Exploring merger of Cairn, HZL into Sesa: Tom Albanese

Albanese sees promoters hiking stake in the company as a sign of confidence in the long haul. Going ahead, the mining major plans to work on ramping up iron ore production, he says in an interview with CNBC-TV18's Ekta Batra and Nigel D’Souza.

Below is the verbatim transcript of the interview:

Ekta: You join us on a day where three of your stocks Hindustan Zinc, Sesa Sterlite and Cairn India are down on the bourses because of reports indicating that Cairn and Hindustan Zinc might eventually be merged into Sesa Sterlite and that the company has already hired consultants to look at this. Can you comment on this?

A: First of all, the markets have generally weakened the resources sector based on broad range of macro economic activity driven by your oversupply in some of these products. So, again this is part of the normal part of the cycle. I want to reinforce the low cost nature of our businesses and the diversified nature of those businesses. Over the years we have said that it is a priority of the board to simplify the corporate structure and of course the Sesa Sterlite merger about a year and half ago. So, it is really a very important step along those directions. Since then of course many have been saying, what is the next step, can you simplify even further and of course we have been exploring odd ideas. We get ideas and we get thoughts from everyone else but at this point that is really all we can say about it.

Nigel: Getting to the main talking point of last couple of weeks with regard to the Mines and Mineral Development and Regulation (MMDR) ordinance. How much of a positive is it for you once it gets pass, in fact now that it’s stuck, what is your view on it and importantly with regard to pricing of non-coal products. How do you think they are going to be priced?

A: We have been proponents for an auction approach to break the current logjams for quite sometime. So I am supportive of the current efforts to amend the mining legislation. This is about getting the mining sector off ground zero, getting and moving again. We have seen this in coal and we have seen in other sectors where history of controversy almost decades of it and some of the allocations, practices and approaches has created an element of distrust on any transfer of assets from the public space to the private space. So for me auctions are way to regain that trust and for me the auction process is not so much about revenues coming into the state from the private sector is much assuring for transparency of the pricing of those resources owned by the state so they can be developed by private companies.

Therefore, I am a supporter of this. I think there will be quite a number of details, we worked that over time and in those leases where everyone has prefect information about the resources, the size of resources, the market for that resources, everyone would go in with same bit of information but practically around India most of the blocks that are going to be considered will not have perfect information. There still is geology that has not been fully completed. It is going to be up to someone investing capital to finish that geology. So different people will be looking at with different lenses, different technical lenses, different marketing lenses, different applications and that will create the competition and that will create the auction.

Ekta: Can you just tell us whether you would be in favour of a possible merger of Cairn and Hindustan Zinc into Sesa-Sterlite eventually because the fear is that both Cairn and Hindustan Zinc are net cash companies whereas Sesa-Sterlite has a debt figure of over Rs 29,000 crore so it wouldn’t be fair for shareholders of Cairn and Hindustan Zinc to get their cash diluted in terms of a merger?

A: Let me make it absolutely clear, this is speculative. We had the Sesa-Sterlite merger year and a half ago, we have said we are going to look for ways of simplifying the company. So, obviously we are going to be exploring those opportunities. Anything that would happen or could happen has to take quite a range of complicated pieces into account. It has take in a range fairness for all the shareholders, it has to take into account the regulatory regimes in a number of multiple jurisdictions and it has taken into account the fact that the government of India owns a sizeable piece of HZL. So, these are all things that would need to be considered but this is strictly speculative and it is part of that progression of what we have discussed in the past about simplifying the corporate structure.

Nigel: What is the update on HZL - which fiscal year it is going to go through because this has been a long prolonged process and also your final bid for HZL, is it at around Rs 150, is there any chance that you are going to make the bid more attractive and maybe throw the bate to the government of India? What is your take on that with regard to HZL, where exactly is this playing out?

A: I think this is in hands of the government of India. There is no bid out there, the government indicated its interest in disinvestment which we are supportive and from our perspective, from the markets perspective this would be an auction type approach and again the details of that auction are pending. We haven’t heard anything and we look forward to hearing something and from my perspective we would look forward to the government announcing its intentions and to the extent we would review it and if it looks attractive we would be participating.

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Ekta: Can you tell us how Cairn India’s realisations are doing at this point in time simply because Brent is now trading sub USD 50? What is the impact on Cairn and there are fears that it could be free cash flow negative going into FY16, could you comment on that as well?  A: The global oil environment is dramatically different at USD 100 Brent versus at USD 50 Brent. Even though we are one of the lowest cost producers in the business we are seeing the big impact in our revenues dropping as all the other oil companies around the world. We do have the benefits of a very low cost structure and a very high quality reservoir. So, that puts us in a position of being, I would use the term last man standing in that environment.  We are definitely focused on staying positive cash flow in this business and so we are looking at our operating costs, we are looking at our capital costs, we are looking at our projects, we are looking at what projects that we may have considered even a few months ago that may not be so attractive in this price environment. So, we will be doing what everyone else in the global oil industry will be doing.  I myself joined the Cairn team in a series of review trips to Calgary and Houston just during December and I got a first hand impression of what is going on in terms of both the oil industry, the gas industries, efforts to reduce cost, defer projects and certainly also got a very clear idea what the vendors in the oil and gas space are  doing to make their own services much more competitive and certainly from our perspective this is the environment where we need to be negotiating hard with all of our vendors to look at a more fit for purpose operating cost and capital cost structure in this low price oil environment.  Nigel: You all have been talking to the Odisha government with regard to transferring power from Sterlite Energy to Vedanta Aluminium (VAL). Post this coal ordinance you will have to reserve some part of that coal to sell it to state boards, etc so do you think this is possible transferring that power that you are generating from Sterlite Energy to VAL? Where has this reached in terms of discussion and is this any kid of hindrance for that particular plan that you had?   A: Let me first talk about coal because again the entire country and the economy of India has been suffering from a shortage of coal and there has been also quite a bit of uncertainty in the coal sector because of the recent dis-allocations. So, we are coming into 2015 with a weak coal supply environment and a lot of uncertainty. It is certainly high on the priority list of Indian senior policy makers who recognise India with some of the highest quality resources of coal in the world has become the third largest importer of coal.  So, clearly something needs to be done and I am very encouraged, I am very appreciative of the leadership of the government to be taking an active hand in moving quite quickly with these coal auctions both for IPP and CPP so we can get some of this coal which is not being fully utilised into the market and eliminate these coal shortages that are so dodging industry in general in India and elevating energy prices.  So, I think that is quite important in my perspective. From our perspective we are actively involved in looking at the details being provided on the various leases that are being considered and I hope to be in a position where we could be reviewing but we will look at all the details as they emanate over the next few weeks.