Vedanta copper unit's prolonged shutdown is credit negative, says Moody's

A prolonged shutdown of Vedanta’s copper smelter plant at Tuticorin would be credit negative for the company and increase leverage marginally, credit rating agency Moody's said in a report on Monday.

Last Tuesday, UK-based Vedanta Resources plc had announced that the Tamil Nadu Pollution Control Board had rejected the company’s application to renew its right to operate its copper smelting facility in Tuticorin.

The facility has been shut down since March 27, when it began a 15-day scheduled maintenance turnaround.

Vedanta owns one of the two custom copper smelters in India and, according to International Copper Association (India), had a 33 per cent market share by sales volume in the financial year ended March 31, 2017. The other major custom copper smelter in India is operated by Hindalco Industries.

How long the Tuticorin copper facility will be shut is not known. If we assume Vedanta’s consent-to-operate licence is not renewed for a year, the company’s pro forma revenue for calendar year 2017 would decline 25 per cent to $10.8 billion from $14.4 billion, and its reported earnings before interest, tax, depreciation and amortization (Ebitda) would decline 5 per cent to $3.6 billion from $3.8 billion, said Moody's. However, increasing production of its other metals and favourable commodity prices would limit the effect on Vedanta’s credit metrics, said the ratings agency.

Vedanta’s potential Ebitda decline from a one-year shutdown of Tuticorin copper smelter would also marginally increase the company's leverage. Despite the smelter shutdown, Vedanta said it would pursue its plans to expand production capacity at Tuticorin, doubling it to 800,000 tonnes per annum from 400,000 tonnes per annum at the end of 2017 by adding a second copper smelter. At the end of 2017, the company had spent about 15 per cent of the second smelter’s $576 million projected cost. 

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