor to the conglomerate's net revenues.

Soon after putting that to rest, Vedanta came up with its second group restructuring plan. The first attempt in September 2008 was halted by shareholder opposition and bad market conditions. Agarwal wants to create a unified natural resources entity, Sesa-Sterlite, merging iron ore miner Sesa Goa, non-ferrous metals producer Sterlite Industries, Cairn India, Madras Aluminum and VAL, among others.

HOW AGARWAL BUILT HIS EMPIRE 1995: MALCO 80% STAKE FOR Rs 22.5 CRORE 2000: CMT (AUSTRALIAN COPPER MINE) — 100% STAKE FOR $43.5 MILLION 2001: BALCO 51% STAKE FOR Rs 551.50 CRORE 2002 : HINDUSTAN ZINC 64.92% STAKE FOR Rs 1,100 CRORE 2004: KCM, ZAMBIA 78% STAKE FOR $263 MILLION 2007: SESA GOA 51% STAKE FOR $1 BILLION 2009: DEMPO 100% STAKE FOR Rs 1,750 CRORE 2010: ZINC- INTL ASSETS OF ANGLO ZINC IN NAMIBIA, IRELAND AND SOUTH AFRICA — 100% STAKE FOR $1.3 BILLION 2011: GOA ENERGY — 100% STAKE FOR Rs 53.72 CRORE 2011: CAIRN INDIA 58.5% STAKE FOR $8.67 BILLION 2011: WESTERN CLUSTER, LIBERIA — 51% STAKE FOR $90 MILLION 2012: L&T'S RAYKAL ALUMINIUM 24.5% STAKE FOR Rs 200.70 CRORE MINEFIELD: Vedanta's mining operations in Orissa's Niyamgiri have run into controversy (BW Archive)

The merger — a set of amalgamations, actually — is complex, involving transfers of a number of assets, and a number of equity dilutions. Vedanta Resources will also transfer its nearly 39 per cent in Cairn India to Sesa-Sterlite for a token $1. The different sub-mergers, so to speak, are all-share transactions.

The Big Plan To Rejig
As a restructuring exercise, the merger of VR firms into a single entity eliminates complex cross-holding patterns, says Amit Tandon, MD, Institutional Investor Advisory Services, which advised investors to vote against the merger. Sales will go up 35 per cent, and after-tax profits by 28 per cent. But debt will go up 400 per cent, thanks to Cairn India and VAL.
Vedanta Resources has valued the equity of VAL at 4.7 times the Ebitda, the same as that for Sesa Goa and Sterlite — both cash rich, very low-debt firms. Other key ratios such as net debt to Ebitda, indicate that for every Re 1 of earnings, VAL has just under Rs 40 in net debt, compared to just Re 1 for Sesa Goa and zero for Sterlite.

"The problem is the valuation of VAL," says Tandon. "Once you take out debt from the implied enterprise value (based on the 72 million- plus shares of Sesa Goa issued to VR for its 70 per cent stake) equity becomes negative. VR's shareholders have benefited by at least Rs 1,650 crore at the expense of Sesa Goa shareholders."

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An analyst at Kotak Securities is sceptical about the merger. "It has nothing to do with expanding the balance sheet for buying assets or doing mergers and acquisitions," he says. "It's to digest the Rs 19,700 crore debt in VAL." Analyst reports published at the time of the merger announcement in February say that apart from the $5.9 billion of Cairn's debt, another $4 billion of VAL's debt will end up on the books of Sesa-Sterlite. In all, Sesa-Sterlite's debt will stand at roughly $14 billion.

VAL's amalgamation is a huge problem. For one, there is little likelihood that the mining assets that are locked in disputes with the government will break free in a couple of years. VAL will continue to add to its accumulated losses.

Shareholders of Sesa Goa and Sterlite Industries approved the merger — 79.1 per cent of the votes cast at the shareholders' meetings of both companies voted for it. But a significant number of minority shareholders appear to have voted against it. There was also a larger-than-usual number of invalid votes, according to media reports. The restructuring will reduce VR's debt burden by about 61 per cent to $3.8 billion. Its debt service liability will come down to $180 million from the current $500 million.

Shopping Spree Continues?
"We get an enlarged balance sheet for global acquisitions," says Tarun Jain, Vedanta's director of finance. "It is derisking. The cyclical ups and downs in one segment will be balanced with the merger." But not many buy it. Says Avinash Gorakshakar, CEO at Moneyinvestments.in, an advisory firm, "Agarwal's intention is clear. He wants to go the whole hog on the oil and gas business, for which he needs money. But this merger has come on the pretext of transferring the assets of all troubled businesses into one."

"I Always Went With The Original Team And Did My Homework"

(BW Pic By Umesh Goswami) Anil Agarwal,chairman of vedanta Group, now aims to convert the merged entity — Sesa-Sterlite — into a global natural resources giant. BW's Nevin John spoke to him to track his plans. Excerpts from the interview: On the merger It will create a large diversified metal and mining company with world-class assets and resources. It will create significant value to all shareholders. It will simplify the group structure and create a truly Indian natural resources major, which will be the seventh largest in the world. Globally, diversified companies have a higher valuation than pure play companies and have been more successful over the last decade. The merger will ensure a more efficient capital structure and will lead to lower cost of capital. The group has world-class aluminium assets fully integrated with power. The merger will result in synergies worth $200 million per annum and cash fungibility will facilitate greater flexibility in cash flow management. On environmental issues When they say illegal mining (at Niyamgiri), we have not even moved a blade of grass. If nothing has happened, what do they mean by human rights violation? For the Lanjigarh refinery, we hope we will get required bauxite in two years as we look at new mines as well. On the long-term vision Every large country has to have a natural resource company. Australia has BHP Billiton. Brazil has Vale. South Africa has Anglo American. Indian companies are still small. Post-merger, Sesa-Sterlite will look significant. We want to become a global company based in India. The journey so far The initial 10 years of my business life was a complete struggle. But simplicity and conviction worked for me. I acquired companies, enhanced capacities and increased profits. I always went with the original team; did my homework. I never regretted that I could have done better.

Two days before the group restructuring plan was announced on 23 February, VAL acquired a 24.5 per cent stake in Larsen & Toubro-promoted Raykal Aluminium, which holds bauxite-mining licences in Orissa, for Rs 200 crore. VAL will fully acquire Raykal Aluminium for Rs 1,811 crore in phases, according to a filing made to the US Securities and Exchange Commission on 31 May by its sister firm Sterlite Industries.

L&T holds prospecting licences for bauxite mines located at Sijmali and Kurumali in Rayagad and Kalahandi districts, respectively. The estimated reserve size of both the mines would be 250-280 mt. "The entire bauxite excavated from the above mines will be available for the use of Raykal and (or) VAL," says the company filing. But it is not clear how those acquisitions will be funded, given Sesa-Sterlite's enlarged debt burden and potentially much higher servicing costs, thanks to VAL. True, listed operating firms such as Cairn India and HZL generate piles of cash, but the former has a large debt burden itself, and in the latter, the government is a partner, whose approval will be necessary for funding the acquisitions.

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Agarwal has made offers to buy out the remaining government stake in HZL and Balco, but is likely to be turned down. The government will want a higher price. Analysts say Agarwal will need another Rs 22,000 crore to fund the buyout. Whether that will come out of Sesa-Sterlite's balance sheet is not clear. Neither is it known if that amount will be enough.

Grim Prognosis
Separately, VAL has to resolve its disputes with the government and local tribal authorities, and that is a long process. Agarwal's troubles do not end there. Sesa Goa also faces troubles: mining has been banned in Karnataka, thanks to the government's efforts to clamp down on illegal mining and exports. That apart, environmental activists in Goa took up cudgels against Sesa Goa, after rains flattened piles of unexported ore (due to the ban) which, in turn, leached into cultivated land. In addition, Sesa's production in Goa has also been hit by road congestion in the state's mining areas.

In a recent earnings call, Sesa Goa managing director P.K. Mukherjee said that road congestion has eased after several mines operating without legal approval were shut. But the stock's value plummeted up to 42 per cent during the first two quarters of fiscal 2011-12, and has not quite recovered yet. Iron ore production declined 27 per cent to 13.8 mt in FY12, against its target of 20 mt. "Once the ban (in Karnataka) is lifted, we will be able to produce 6 mtpa," Mukherjee said. Sesa Goa's output from its Goa mines is expected to be 15 mt in FY13, against 12.7 mt in FY12.

Cairn India had posted revenues of Rs 11,860 crore and profit of Rs 7,937 crore in 2011-12 at a consolidated level. What else does Agarwal need? "All our businesses have the potential to generate $2-3 billion profit with 10 per cent less or more. Our CEO feels that we could achieve the 2015 target," says Agarwal. He claims the oil find in Sri Lanka will be larger than the one in Barmer. But the development of the Sri Lankan field will take at least 5-6 years. For Reliance Industries, which found gas in the Krishna-Godawari basin in 2002, it took six years for production to start.

The problem is capex: Vedanta will have to invest billions, and the company already has $14 billion in debt on the proposed Sesa-Sterlite's books. The company estimates that investment from financial year 2012 to 2015 would be $10.3 billion, a quarter of it in the oil and gas business. Global mining companies spend $5 billion annually as capital expenditure.

Grabbing an opportunity, as well as his sense of timing — whether it was the acquisition of Cairn India, or the decision to take VR to global markets via the London Stock Exchange — have been Agarwal's defining abilities. But is he losing his grip? He will need those capabilities more than ever now. This may not be a make-or-break moment yet, but at the very least, it will be a redefining one for his conglomerate.

nevin(dot)john (at)abp (dot)in

(This story was published in Businessworld Issue Dated 09-07-2012)