“Our strategic objectives remain the same. We will continue to strengthen our operations, optimise the utilisation of our assets and strengthen the balance sheet. Not just that, we will also build our reserves and resources, simplify our business structure and protect and preserve our licence to operate.”
FY 2017 has truly been a transformative year for Vedanta and its stakeholders. The merger with Cairn was the most significant event for the year and has helped make the group structure simpler and capital allocation more efficient. The strong approval of all sets of shareholders and the necessary regulatory permissions helped tie together the efforts of the past two years.
We ended FY2017 reaping the benefits of our collective efforts during and after FY2016, by reporting strong EBIDTA and free cash flows. Our strategic focus to ramp up production across the portfolio namely in zinc, aluminium, power and iron ore businesses throughout the year, has strengthened revenue growth. Record production levels of zinc and aluminium were well-timed in an environment of strong supply side pressures on both commodities. Our culture of cost management also stood us in great stead throughout the year. Overall, our performance is the outcome of a holistic focus on innovation, optimisation of highquality assets, low-cost operations and sustainable development. Of course, the tailwind of an improved commodity price scenario, specifically in our commodity basket helped immensely.
FY 2017 was also the year when we returned record dividends to our shareholders. Further, the Vedanta Limited stock mirrored our strong operational performance. The new dividend policy announced in May 2017 is a step further in our resolve to return value to our shareholders.
DISCIPLINED APPROACH AMID VOLATILITY
The macro-economic environment during the year continued to witness volatility; and there was widespread concern over whether China would be able to manage its growth aspirations. Continued efforts at financial reform and fiscal stimulus in China have raised hopes that China is likely to witness stronger than expected growth in the medium term. In addition, continued improvement in the US economy and strong consumer confidence in the UK after the Brexit vote show that the global economy is on the road to stability. However, I must emphasize that geopolitical uncertainties will continue to create headwinds for businesses across the world.
2016 was the first time in about five years that commodity markets improved towards the end of the year. I am confident that as long as global businesses remain disciplined in capex, we can expect to see continued progressive tightening and a buoyant market environment continuing for the next several years.
Ever since we began our journey, our approach has been to remain disciplined, and keep our balance sheet robust and resilient. As a part of our overriding agenda on discipline and fiscal prudence, we are continuing our cost-optimisation initiatives. Such a strategy has been the key driver of our performance during the year. We see significant opportunities for cost savings, going forward, particularly in areas of plant optimisation, delivery, logistic and supply chain. Our cost reduction initiatives continue to be a collective effort, strengthened by the ideas and execution capabilities of our large Vedanta family.
STRONGER, SMARTER, SUSTAINABLE
The resilience we showed last year has produced encouraging outcomes this year. Our core strategy revolves around having low-cost operations, allowing us to generate positive cash flows at even the most difficult parts of an economic cycle. We attempt to stay at the lowest end of the cost curve through our efforts and our results strengthen our resilience.
During the year, we ramped up the new Gamsberg project, which given the state of the zinc markets, now appears very timely. Going forward, we expect a modest escalation in our capex programme, as we begin to explore opportunities to increase our zinc and oil and gas businesses
Our focus continues to remain on maintaining strong credit metrics and using our strong free cash flows to drive further reduction in gross debt. We will only invest in high return projects in our existing businesses. For us, each investment proposal passes through a rigorous test to achieve a hurdle rate criterion.
Our efforts are yielding a solid return in innovation, across multiple cost saving programmes, such as Eureka, the details of which are captured elsewhere in this report. All our actions are focused towards creating a more sustainable enterprise. Besides business performance, we are making significant investments in community engagements and maintaining a best in class environmental performance record.
India has emerged as the world’s sixth largest manufacturing country, rising from the previous ninth position, and thus retaining its bright spot in the global economic landscape. The country’s economic fundamentals continue to be strong; and I believe the ‘Make in India’ initiative and Smart City project will continue to drive metals and energy demand. We can already see the positive impact of ‘Make in India’ playing out in the auto sector, which is emerging as one of the most vibrant in the world today, with wide-ranging innovations. Interestingly, many states are also focusing on their own smart city development. If we match that with the demographic advantage of millions of hard-working and aspiring Indians entering the workforce every year, it would lead to significant improvements in sectors, such as manufacturing, infrastructure, urban development, housing and consumer goods. Therefore, we are anticipating a humongous demand upsurge for metals and energy and we are equipped to help address the demand spectrum as a diversified natural resources powerhouse.
I am also impressed by the Government of India’s focus on greater digitalization and formalisation of the economy. These are enablers for strong and sustainable growth. We also see ourselves staying at the forefront of digitalization in mining, which is only just beginning. Vedanta is inspired to be a part of India’s growth story with a portfolio of highquality assets and a strong focus on value creation even in a volatile business scenario.
LICENCE TO OPERATE
Health and safety continue to be a high priority for us and we are committed to protect and preserve our licence to operate. You must be aware that we are leading a ‘Zero Harm’ culture across the organization and we will continue to strengthen our strategy of responsible stewardship. I am deeply saddened by five tragic fatalities that we recorded in FY2016- 17. Such outcomes are unacceptable at our sites, and we remain determined as ever to create a safer workplace for all. I can assure you that there has been a noticeable improvement in not only our safety approach, but certainly the numbers related to our safety performance.
We continue with our production ramp-up across much of the portfolio in India. We have achieved record annual production of aluminium, power, zinc, silver and copper as a part of our domestic operations. We had record production of zinc both in mined metal and in terms of silver. In our projects, we are well on our way to achieving the 1.2 MT of mined metal capacity in fiscal year 2020.
The Aluminium ramp up during the year has helped us exit FY 2017 at a run rate of 1.4MT, nearly 40% increase compared to our FY 2016 exit run rate. While we recognise that these improvement was not as smooth or as great as we hoped, being stalled by power interruptions and other events, we have run diagnostics to understand the issues and learn from them. We are confident that despite these challenges, we are making strong progress towards our total production capacity of 2.3 MT for aluminium.
During the year, we successfully commissioned our TSPL unit in Punjab and finished the year with its business contributing improved earnings and cash flow overall. We have also been steadily ramping up our power load factor (PLF) in BALCO and Jharsuguda. Most of our power is captive and by ramping up our capacity, we are providing more power at competitive rates to the Indian consumer.
In Oil & gas, our core fields continue to deliver along expected lines with gross production across the assets for the year at 190,000 boepd. Our Mangala EOR continues to deliver strong performance with Q4 FY’17 volumes at 56,000 bpd. Continued reservoir management practices and production optimization helped deliver steady production from water flood operations across fields. The Rajasthan assets also recorded excellent plant uptime of over 99% during the year.
In iron ore, we achieved 2.6 million tonnes of the additional production capacity granted in Goa. We are pleased that mining ban is a thing of the past and we have been ramping up our production to the extent allowed within the court-imposed mining cap in Goa. We continue to be engaged with respective state governments and the courts for allocating a higher limit.
At Zinc International, our Gamsberg project is on track to commence production in mid CY 2018. At our Namibia operations, the Skorpion pit extension is underway. We have started mobilizing for the pit layback in April 2018 with ore extraction expected by the third quarter of fiscal year 2018. This has the potential to increase mine life by three years.
Our best days are ahead of us as the commodity markets improve, largely driven by supply-side constraints. However, we must be prepared for volatility in an uncertain global business landscape. We will focus on safely increasing production, optimising costs, engaging in disciplined capex and leveraging technology to run the business better.
Our strategic objectives remain the same. We will continue to strengthen our operations, optimise the utilisation of our assets and strengthen the balance sheet. Not just that, we will also build our reserves and resources, simplify our business structure and protect and preserve our licence to operate.
Before I conclude, I would like to emphasize on the fact that Vedanta Limited continues to be a compelling investment case. We have a large and diversified commodity mix, geared to base metals and oil, and ideally placed to achieve sector-leading production growth. Moreover, we have a lowcost production profile with most businesses in the lowest cost quartile and most of our assets capable of generating positive free cash flow even at low commodity prices. We also have the strongest balance sheet among the Indian and global peers with the net debt-to-EBITDA ratio of 0.4 and gearing of 9%.
This is my last communication to you as CEO, before I hang up my helmet. It has been a most exciting and eventful journey, with many cherished moments. For that, I have only gratitude to offer to every member of the Vedanta Team, our Board and all our stakeholders.
I have always believed that India will act as a powerful growth catalyst for a sluggish global economy, and my years in India have only reinforced that belief. Vedanta is committed to contribute to India’s socio-economic prosperity as a stronger, smarter and a more sustainable organisation.
Chief Executive Officer