2nd Jun 2005 07:01
Vedanta Resources PLC02 June 2005 Vedanta Resources plc Preliminary results for the year ended 31 March 2005 Highlights • Delivery on growth projects - 2 out of 4 projects complete - Tuticorin copper smelter now fully operational - Chanderiya zinc smelter and Rampura Agucha mine expansions delivered on time and ahead of budget - Aluminium expansion project at Korba remains on target for March 2006 commissioning - Further progress with 1 mtpa(1) alumina refinery at Orissa • Strong financial results - Group Operating Profit up 40% to $332 million and Group EBITDA(1) up 41% to $455 million driven by production growth and strong pricing - Well capitalised balance sheet with Group Gearing(1) at 4% and gross cash of $1.4 billion - Strong ROCE(1) at 32% - 5% final dividend increase reflects the confidence of the Board in continued successful delivery • Increased share of earnings - minorities reduced to 45% in the second half (from 63% at Listing) - Economic Interest(1) in Sterlite, the largest subsidiary, increased to 80% (from 69% at Listing) - Attributable Profit(1) up 66% to $120 million, benefiting from reduction in minority interests • Successful investment in Konkola Copper Mines with opportunities toimprove output, reduce costs and pursue future growth -------------------------------------------------------------------------------- Full Year 2005 Full Year 2004 % Change (restated)--------------------------------------------------------------------------------Group Turnover ($ million) 1,884.2 1,289.5 + 46%Group EBITDA ($ million) 455.0 322.7 + 41%Group EBITDA margin(1) 24.1% 25.0%Group Operating Profit ($million) 331.8 237.1 + 40%Attributable Profit ($ million) 120.0 72.3 + 66%ROCE(1) (excluding project capital work in progress) 32.0% 24.1%Final Dividend (2) (US cents per share) 11.55 11.0 5%-------------------------------------------------------------------------------- Vedanta's Chairman Anil Agarwal commented: "Vedanta is a unique growth story and our profile of organic growth isunrivalled in the metals and mining industry. This has been an exciting year forVedanta. We have made strong progress and have delivered on several of ourdevelopment projects. We continue to focus on our growth strategy and have movedforward in all areas. We remain confident of continuing to deliver this growthin the year ahead." (1) Refer to glossary and definitions (2) The dividend for the full year 2004 of US 5.5 cents per share was based on the four month period following Vedanta's Listing, equivalent to a final dividend of US 11.0 cents CHAIRMAN'S STATEMENT Vedanta is a unique growth story and our profile of organic growth is unrivalledin the metals and mining industry. This has been an exciting year for Vedanta.We have made strong progress and have delivered on several of our developmentprojects. We continue to focus on our growth strategy and have moved forward inall areas. We remain confident of continuing to deliver this growth in the yearahead. At the time of our Listing we set out a four part strategy. The first pillar ofour strategy is to optimise the performance of our existing assets, whichincluded the expansions in our copper and zinc operations. In April 2005 westarted commissioning our copper smelter at Tuticorin and the new 300,000 tpa(1)facility is producing metal. On 31 May 2005 we announced the commissioning ofthe new facilities at Chanderiya, supported by the expanded output at RampuraAgucha mine. This was completed around 15% below the forecast budget of $425million and well below the benchmark costs for comparable internationalprojects. We will continue to look for opportunities to optimise performance andlower costs in all aspects of our operations. The second part of our strategy is to complete the two greenfield projects; the250,000 tpa aluminium complex, at BALCO, and the new 1 million tpa alumina plantat Orissa. The facilities at BALCO are proceeding on schedule, we are carryingout technology trials on some of the pots and are producing metal. The aluminarefinery at Orissa is also on track and budget. As mentioned in our recentproduction report, public interest submissions regarding environmental clearanceare currently being addressed within a timetable set by the Supreme Court. The third pillar of our strategy is the consolidation of our Group structure andfurther good progress has been made over the year. The most significant changecame from the $434 million rights issue in Sterlite which allowed us to increaseour Economic Interest in Sterlite to 80% and to inject funds into Sterlite, foruse in our expansion programme. The exercise of the option in BALCO continues toproceed with independent valuers having been appointed by the Government. Wewill continue to pursue opportunities to simplify the structure of the Groupwhere possible. In November 2004 we completed our acquisition of Konkola Copper Mines, at agross cost of $49.2 million. This formed the fourth pillar of our strategy;leveraging our existing skills through investment opportunities. At current highcopper prices Konkola is profitable, but the aim is to place the operations in aposition where they are more profitable through the commodity cycle and to giveKCM a more solid long term outlook. Our immediate focus is to improve processesand stabilise production levels. There are considerable opportunities for futuredevelopment at KCM, including the world class Konkola Ore Body with resources of210 million tonnes containing copper at 3.8%. During the year the Company received its first credit rating, Baa3/BB, sinceupgraded to BB+. This placed us at the Indian sovereign limit, which given thedominance of Indian assets was as high as could be expected. We raised $600million in a bond issue and the Board believes that we have a well balanced mixof funding in place for our current expansion projects. Over the year we havespent $735 million on our $2.2 billion project pipeline. This brings totalspending to date to $1,029 million. We remain confident of remaining within ourgearing target of under 45% of Capital Employed(1) throughout our current spending programme. We believe that there are several opportunities that will allow us to developour growth strategy further and extend the expansion pipeline. This will takeadvantage of the strong cashflow that will be produced as the current projectscome into production and reflects the many options that we have to continue toachieve volume growth in the long term. We are reviewing further aluminium smelting capacity, to take advantage of theproduction from VAL, with the possibility over time of an additional 500,000tonnes of finished aluminium per annum. We also signed a memorandum ofunderstanding with the State Government of Orissa regarding an iron ore projectwith related steel facilities. These are both at an early stage and any projectswill be pursued on the basis of maintaining positive financial returns. Thereare opportunities for expansions elsewhere in our existing operations, and weare evaluating projects at both zinc and copper. This has been an exceptional period for metal prices driven by strong demandfrom China. This has also had an impact on several input prices, particularlyenergy related costs such as oil and coal. There has been much talk of a supercycle and the potential for a prolonged period of above average commodityprices. Our policy is to remain focused on delivering our new projects andlowering our costs, which will allow us to take advantage of the significantgrowth opportunities offered within India and to stay profitable regardless ofthe commodity market cycles. A new Government, led by the Congress party, was elected in India in May 2004.The new Government has maintained a policy of growth and liberalisation. Metaluse in India continues to grow above global levels and the long term attractionsof the Indian economy remain considerable. India has been much talked about asan attractive investment destination, attracting growing levels of foreigninvestment and the potential to become a major regional manufacturing hub. Ibelieve we are well placed both to take advantage of this growth and also tocontribute to the future development of India by providing vital basicresources. In March 2005 I took over as Chairman of the Board and KK Kaura became ChiefExecutive. I would like to thank Michael Fowle, my predecessor as Chairman, andJean-Pierre Rodier for their guidance and input during the past year. Sir DavidGore-Booth sadly died during the year and his counsel will be greatly missed. Iam pleased that we have appointed three new Non-executive Directors withcomplementary experience and we intend to appoint a further senior independentNon-executive Director in due course. The Board is proposing a final dividend for the year of 11.55 US cents perOrdinary Share, an increase of 5% on last year's implied final dividend of 11.0US cents. Last year we paid a single dividend of 5.5 US cents per OrdinaryShare, for the four months for which we were listed, equivalent to an annualpayment of 16.5 US cents per Ordinary Share. The total dividend for the year is17.05 US cents per Ordinary Share. The increase in dividend at this early stagereflects the Board's confidence in continued successful delivery and we remaincommitted to a progressive dividend policy. The delivery of our projects and the growth of our business could not have beenachieved without the efforts of the Board, management and employees of Vedanta,who have shown great commitment to building this success. The success in all areas of our strategy over the past year has been encouragingand in the next twelve months we will see progressive benefit from the recentlycommissioned facilities at Chanderiya and Tuticorin and a full year'scontribution from KCM. We remain focused on completing Korba and Orissa as wellas evaluating opportunities, to extend our unique growth pipeline. We areconfident of showing good progress over the next twelve months and deliveringvalue to all stakeholders. CHIEF EXECUTIVE'S STATEMENT Over the past twelve months we have shown good operational delivery on ourexisting assets and made excellent progress on our expansion pipeline. The yearwas again weighted towards the second half with production, turnover andprofitability rising through the year in all areas. Zinc and aluminium bothenjoyed significant increases in profitability in comparison to the previousyear. The acquisition of KCM, in November 2004, also contributed to our turnoverand margin. Strong metals prices were a consistent factor, which more thanoffset high energy costs and the impact of tariff cuts. Group turnover has increased 46% to $1,884 million, compared to last year, andEBITDA has increased by 41% to $455 million, of which $295 million was in thesecond half of the year, including $76 million from KCM. Operating profit hasincreased by 40% to $332 million Strong metals prices have more than offsetrises in some input costs, such as energy, and reductions in import tariffs bythe Government. EBITDA margin has remained consistent at 24%. Underlying Profit(1) has increased by 82% to $138 million from $76 million, and EPS(1) by 82% to48.1 US cents per Ordinary Share. This reflects the benefit of the successfulchanges in the Group structure, which has increased the proportion of earningsretained within the Group. The expansions at the Tuticorin copper plant and Chanderiya zinc plant werecompleted shortly after the year end and the aluminium expansion at BALCO is inits final phase before commissioning. There are many opportunities to developKCM and we have a clear strategy on how to take these assets forward. Theseexpansions should result in steadily building production over the coming year,with the ramp-ups of copper, zinc and aluminium contributing towards a rise inproduction in the second half of the current year. Tariffs on metal imports into India were cut twice during the year, at a specialpost-election budget in July 2004 and at the annual budget in February 2005.Tariffs now stand at 10% on each of our major metals, around the levelrecommended in the report produced by the Kelkar Committee, for the Government. Growth in India has continued at a good pace and this has been reflected indemand for metals. The new Government has continued with policies to promotegrowth and development in India. Industrial production in India has risen byaround 8% during 2004 and official Government forecasts anticipate similarlevels for this financial year. Metals' demand should also benefit from atargeted rise of 14% in infrastructure spend by the Government. India is wellplaced to play a growing role in the global metals and minerals markets, bothfrom domestic demand and the development of resources and facilities. Our organisation continues to develop and grow. The use of programmes such asTPM and Six Sigma, along with the assistance of external consultants andreviews, help to deliver operational improvements, utilise our assets better,develop and retain our staff and, importantly, to improve service to ourcustomers. Aluminium The existing assets performed well over the year and the results benefited fromthe strong increase in the metal price. The expansion project at Korba is ontrack for commissioning in March 2006, taking our aluminium capacity to around400,000 tpa and the new 1 mtpa alumina refinery at Orissa is making goodprogress. The total production of finished aluminium in the financial year was 135,926tonnes, an increase of 5% on last year, and in line with capacity. Theintroduction of a fifth boiler at BALCO allowed more stable power output withfewer interruptions in power supply and better control of management processesat both companies also helped to increase output. We sold around 35,000 tonnesof rolled products from BALCO over the year. Turnover in the Aluminium Business increased by 26% to $282 million, with EBITDAincreasing 41% to $76 million. The increase in turnover and profitability wasprincipally due to the strength of the price for aluminium, with aluminiumprices, as quoted on the LME, averaging $1779 per tonne over the year, anincrease of 24% over the previous year. Tariffs on the import of aluminium werereduced in February 2005 from 15% to 10% and thus the impact from tariff changesin the financial year was limited. Unit costs rose to $1378 per tonne, an increase of 12.5% from the previousfinancial year. This was primarily caused by the increase in all key inputprices, notably petroleum products, coal and caustic soda. The expansion plannedat BALCO will introduce more modern 320 KA pre-baked technology, giving thepotential for a significant reduction in unit costs, mainly through lower powerconsumption and better heat rate from the new power plant. We estimate that demand for aluminium in India increased by around 10% over theyear, driven by strong demand from the power, construction, automotive andpackaging industries. Power transmission and electrical applications continue tobe the single largest domestic user of aluminium. The domestic market will see significant capacity expansion over the next threeyears. Consumption in the country is still less than 1 kilogram per capita andwe believe that consumption growth over the next three years should average over9 to 10% per annum with demand being driven by the construction, automotive andpower industries. The expansion project at Korba has made excellent progress over the past year.We have invested a further $431 million over the period, to bring our totalspend to $562 million, against a budget $900 million. The captive power plant isat an advanced stage and we anticipate being able to use the first of the fourpower units in June 2005. The pot rooms are complete and technology testing onthe pots has been successfully undertaken. We will start bringing pots intoproduction on a progressive basis as the power plants are introduced. We should, therefore, see some increase in output towards the end of the yearfrom these first pots and remain on track for our commissioning date of March2006. I look forward to reporting next year on this expansion, which willtransform the size, dynamics and cost of production of this Business. Alumina At our major alumina project in Orissa, we have made substantial progress on thealumina refinery with all of the civil works and construction well in hand andaround halfway to completion. To date, approximately $101 million has beeninvested. There have been some public interest submissions to a Supreme Court ofIndia sub-committee, regarding the environmental clearances for the bauxitemining and these are currently being addressed. As mentioned in last year'sannual report, we have investigated the possibility of introducing a partner inthis project and this option remains under consideration. Copper The assets in India made limited headway over the year, given flat TC/RCs(1) andthe impact of tariffs. The new smelter received permission to operate in April2005 and will take our capacity to 300,000 tpa. In November 2004 we acquiredKCM, making Vedanta one of the top five global copper producers. Copper - India/Australia Production of copper cathode in India declined by 4% from the previous year to171,992 tonnes. Production was lower in the first quarter as a result of aplanned shutdown of 20 days at the smelter, after a long campaign life of 24months. In the second half of the year this was almost fully recovered, with theplant running above capacity through both the third and fourth quarters. Turnover increased 29% to $766 million, though EBITDA declined by 10% to $85million. The rise in turnover reflects the significant increase in the copperprice over the period. The average price on the LME over the financial year was136 US cents per pound, an increase of 68% on the previous year. Around 20% ofour copper concentrate was supplied by our own mines in Australia and theseoperations benefited from this rise. The average TC/RC we received in the year was 8.6 US cents per pound, similar tothe levels of 2003/4. TC/RC's in the first half were 6.6 US cents per pound andwere improving towards the end of the year. We anticipate that our TC/RC'sshould increase significantly in the current year. We have made good progresstowards our strategy of obtaining around two-thirds of our concentrate on longterm contract, having signed some frame contracts over the year. The impact of tariffs was most significant in the Copper Business. Over thecourse of the year, tariffs on imports of finished copper were reduced from 20%to 10%. Duty assistance on exports of copper was also reduced during the year.On current prices of copper cathodes this export assistance broadly offsets thetariff of 5% paid on copper concentrate imports. Cash costs were improved from 7.8 US cents per pound to 7.1 US cents per pound.This was driven by better recovery of metal and improved by product management,notably sulphuric and phosphoric acids. Our copper operations in India arealready in the first quartile of cash costs for copper producers globally,however we believe we can improve this further and are targeting a cost of 6 UScents per pound. During the year, further drilling was undertaken at CMT and a further 13.2million tonnes of ore has been added to reserves, reflecting an extension to themine life of around five years. CMT produced around 27,600 tonnes of copper inconcentrate over the year and the operation gained substantially from theincrease in the copper price. Production at TCM was around 12,300 tpa. Theoperation is likely to be closed in the first quarter of the 2005/06 financialyear and closure costs, as estimated, have been fully provided. We estimate that growth in demand for copper in India has grown at around 7% perannum, over the past two years. This growth rate should benefit from growingpower sector demand, construction, air conditioning and the automotive sector.At the end of 2002, India had power generation facilities of 105,000 mw(1); thisis planned to double by 2012. Shortly after the year end we started commissioning the new copper smelter atTuticorin. This will take our capacity to around 300,000 tpa of copper anode. Anew refinery of 120,000 tpa and rod plant of 100,000 tpa has also been built atTuticorin, so that the additional anode will be processed at Tuticorin. Thiswill allow production of around 300,000 tpa of cathode and 240,000 tpa of rod.The expansion also included a new 22.5 mw power plant, and new acid and oxygenplants. The smelter is producing metal and we are moving through the ramp-upphase, towards full production in the second half of the year. Copper - Zambia In November 2004 we acquired a 51% holding in Konkola Copper Mines. KCM is thelargest mining company in Zambia, contributing significantly to the nation'seconomy and export earnings. Over the five months from the date of acquisitionKCM produced 67,547 tonnes of copper cathode and contributed $76 million ofEBITDA to the Group. The cash cost of production was 106 US cents per pound. A new chief executive, Mr CV Krishnan, has been appointed to KCM. He hasextensive experience in the Copper Business, having worked previously with theGroup at Tuticorin. The immediate aim is for a substantial improvement inoperations and processes. We are seeking to raise plant availability and deliverbetter process management. Training for staff is taking place along with thetransfer of around 15 specialists from elsewhere in the Group. There are several projects underway at KCM, all with the aim of enhancingproduction and reducing costs. A new 500 tonne per day acid plant is being builtto improve the availability of sulphuric acid and reduce costs for the leachingplant. We are also moving to de-bottleneck the smelter and improve recovery inthe smelters and concentrators. The most significant project at Konkola is the Konkola Ore Body ExtensionProject. This involves mining the ore below the current depth at Konkolaunderground mine and expanding production from 2 million tonnes per annum to 6million tonnes per annum. Our intention is to make full use of the existinginfrastructure and thereby deliver the project at a lower cost and shortertimescale than had previously been thought possible. The project should alsohave several economic and environmental benefits for the surrounding area. It isintended that the additional production of concentrates from Konkola will betreated in the smelter at Nkana, producing copper cathodes for export. Zinc The Zinc Division performed exceptionally well over the period, assisted bystrong sales and a firm zinc price. Our expansion at Chanderiya was completedand trial production commenced in May 2005 and this will increase our refinedzinc output close to 400,000 tpa of finished metal. Mine output has improved considerably and all the mines have performed well.Rampura Agucha in particular did better than the previous year due tode-bottlenecking. This is reflected in an increase in mined metal content of 7%over the year to 354,641 tonnes. Production of refined zinc declined by 4% to212,445 tonnes, due to inconsistent qualities of met coke, caused by shortsupply, which impacted the production process. Sales of zinc metal at about 289,000 mt are about 12% higher than the prioryear, using our own production of 212,445 mt(1) along with additional tonnagefrom tolling activities and stocks. Turnover rose 21% to $486 million and EBITDA rose 22% to $219 million. Bothturnover and profitability were driven by the increase in finished metal salesand the strong rise in the zinc price. The average price for zinc over theperiod, quoted on the LME, rose 34% to $1,108 per tonne. This has more thanoffset rising costs and tariff reductions. Cash costs of production rose 22% to$695 per tonne. These were impacted by rising energy prices and the costs of metcoke. Import tariffs on zinc were reduced in 5% stages, from 20% to 10% in July2004 and February 2005. Zinc demand in India grew at around 10% over the year. The growth is driven bygalvanising, which protects steel from corrosion, and the end users ofgalvanised materials in construction, the automotive sector, housing and powertransmission. About 50% of zinc demand is driven by sheet galvanising. There have been focused efforts on expanding new zinc applications, notablygalvanised reinforcement bars and structures used in construction. These shouldbenefit from Government infrastructure spend. Shortly after the year end we commissioned the new facilities at Chanderiya zincsmelter. The final cost of the expansion is around 15% below the budget of $425million, set out at the time of Listing. First metal was poured in May 2005, andwe will build up towards full capacity in the second half of the financial year,which will take our total zinc capacity close to 400,000 tpa. The new facilitiesshould assist in reducing unit costs in the future towards our target of $500per tonne, subject to variations in energy and coal prices. The operations arealready in the first quartile of global costs and reaching our target will makethem one of the lowest cost zinc producers in the world. The lead smelting facilities are currently being increased by 50,000 tpa to taketotal output to 85,000 tpa. These new facilities should be commissioned by theend of the financial year. The cost of this will be around $35 million. Exploration The replacement and growth of our resource base is fundamental to ourBusinesses. During the year, we appointed a Head of Exploration, who will lead ateam responsible for exploration across the Group. The team is tasked withdeveloping our competence in this area and producing a meaningful explorationprogramme. The importance of exploration has already been demonstrated at our zincoperations. The reserves at Rampura Agucha have been increased to 50.1 milliontonnes from 40.1 million tonnes. These contain zinc at 12.8% and lead at 1.9%.The life of the mine has increased to well over 15 years, even at the increasedlevels of production required by the expansion at the smelter. We will continuewith further exploration work around the mines. New Projects The four projects set out at Listing are around 50% complete in terms of budget,with two already commissioned, zinc and copper, and the third, aluminium, ontrack for the end of the 2005/06 financial year. Costs are within budget, inspite of input cost pressures, such as steel, through a combination of thetiming of the initial contracts and sound project management. We believe that there are some significant further opportunities to expand ourproduction in the future and this coincides with a unique period in India'seconomic growth and development. There is also the potential to move our Zambianassets forward considerably. This will extend our pipeline of growth into thefuture and retain our profile of growth led through projects. We are undertakinga detailed feasibility study for the development of aluminium production in thestate of Orissa. We are at a preliminary stage in evaluating the potential foriron development in the same state. We believe that there is potential forfurther additions in other areas, particularly aluminium and zinc, and thesepossibilities should develop over the year ahead. Sustainable Development We believe in sustainable development and are committed to effective managementof health, safety, environment and community development as an integral part ofour business. The acquisition of KCM brings our total workforce to around 22,450 and as theGroup has grown, so have our responsibilities to our employees and thecommunities around us. We have made considerable progress over the past yearwith many initiatives undertaken. We have appointed Group managers for both HSEand CSR, who will further develop tasks and performance indicators across theGroup. We seek to meet needs in the community by providing assistance in the three keyareas of primary health, education and distress relief. It is our wish to assistthose around us, far beyond their minimum needs. Across the Group we undertakeconsiderable work ranging from funding schools and school meals, to skilltraining programmes for adults and the sponsorship of sports. There is a widerange of activity in health care, from providing centres and medicine toextensive treatment programmes. KCM has a strong track record in malaria and HIVprogrammes, the learning from which we can spread around the Group. Over the year we have undertaken several initiatives to ensure that we meetenvironmental requirements and the use of third party audits by internationalspecialists, has validated our belief in our practices. The selection of the newtechnology being introduced in our expansion programmes will assist our effortsby improving on energy efficiency and waste recycling. Investment has takenplace to improve air quality well within current permissible standards, inanticipation of more stringent legislation that will inevitably be introduced inthe future. Outlook This year will see further significant delivery of the tasks we set out atListing, as new production ramps up from our copper and zinc expansions and ouraluminium project is fully commissioned. I also anticipate improvements in production and costs at KCM. The delivery of our strategy will reduce our unit costs, through the increase in volumes, new technology and greater productivity and take us towards our goal of being in the top decile of cost of production in all of our Businesses. Our growth strategy combined with growing demand for metals in India gives a positive outlook and I look forward to reporting on this over the year. FINANCIAL REVIEW EBITDA increased 41.0% to $455.0 million, including a $76.0 million contributionfrom KCM. Depreciation rose to $101.7 million split between $77.5 million fromour existing Businesses and $24.2 million from KCM. Depreciation is forecast torise next year with the commissioning of new plant in our Aluminium, Zinc andCopper Businesses and a full year of depreciation from KCM. During the year, foreign exchange losses of $11.2 million in the first half werelargely reversed in the second half resulting in a net foreign exchange loss of$1.6 million in the year. This compared to the $14.0 million gain arising duringthe prior year. Group operating profit after exceptional items increased to $331.8 million, a39.9% increase. Operating exceptional items were $21.9 million; these related toa $4.1 million charge arising from voluntary retirement schemes (2004: $13.3million) and a $17.8 million impairment charge recognised against certainnon-core assets identified in last year's annual report. Whilst these non-coreassets have been substantially written down, we are pursuing a number ofopportunities to maximise realisation over and above their net carrying value of$52 million (2004: $65 million). Foreign Exchange and Net Interest Net interest income was $3.6 million compared with a $1.3 million net interestcharge in the prior year. This included a net foreign exchange loss of $7.6million (2004 $14.1 million gain) arising on foreign currency funds andborrowings within the Group. Investment income totalled $41.3 million (2004:$39.7 million) and interest payable $37.7 million (2004: $41.0 million); thisexcludes net interest capitalised on our growth projects of $24.2 million (2004$4.6 million). Taxation The tax rate in the year was 29.4% (2004: 32.6%) split between current tax of19.7% (being the cash rate for the Group) and deferred tax of 9.7%. The tax ratefor the current year benefited from several factors including the acquisition ofKCM with significant tax losses, a 3% reduction in Indian income tax rates andfiscal breaks arising from the extensive capital expenditure programme. Thesemostly occurred in the second half of the financial year reducing the full yeartax rate compared to that estimated in the interim accounts. The tax rate isexpected to be moderately higher in the future although the capital expenditurefiscal breaks will continue. Minority Interests Minority interests have been restated to reflect a new accounting policy,required by UITF Abstract 38 'Accounting for ESOP Trusts'. The SEWT's holding of3.2% in the issued share capital of Sterlite is reclassified from otherinvestments and instead, recorded as a reduction in shareholders' funds. From aGroup perspective, the shares are effectively treated as cancelled, whichincreases Vedanta's Economic Interest in Sterlite. As a consequence of thischange in accounting policy, the minority interest reflected in the profit andloss account decreased from 57.7% to 54.1% for the year ended 31 March 2004. After reflecting the change in accounting policy, our share of post-tax profitabsorbed by minority interests decreased from the restated 54.1% for the prioryear to 48.9% in the current year, split as to 50.6% in the first half of theyear and then reduced further to 48.0% in the second half of the year, or 44.5%when excluding operating exceptional items. This reduction reflects the successin implementing our strategy to increase ownership in subsidiaries, principallyarising from Sterlite's rights issue concluded in September 2004. Furtherdetails are discussed below. Profit for the Year The profit for the year was $120.0 million against $72.3 million in the previousyear, an increase of 66.0%. This increase was due to a combination of theimproved results reported across our Businesses and the reduction in minorityinterests. The Underlying Profit was $137.7 million, an improvement of 80.7% against theprior year. Underlying Profit excludes the effects of exceptional items, theirtax and minority interest impact, and is a more informed measure of therecurring performance of the Group. Earnings per Share and Dividends EPS based on profit for the year rose by 65.6% to 41.9 US cents per OrdinaryShare whilst EPS based on Underlying Profit rose by 80.8% to 48.1 US cents perOrdinary Share. There was no material difference between basic EPS and dilutedEPS as the only effects on profit after dilutive adjustments are shares to beissued under the Vedanta Resources LTIP totalling $0.2 million, and anadjustment in respect of the convertible bond in Sterlite totalling $1.9million. The Board has proposed a final dividend of 11.55 US cents per Ordinary Share inrespect of the year ended 31 March 2005 which, together with the interimdividend of 5.5 US cents per share paid in January 2005, gives a total for theyear of 17.05 US cents per share. The final dividend is increased by anequivalent of 5% on the previous year when a final dividend of 5.5 US cent pershare was paid for the four month period to 31 March 2004 following theCompany's Listing in December 2003. The Company has a progressive dividendpolicy but recognises that in the year there was no benefit from the $2.2billion growth projects. Cash Flow During the year, there was a decrease in net cash of $496.6 million reflected ina net cash position of $422.3 million as at 31 March 2004 moving to a net debtposition of $74.3 million as at 31 March 2005. This movement arose fromsignificant Expansion Capital Expenditure which more than offset free cash flow. The Free Cash Flow in the year of $204.4 million is lower than last year'sfigure of $335.4 million, which had benefited from extended trade creditreceived of over $200 million included within the working capital movement. Thisyear there was a significant working capital outflow of $180.2 million due to acombination of a higher level of copper concentrate inventory compared to theprevious year's unusually low level and increased trade debtors arising fromstrong fourth quarter sales volumes and selling prices. Sustaining CapitalExpenditure was again tightly controlled, this year including KCM, increasingmodestly to $67.1 million against $64.5 million in the previous year. Tax paid was limited to $65.8 million, equivalent to 19.8% of profit before tax,benefiting from the advantageous fiscal breaks noted earlier and tax lossesincluding five months of KCM ownership. After the Group's expansion projects arecommissioned it is anticipated that the cash tax rate will remain at theselevels in future years. The main feature of the year was progress with the $2.2 billion expansionprojects with $734.6 million spent in the year bringing the total spent at 31March 2005 to $1.03 billion, approximately 47% of the planned $2.2 billionprogramme. A further $1.2 billion was outstanding at the year end of which 40%has been committed. The most significant acquisition expenditure in the year related to the purchaseof a 51% equity interest in KCM on 5 November 2004 for $28.2 million. This acquisition, at a total gross cost of $49.2 million, was implementedthrough a $25.0 million subscription to newly issued shares by KCM which hasbeen retained in the enlarged group and agreement to pay $23.2 million to ZCI, aminority shareholder in KCM, comprising an initial payment of $2.3 million atthe date of acquisition, with the remaining $20.9 million payable in equalinstalments over four years from 31 December 2005. Minority Interests and Simplification of Ownership A major element of the Group's strategy at the time of Listing was toconsolidate the ownership interests in subsidiary companies where significantminority interests were present. During the last year the Group's EconomicInterests in Sterlite, BALCO, HZL and VAL all showed significant increases asset out below. Sterlite During the year, substantial progress has been achieved against this strategicobjective for Sterlite as shown below: •in April 2004, 2.4% of Sterlite's issued share capital was purchased from the SEWT for $21.4 million. As the SEWT is consolidated, this transaction had no cash impact at a consolidated level, although cash within the SEWT is restricted. This purchase was in addition to the acquisition of 4.98% of Sterlite's issued share capital from the SEWT in January 2004 for $58.0 million; and •in September 2004 , the Group completed the Sterlite rights issue, which raised $434 million in aggregate. Of this, only $1 million was funded by minority shareholders with the balance of $433 million being funded by the Company through the investment of proceeds raised from the Listing. Subscribing to the rights issue in this way was a highly tax efficient manner of remitting funds to our projects in India, and also ensured the Company's Economic Interest in Sterlite increased substantially. However, towards the end of the year, $25.8 million of Sterlite's convertiblebond issued with a face value of $50 million was converted into 2.13 millionSterlite ordinary shares, thereby reducing debt by $25.8 million, but dilutingthe Group's Economic Interest in Sterlite by 1.4%. Conversions in the periodfrom 31 March 2005 to 1 June 2005 were minimal at $1.5 million. These changes resulted in the Group's Economic Interest in Sterlite increasingby 9.1% from 1 April 2004 to 31 March 2005. If the outstanding convertible bonds were converted into Sterlite's ordinaryshares, the conversion would result in dilution of the Group's Economic Interestby a further 1.4%. BALCO Progress on the exercise of the option to acquire all or substantially most ofthe shares in BALCO held by the Government of India continues. The Group hasconfirmed to the Government that it wishes to exercise its option andconsequently a valuation of the shares by an independent valuer, in accordancewith the shareholder agreement, is in process. Discussions with the Governmentcontinue on the matter of offering shares not exceeding 5% of the total to theemployees. MALCO Whilst we were unsuccessful in our attempt to acquire the 20% interest in MALCOheld by minority interests, market conditions will be continuously reviewed toensure our options are kept open. Balance Sheet Capital Employed increased in the year to $1.80 billion from $0.99 billion lastyear mostly due to $734.6 million of capital expenditure incurred for the majorgrowth projects. For the year ended 31 March 2005, ROCE was 13.7% (2004: 16.9%)although $1.03 billion was attributable to the major projects on which no returnwas made during the year. Excluding this project capital work in progress, ROCEincreased in the year to 32.0% (2004: 24.1%). Working capital movements have also had an upwards effect on capital employed asdid the acquisition of KCM where net assets acquired of $201.4 million wasoffset in part by negative goodwill on acquisition of $56.6 million. The balance sheet is funded by equity shareholders' funds totalling $1.05billion (2004: $990.9 million), minority interests of $681.6 million (2004:$423.2 million) and net debt of $74.3 million (2004: net cash of $422.3million). It is expected that based on current investment plans net debt willpeak during the next two years after which it should decrease as the majorprojects become operational. Provision for liabilities and charges increased to $424.2 million from $162.9million from the prior year, which is largely attributable to the KCMacquisition. Transition to International Financial Reporting Standards All companies listed in the European Union are required to present consolidatedfinancial statements for accounting periods commencing from 1 January 2005 thatcomply with IFRS. Vedanta's first set of IFRS-compliant results will be thefirst quarter results to be announced in July 2005, followed by its interimresults for the six months ending 30 September 2005 to be announced in November2005. Vedanta will prepare its first full year IFRS-compliant consolidatedfinancial statements for the year ending 31 March 2006. The IFRS transitionproject is well advanced and the Group is on course to meet its reportingdeadlines. FINANCIAL AND PRODUCTION HIGHLIGHTS -------------------------------------------------------------------------------- 31 March 2005 31 March 2004--------------------------------------------------------------------------------Group turnover ($ million) 1,884.2 1,289.5Group EBITDA ($ million) 455.0 322.7EBITDA margin 24.1% 25.0%Group operating profit ($ million) 331.8 237.1Group operating profit margin 17.6% 18.4%Group operating profit before exceptional 353.7 250.4items ($ million)Group operating profit before exceptional 18.8% 19.4%items marginGroup operating exceptional items ($ million) (21.9) (13.3) Net interest ($ million) 3.6 (1.3)Effective tax rate 29.4% 32.6%Equity minority interests 48.9% 54.1%Profit for the year ($ million) 120.0 72.3Underlying Profit ($ million) 137.7 76.2Return on capital employed 13.7% 16.9%Average $/INR exchange rate 44.96 45.92-------------------------------------------------------------------------------- SEGMENTAL ANALYSIS --------------------------------------------------------------------------------Copper 31 March 2005 31 March 2004--------------------------------------------------------------------------------Production cathode- Sterlite (MT) 171,992 178,654Production cathode- KCM (MT) 67,547 -Production copper rods (MT) 125,406 122,713Unit cost- Sterlite (US cents per lb) 7.1 7.8Unit cost- KCM (US cents per lb) 106.2 -Turnover ($ million) 1014.7 592.8EBITDA ($ million) 161.2 94.1Net assets before net (debt)/cash ($ million) 484.1 160.2-------------------------------------------------------------------------------- --------------------------------------------------------------------------------Aluminium 31 March 2005 31 March 2004--------------------------------------------------------------------------------Production MALCO (MT) 35,649 32,226Unit cost MALCO (US cents per lb) 66.5 53.8Production BALCO (MT) 100,277 96,829Unit cost BALCO (US cents per lb) 61.1 56.2Turnover ($ million) 281.7 223.4EBITDA combined ($ million) 75.6 53.6Net assets before net (debt)/cash ($ million) 752.9 353.9-------------------------------------------------------------------------------- --------------------------------------------------------------------------------Zinc 31 March 2005 31 March 2004--------------------------------------------------------------------------------Production (MT) 212,445 220,664Unit cost (US cents per lb) 31.5 25.9Turnover ($ million) 486.4 401.1EBITDA ($ million) 218.8 179.3Net assets before net (debt)/cash ($ million) 589.6 391.4-------------------------------------------------------------------------------- CONSOLIDATED PROFIT AND LOSS ACCOUNT ---------------------------------------------------------------------------------------------------------------- Continuing Year Acquisition operations Total ended Year ended Year ended Year ended 31 March 31 March 31 March 31 March 2004 2005 2005 2005 (restated) $ million $ million $ million $ million Note ----------------------------------------------------------------------------------------------------------------Group and share of associate's turnover 249.2 1,645.8 1,895.0 1,300.6Less: associate's turnover - (10.8) (10.8) (11.1)---------------------------------------------------------------------------------------------------------------- Group turnover 3 249.2 1,635.0 1,884.2 1,289.5Cost of sales (161.3) (1,253.5) (1,414.8) (973.9)----------------------------------------------------------------------------------------------------------------Gross profit 87.9 381.5 469.4 315.6Selling and distribution costs (8.0) (43.5) (51.5) (35.6)Administration expenses (27.7) (84.3) (112.0) (60.1)-----------------------------------------------------------------------------------------------------------------normal (27.7) (62.4) (90.1) (46.8)-exceptional - (21.9) (21.9) (13.3)----------------------------------------------------------------------------------------------------------------Other operating income 0.5 25.4 25.9 17.2----------------------------------------------------------------------------------------------------------------Group operating profit 3 52.7 279.1 331.8 237.1----------------------------------------------------------------------------------------------------------------Operating profit before 52.7 301.0 353.7 250.4operating exceptional itemsOperating exceptional items - (21.9) (21.9) (13.3)----------------------------------------------------------------------------------------------------------------Share of operating loss in associate - (2.7) (2.7) (1.2)Loss on disposal of fixed assets - (0.4) (0.4) (1.2)----------------------------------------------------------------------------------------------------------------Profit on ordinary activities before interest and taxation 3 52.7 276.0 328.7 234.7Investment income 41.3 39.7Interest payable and similar charges (37.7) (41.0)----------------------------------------------------------------------------------------------------------------Profit on ordinary activities before taxation 332.3 233.4Tax on profit on ordinary activities 4 (97.6) (76.0)---------------------------------------------------------------------------------------------------------------- Profit on ordinary activities after taxation 234.7 157.4Equity minority interests (114.7) (85.1)---------------------------------------------------------------------------------------------------------------- Profit for the financial year 120.0 72.3Dividends 6 (48.9) (15.8)---------------------------------------------------------------------------------------------------------------- Retained profit for the financial year 71.1 56.5----------------------------------------------------------------------------------------------------------------Basic earnings per share (US cents/share)Profit for the financial year 5 41.9 25.3Underlying Profit for the financial year 5 48.1 26.6----------------------------------------------------------------------------------------------------------------Diluted earnings per share (US cents/share)Profit for the financial year 5 41.0 24.9Underlying Profit for the financial year 5 47.2 26.2---------------------------------------------------------------------------------------------------------------- There is no material difference between the profit on ordinary activities beforetaxation and the profit for the year stated above, and their historical costequivalents. CONSOLIDATED BALANCE SHEET -------------------------------------------------------------------------------- 31 March 2004 31 March 2005 (restated) $ million $ million Note--------------------------------------------------------------------------------Fixed assetsIntangible assets (52.6) 3.6--------------------------------------------------------------------------------Positive goodwill 10.8 12.2Negative goodwill (63.4) (8.6)--------------------------------------------------------------------------------Tangible fixed assets 2,275.0 1,268.4Investment in associate 3.3 2.7Other investments 24.8 27.5-------------------------------------------------------------------------------- 2,250.5 1,302.2--------------------------------------------------------------------------------Current assetsStocks 336.3 199.9Debtors 464.2 245.5Current asset investments 1,386.0 1,188.5Cash at bank and in hand 61.6 52.7-------------------------------------------------------------------------------- 2,248.1 1,686.6--------------------------------------------------------------------------------Creditors: amounts falling due within one yearShort-term borrowings (218.4) (295.3)--------------------------------------------------------------------------------Loans (194.7) (245.8)Convertible bonds (23.7) (49.5)--------------------------------------------------------------------------------Other current liabilities (723.2) (586.5)-------------------------------------------------------------------------------- (941.6) (881.8)--------------------------------------------------------------------------------Net current assets 1,306.5 804.8--------------------------------------------------------------------------------Total assets less current liabilities 3,557.0 2,107.0Creditors: amounts falling due after more than one year (1,344.7) (529.9)Provisions for liabilities and charges (424.2) (162.9)Non equity minority interests (59.4) -Equity minority interests (681.6) (423.3)--------------------------------------------------------------------------------Net assets 3 1,047.1 990.9--------------------------------------------------------------------------------Capital and reservesCalled up equity share capital 28.7 28.6Shares to be issued 0.9 -Share premium account 18.6 18.6Merger reserve 4.4 4.4Other reserves 26.9 8.3Profit and loss account 967.6 931.0--------------------------------------------------------------------------------Equity shareholders' funds 8 1,047.1 990.9-------------------------------------------------------------------------------- CONSOLIDATED CASH FLOW STATEMENT -------------------------------------------------------------------------------- Year ended Year ended 31 March 2005 31 March 2004 Note $ million $ million--------------------------------------------------------------------------------Net cash inflow from operating activities 9 303.2 496.3-------------------------------------------------------------------------------- Returns on investments and servicingof financeInterest received and other income 57.8 34.6Interest paid (64.1) (42.0)Dividend received from fixed asset investments 2.8 0.8Dividend paid to equity shareholders (15.8) -Dividend paid to minority shareholders (7.7) (10.1)-------------------------------------------------------------------------------- (27.0) (16.7)-------------------------------------------------------------------------------- Taxation (65.8) (57.5)-------------------------------------------------------------------------------- Capital expenditure and financial investmentPayments to acquire tangible fixed assets (535.3) (349.0)Proceeds from the sale of tangible fixed assets 14.1 2.8Purchase of fixed asset investments - (9.2)Proceeds from sale of fixed asset investments - 1.8-------------------------------------------------------------------------------- (521.2) (353.6)-------------------------------------------------------------------------------- AcquisitionsPurchase of interest in subsidiary undertakings (28.3) (81.1)Net cash acquired with subsidiaries 41.2 -Investment in associate (6.2) -Buyback of shares from minorities (2.3) --------------------------------------------------------------------------------- 4.4 (81.1)-------------------------------------------------------------------------------- Cash outflow before use of liquid resources andRelated Shares:
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