Despite Indian Supreme Court opposition to a bauxite mining project in India, Standard & Poor's Rating Services Monday reversed its outlook from negative to positive for Vedanta Resources PLC, and affirmed its ‘BB' long-term foreign currency corporate credit ratings for the UK and India-based mega-miner.
The outlook revision reflects greater clarity on some company developments, especially the uncertainty on operating the alumina refinery in Orissa, India, Primary Credit Analyst Anshukant Taneja and Secondary Credit Analyst Joey Chew, both of Singapore, wrote. Furthermore, the company's power-generation project is expected to be funded and constructed as scheduled, though its cash flow contributions have not been factored into the current ratings.
These events, in the backdrop of steady improvement in the credit metrics and greater clarity on future capital commitments, support the positive outlook on the ratings.
Vedanta had been given a negative outlook by S&P after the Indian Supreme Court declined the company permission to mine for bauxite in the Lanjigarh area of Kalahandi district of Orissa. A special bench said at the time, We are not inclined to approve of the project in its present form.
The hilly areas of the southern part of the state of Orissa are rich in bauxite. Orissa has 69.7% of the total bauxite deposits of India mainly concentrated in the K-B-K districts (Koraput, Bolangir and Kalahandi). Vedanta subsidiary Sterlite Industries India wants to construct an open pit mine in the Niyamgiri hills, which have 73 million tonnes of high quality bauxite. The alumina refinery plant will be at the mining site
However, opponents say the mine will destroy hills tribal people consider sacred, force them from their homes, and destroying their livelihoods, based on farming, hunting and collecting fruits and species from the forest. The planned mining area includes 120 forest communities, a number of which would be relocated to accommodate the mining project.
Enviromental NGOs argue that mining in Niyamgiri would violate the basic environmental and human rights conditions of tribal development and poverty reduction.
The Indian government supports the mine. Officials of the state government said since Orissa is a poor and backward state, there is a need for industrialization to help its economy.
The high court said Vedanta could withdraw from the venture, and, instead, would consider an application from Sterlite Industries.
On the Vedanta's bauxite mining issue, while the company has agreed to the court's requirements and has made the requisite submissions, a final court ruling is awaited, S&P said Monday. Vedanta has confirmed that the courts and regulatory authorities have not opposed the refinery operations, even though the issue of linkages to the captive mines awaits a final court decision.
Meanwhile, a US$40 million rehabilitation plan (for displaced residents and the environmental impact from the mining site) has been submitted to the court for final approval, according to S&P. The first production of the stream of the finery is now operational, with bauxite from its own mines at Bharat Aluminum Co. Ltd. and third-party sources, and has started contributing to operating cash flows.
However, S&P credit analyst Taneja noted Monday that its overall business would be weaker in contrast to a fully integrated operation. Nonetheless, if access to the mines is not approved and the current operating arrangements (i.e., third-party bauxite) continue, this may not, by itself, weaken the overall risk profile of the company.
S&P also noted that the outlook factors in Vedanta's bid to acquire U.S. copper miner Asarco, a fully-debt funded approach for this US$2.6 billion outlay may exhaust the company's debt-capacity and affect the momentum for further improvements.