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Buttressing the zinc portfolio
We visited Gamsberg mine in South Africa of Zinc International (ZI) operations of Vedanta. Black Mountain mining complex (Deeps + Swartberg + Gamsberg) is located in the Northern Cape province of South Africa with ~70% owned by Vedanta, 6% by employees (ESOP) and 24% by Exxaro resources. Phase-1 of the project with 250ktpa capacity (charts 1 & 3) is in operations and critical equipments have reached 80% availability. Phase-2 will see capacity ramp-up to 450ktpa while an eventual phase-3 can take the total Metal in Concentrate (MIC) capacity to 600ktpa. The geology of the mines (relatively high percentage of manganese in the ore making it necessary to control it) has ensured better adoption of technology in mixing ore grades and can perhaps lead to better efficiencies in the future. Execution of what appears a relatively intricate mining plan will be key in achieving volume and cost targets; intricacies which perhaps Indian Zinc mining assets did not warrant. We maintain SELL on Vedanta with a target price of Rs145 (per share).
* ZI is shaping up to be a meaningful growth driver for Vedanta.
ZI will see production ramping up to 400kte in FY20E from 150kte in FY19, driven by 200kte of production expected from Gamsberg. The increase will also be driven by 130kte of ramped up production from Skorpion Pit 112 extension. While the headline growth is extremely impressive, ZI’s asset portfolio suggests that Skorpion will tapering off post a production burst from Pit 112; Deeps too will taper off and will be replaced by a ramped-up Swartberg (underground) mine, while Gamsberg phases-1&2 will witness measurable flux in the producing pits. Despite the intricacies of the mining plan, the management appears confident of achieving its production and cost guidance over a longer timeframe.
* Gamsberg execution has been carefully planned,
keeping in mind a faster payback (e.g. stripping ratio in phase-1 is 7.8 while the same for phase-2 is 10). Gamsberg North has three pits planned; while production from the South pit has started, it will run out by FY20/21. East and West pits will expand to eventually merge and South pit will be used to dump waste – thereby creating one large pit from three disjointed pits and concurrently move to phase-2 from phase-1. In the process, reserves will move from 53mnte as established under phase-1 to ~110mnte under phase-2. Phase-3 involves a separate underground mine in Gamsberg East. Even if we ignore phase-3 for the time being, phase-1 is only a precursor to phase-2 and may take 3-5 years to start ramping up production from 200ktpa in FY20E to 400/450kpa. The execution of mine planning and geological support to execute the same can allow Gamsberg to reap rich dividends for Vedanta. If geology disappoints (risk factor), the readiness of the mining plan to chalk out alternatives and evacuate 4mtpa and 8mtpa (phases-1&2 respectively) of mined ore needs to be observed.
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