SARDAEN — earnings call
The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.
Prepared remarks
Moderator · Conference Operator
Ladies and Gentlemen, Good Day and Welcome to the Sarda Energy & Minerals Limited Q2FY21 Conference Call.
As a reminder, all participants’ lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes.
Should you need assistance during the conference call, please signal an operator by pressing ‘*’ and then ‘0’ on your touchtone phone.
Please note that this conference is being recorded.
I now hand the conference over to Mr. Pankaj Sarda – Joint Managing Director.
Thank you and over to you, Sir.
Pankaj Sarda
Thanks a lot.
Good Morning everyone.
I extend a very warm welcome to all of you to the
Moderator · Conference Operator
Thank you very much.
We will now begin the question and answer session.
The first question is from the line of Shubham Agrawal from Aequitas.
Please go ahead.
Shubham Agrawal
Good Afternoon gentlemen, my first question is regarding iron ore prices, actually the voice was not very clear when you were updating about iron ore, so I understand that you said that prices will remain firm in the next quarter also, so can you just elaborate on that?
Pankaj Sarda
The prices of iron ore is expected to be firm because so many Orissa mines which were auctioned have not yet started and prior allottees have still one more month.
They were taking out the mines and material till end of October 2020, so assuming that the new owners will start taking over the mines and will start operations in the mines, there will be a shortage of lumps and fines iron ore in the coming 3 - 4 months or maybe 6 months.
Manish Sarda
Apart from this, the international prices of iron ore is also pretty strong because the demand from China is also very huge.
Shubham Agrawal
Sir, in the existing iron ore mine, there is some inventory which is still pending which is expected to be off taken, so what is the total amount of inventory and will this reduce iron ore prices in India at least?
Pankaj Sarda
I am sorry can you repeat again?
Shubham Agrawal
In the existing iron ore, there are few inventories left which is expected to be off taken, so once this is allowed, do you expect the iron ore price to go down and what is the total inventory that is lying there in the mines, if you have any idea?
Pankaj Sarda
You are talking about Orissa mine?
Shubham Agrawal
Yes.
Pankaj Sarda
In the Orissa mine, the Government is not giving extra permission to the past owners of the mine to take out the material, so they are not allowing it as far as I know about it and the new owners will come into picture now and they resume operations and they have to buy their heavy machinery equipment etc. and they will be starting their mines very soon.
Padam Kumar Jain
Since the premium quoted is very high that will not allow the iron ore prices to go down.
Shubham Agrawal
Sir, secondly my question is regarding Sikkim, so in the presentation it is mentioned that it is likely to start in December 2020, but in the call just now you said that 15-20 days it may be delayed further, so this can be expected in mid of Q4FY21, am I right?
Sarda Energy & Minerals Limited November 10, 2020
Padam Kumar Jain
No, well before that, somewhere in January 2021 latest, we are trying to complete by December 2020, but there may be some delay, I think in January 2021 we should be able to start.
We are still trying to complete by December 2020 end, but there may be delay for few days.
Shubham Agrawal
With regard to the refinancing, you said that the interest cost has lowered by 2%, so what was the total amount on which this has been lower?
Padam Kumar Jain
I think it was somewhere about Rs 50 crores- Rs 60 crores, that is only a small loan amount we have refinanced.
Shubham Agrawal
Okay, so rest of it will go lower once the Sikkim starts?
Padam Kumar Jain
Yes, major reduction will come only after commissioning of the Sikkim power project.
There is certain reset also due, which will also have bearing on our interest.
Shubham Agrawal
Got it, Sir regarding the ferro alloys business, the margin in this quarter was substantially lower compared to the last quarter, what was the reason you would attribute this to, if I see EBIT margin was 8.6% compared to 18.3% in last quarter?
Padam Kumar Jain
The prices ferro alloys has gone down so there was inventory loss because of the reduction in the prices that also affected margins to some extent; it was a contribution of the inventory loss and to some extent it was basically fall in the prices.
Shubham Agrawal
Sorry, can you come again?
Padam Kumar Jain
There are two contributing factors in ferro alloys EBITDA going down, one is the inventory loss because of the fall in the prices, and another is on account of the falling prices, margins constraint to some extent and as I told one of our furnaces is also under shutdown.
Shubham Agrawal
So going ahead what can we expect the margins to be because given some of the competitors, their margin was still healthy this quarter also?
Padam Kumar Jain
It also depends on how is the cost structure, what is the power cost, there are multiple scenarios which works.
As I said, one of the reasons has been inventory loss which may not be there, so that will definitely improve our ferro alloy performance from here.
Shubham Agrawal
Got it, pellet shutdown was there and power plant also was shutdown till 22nd October,2020, do we expect any more shutdown in the current year or all is done expect the ferro alloys?
Padam Kumar Jain
Except ferro alloys all is done.
Shubham Agrawal
Regarding this Chhattisgarh 25 megawatt hydropower project for which land has been acquired, so what is the current status of further investment there?
Sarda Energy & Minerals Limited November 10, 2020
Padam Kumar Jain
We have not yet started work on the project, but I think soon we will start work on that project, maybe within next 6 months work on the project will be started.
Shubham Agrawal
Next 6 months, and what is the total investment expected?
Padam Kumar Jain
Total investment is about Rs 250 crores over a period of 4 years.
Moderator · Conference Operator
Thank you.
The next question is from the line of Rahul Jain from Systematix.
Please go ahead.
Rahul Jain
Thanks for taking my question, Sir on steel what are the trends you are seeing on pricing because what I see on Q-o-Q our prices have not been very robust, so I am just wondering is there small price increase to come from here?
Manish Sarda
The overall pricing of steel I think will remain more or less stable because we are seeing the reopening also of the economy now in terms of COVID-19 and lot of Government projects which were stuck because of labor issues and because of COVID-19 will kick start in a big way.
There will be a lot of pent-up demand as well which has been there and we have seen imports being very negligible if you look at the previous year and this year the Government has imposed a lot of curbs in terms of steel imports and is focusing more on Made in India, so effectively I think the steel prices will be stable and firm for the coming six months.
Rahul Jain
Currently, by how much they would be higher compared to Q2 average, are they similar or they would be like Rs.
1,000 to Rs 2,000 higher.
Manish Sarda
No, they have definitely increased in some of the products, they have increased up to Rs.
1,700- Rs 1,800.
Rahul Jain
Sir, could you also elaborate on your coal mines for which we have emerged as the highest bidders, so essentially where do you intend to use it for merchant sale or for your steel plant and how long will it take to get started?
Pankaj Sarda
Regarding the coal mine, that is the best part about it, it is a complete merchant mine, so whenever if we see that the low grade of material is coming out of the seam, we can sell it locally, only high grade we could get to our plant, so that is the beauty about it.
Regarding the Chhattisgarh coal mine, we intend to start that mine within 1.5 years, because all the permissions and clearances, everything is there and it was earlier with us, so we have complete idea about it, so we feel that we should be able to start it within one year
Rahul Jain
You will be able to utilize the rated capacity within 1.5 year, is that right?
Pankaj Sarda
No, within 1 year, we will be able to start the mine and after 1 year, we will try to reach to the rated capacity.
The best part about this mine, is that it was operated and owned by us only so we have the land in place, we have our labor in place, we know the mines in and out and apart from Sarda Energy & Minerals Limited November 10, 2020 that, our whole perspective of restarting this mine would be to get the best quality coal to our plants, for applications of this coal into sponge, pellet, ferro alloys, and whatever best we can do in terms of the logistics as per the GCV basis, we will be trying to do that because now since it is a commercial mine, we are also be allowed to sell the coal at the pit head to other power plants and there are a number of power plants which are there near our coal mines, so we can sell that coal easily.
Rahul Jain
How does the system work, so you have a revenue share of say I think one is 26 and other is 66.8, so whatever is the relevant Coal India price of that particular grade, you have to share that percentage with the …
Pankaj Sarda
If you see the earlier bidder, Monnet had bidded this at Rs.
2,600 per ton.
Rahul Jain
That is over and above the royalty rate?
Pankaj Sarda
Over and above the royalty, that is how high they went up to whereas the 66.75% will be much below Rs.
1,000.
Rahul Jain
So the equivalent rate is what Rs.
1000, this is which grade?
Pankaj Sarda
This is the open cast mining has an overall grade of around G11.
Rahul Jain
Right, so typically around Rs.
600 is roughly you will have to share with that?
Pankaj Sarda
Rs.
800 to Rs.
900.
Rahul Jain
What is the cost of mining you expect, around Rs.500 or more than that?
Pankaj Sarda
It should not go beyond that.
Moderator · Conference Operator
Thank you.
The next question is from the line of Abhishek Maheshwari, an Individual Investor.
Please go ahead.
Abhishek Maheshwari
Sir, thank you for taking my question, just two basic questions, are we exporting our steel also or only ferro alloys?
Manish Sarda
We are not exporting our steel, we only export our ferro alloys, steel is sold locally and domestically we sell it in India
Abhishek Maheshwari
Sir, secondly like certain places in Maharashtra like Mumbai and all, we are seeing realizations crossing Rs 40,000, so in Raipur also that is the case or are we still seeing Rs 35,000 – Rs 37,000 of realization?
Sarda Energy & Minerals Limited November 10, 2020
Manish Sarda
No, the case in Bombay is totally separate because you have to understand that in Bombay, mostly the steel is sold by the traders and the traders have their credit margins and all, so there is a long products because it is mostly for the real estate sector and infrastructure sector in Bombay the long products and there is a big payment delay in terms of 30 days and 60 days depending upon the customer, so the pricing is more or less 37days -38 days, but they have their own margins for financing ,warehousing and the storage cost is very high.
Abhishek Maheshwari
Okay, fair enough, so your realizations are somewhere around Rs.38,000 only?
Padam Kumar Jain
It will depend on the product.
Abhishek Maheshwari
I mean wire rod and HB wire, somewhere around Rs 35,000 – Rs 38,000 only.
Padam Kumar Jain
Yes, Rs 37,000.
Moderator · Conference Operator
Thank you.
The next question is from the line of Vikas Singh from PhilipCapital.
Please go ahead.
Vikas Singh
Good Afternoon Sir, my first question pertains to your hydropower project of Sikkim, so any update on the rates which would be fixed or what kind of utilization or the PLF we can take for this plant in one year’s time?
Padam Kumar Jain
Presently is the lean season, so in the rainy season we get the full generation, in the first year itself we will reach the normal capacity utilization level.
Vikas Singh
That is roughly around?
Padam Kumar Jain
50% around, in the first year itself
Vikas Singh
Annualized basis?
Padam Kumar Jain
In the first full year of operation, in the next season we will be at rated capacity, but since we will be starting in the lean season, initially we will be starting only with the one unit because presently power will be on the low flow.
Vikas Singh
Any word on the provisional rates as of now?
Padam Kumar Jain
Provisional?
Vikas Singh
Provisional rates at which we would be able to sell?
Sarda Energy & Minerals Limited November 10, 2020
Padam Kumar Jain
We have not yet got the order, but as I said the provisional rates for smaller hydropower project of up to 25 megawatt is Rs.
6 plus and I think we should be getting the same provisional rate, we have not yet got the provisional rate approved.
Vikas Singh
Understood, Sir my second question pertains to assuming that your hydropower project starts, but we have couple more smaller hydropower projects, one you have mentioned Rs 250 crores plus upgradation in the ferroalloy unit as well, so how do you see that the CAPEX and the cash flows in next couple of years and overall the debt correction because of that?
Padam Kumar Jain
As far as Sikkim hydropower project, their capital outflow will stop, so far as this Chhattisgarh hydropower project whatever expansion we are doing, whatever internal promoter contribution is required, existing project will support that.
The Chhattisgarh hydropower existing project is generating sufficient surplus cash after meeting its debt obligation, so that will be handled independently, that will not require any equity contribution or support from the promoter company.
Vikas Singh
Sir, let me rephrase it in a different manner, so what I wanted to understand that we have almost Rs 250 crores in Chhattisgarh, if I get it directly then around Rs 100 crores in the ferro alloys kind of CAPEX and we have these normal maintenance CAPEX also going on for the next 2 or 3 years, so just wanted to understand that the total CAPEX which we are going to put in versus the cash inflows which we could get from the Sikkim power project, so how the overall debt position would be as per your calculation, would they are in let us say next couple of years down the line?
Padam Kumar Jain
The debt position should remain more or less at the existing level, there may be some plus or minus, but there will not be material impact because there will be some additional CAPEX and there will be some repayments, so it should remain within these range based on the existing planned CAPEX.
Vikas Singh
Okay, it is better to assume that whatever the incremental cash flows are coming, we are putting it in further growth project, so that could remain more or less at Rs 1,350 crores for next couple of years?
Padam Kumar Jain
Yes.
Our existing gross loan is about Rs 1,650 crores, maybe Rs 1,600 crores gross loan.
Entire Rs 300 crores we are holding in cash, so if we are going with the coal mines also, we are going all those things maybe in the range of this Rs 1,500 crores- Rs1,600 crores loans will remain, there will not be material addition, there will not be material reduction.
Vikas Singh
Sir, my second question pertains to our coal mine, so this 1.8 MT of total annualized production which we have got in both the mines combined, so would that be able to suffice the entire coal requirement or what portion could be available for us to sell in the merchant market?
Sarda Energy & Minerals Limited November 10, 2020
Manish Sarda
It will depend upon the pricing what we get in the merchant markets, however, efforts will be to first see and effectively close our own coal and cut down on our imports in a big way so that we are self-sufficient and we are away from fluctuations of the international market and the Dollar movements.
Pankaj Sarda
Apart from this, we have a requirement of almost 1 MT in our Siltara plant, Raipur, so over and above that, we can always sell outside to third party and over and above, the MOU gives us the clearance to increase our capacity by around 50%, so 1.8 MT we can achieve if we want to increase our capacity without any MOU clearance, we can go above 1.8 MT - 0.9 MT more.
Vikas Singh
Sir, if I get it correctly that there is some 65% kind of a production performance guarantees that most of these coal mines which are getting auctioned within one year, but you are saying that the next 1.5 year only you would be able to start, so if you could just elaborate that what happens to that performance guarantee part of it?
Manish Sarda
No, it is basically that once the Government gives you all the clearances in place within the stipulated period of time, you have to start your production and have to achieve 65% of your production, it is not within the one year from the date of allocation.
Pankaj Sarda
Once the Government gives us the vesting order, we have 51 months to start the mine.
Vikas Singh
Understood Sir, just one last question, what is the current rate of same grade of coal which you are getting at your plant, so what is the blended cost that has been?
Pankaj Sarda
There are multiple grades, we are using different grades for power, there are multiple grades, it is not a single grade
Vikas Singh
Power grade you can say whatever we are using for our power plants, so what is the rate at which we are getting at the plant right now?
Pankaj Sarda
We are getting around Rs. ~1.15 per GCV.
Moderator · Conference Operator
Thank you.
The next question is from the line of Parthiv Shah, an Individual Investor.
Please go ahead.
Parthiv Shah
Thank you Sir for taking my question and firstly congratulations for a very decent set of numbers; my first question is regarding your interest cost, so probably I am assuming that you would be capitalizing a lot of your interest cost at this juncture that is why your interest cost comes to at around 5%-5.2%, I just want to understand once we are servicing the normalized rate of interest for our loans, which is we discussed about Rs 1,500 crores – Rs 1,600 crores and after the interest reduction and everything, what sort of annualized interest cost are we looking at for the company at consolidated level?
Sarda Energy & Minerals Limited November 10, 2020
Padam Kumar Jain
If you consider that way, even if you consider 10% on average then effectively Rs 150 crores is the total interest component and definitely they are interest incomes also because as I said we are holding Rs 300 crores of the cash and bank balance and in addition to that we have certain loans etc., so ultimately our effective borrowing cost will be on somewhere around maybe Rs 1100 crores or Rs 1200 crores that we are incurring even after commissioning of the Sikkim hydropower project.
In net cost if you consider, it will not exceed maybe Rs 110 crores or Rs 120 crores.
Parthiv Shah
Which is against Rs 82 crores which we are having right now, right?
Padam Kumar Jain
Yes.
Parthiv Shah
Sir, I just want to understand somehow there seems to be some sort of delay in the additional capacity commissioning of our pellet plant, what is the reason for such a long delay because I think this plant was to add 2 lakh MT since long, but we are not being able to take advantage of the current pellet price rally?
Padam Kumar Jain
There has been changes in the Government policies, in between NGT had come out with a different guideline, so there are multiple changes in the Government policies.
Further, Raipur as you may be aware, is one of the critically polluted cities, and so there are multiple agencies involved and time to time there have been changes in the policies, which has affected this.
Pankaj Sarda
The delay is also because of this COVID-19 pandemic which has been ongoing for the last seven to eight months and the Government offices have also not been working in that way which is a normal way of working and NGT also came into play, so all of this has added to that delay.
From our side, there is no delay, it is basically the Government policies that have to be cleared with respect to Chhattisgarh and Raipur specifically as a zone.
Parthiv Shah
Sir, I also see that this quarter our pellet realization was somewhere around Rs 6,110 per MT, so I mean is it less as compared to some of the peers or how it has panned out and also I would like to know now that our plant operation maintenance is over, now we will be running at full rated capacity, so in this quarter at what rates are we booking the pellet, I am assuming that will be a huge turnaround from this quarter, right?
Padam Kumar Jain
Last quarter because of shutdown during the price increase, we could not take advantage of that increase because prices had moved from Rs 5,800 to Rs 8,000 per MT, so there were pipeline orders also and there was they shut down, that definitely affected our average realization of the pellet plant, which is less than market average realization because of the shutdown and pipeline orders, and this quarter definitely it will be plus Rs 8,000 per MT.
Parthiv Shah
So what volume we are targeting in Q3FY21 and Rs 8,000 per MT you are expecting the ballpark number, right?
Sarda Energy & Minerals Limited November 10, 2020
Padam Kumar Jain
Yes, ballpark number is on average what we are selling is more than 1 lakh ton of the pellet we sell in the market every quarter, sometimes in some quarter it might be less, some quarter it may be more, on average what we sale of in the year.
Parthiv Shah
Sir, last question regarding the iron ore scenario and also for our company where we have our own mine, but we are also buying from the market, so what is the percentage of our source that we are buying from the market and what is the current landed cost of that, so I just want to understand two things, one is the blended cost of our ore fines for our pellet plant and also at what rate is the current landed cost and also talking about the iron ore scenario, Mr. Sarda very nicely explained that it could be a phenomenon of a huge supply shortage for the next 3 - 6 months, what is the possibility that it can last for six months because if it lasts for 6 months and also hearing commentary from very big steel manufacturers like JSW Steel you know the scenario looks very bad in terms of the supply, so this will really hurt production going ahead, what is your sense overall commentary on this?
Pankaj Sarda
As far as shortage is concerned I would say that we also expect that the shortage will be there for the coming four months or maybe it will extend to 6 months or 7 months, but at the end of the day, there will be some kind of solace in terms of imports because if the shortage goes on for a very long period of time, we will see a robust pricing of iron ore, because the pricing may go up and that will make it viable for imports at least for the coastal based plants, the plants which are based on the coast line, they will be able to import iron ore.
And I think all the guys who have invested in mines would be also wanting to restart and wanting to consume the iron ore, no company would be interested to import iron ore in the country.
Parthiv Shah
Sir, for us the landed cost of mines for our pellet manufacturing and what percentage are we using and what is the blended cost?
Manish Sarda
We are using around 50% - 60%, we are blending and our captive iron ore we are using around 40% - 45%.
The landed cost of, there are various grades of iron ore mines that is available from around 62.5 plus grade material from Orissa is coming around Rs.
5,500 per MT to Rs.5,800 per MT at the moment.
Parthiv Shah
Okay, but you are getting the supply for manufacturing use in your pellet?
Manish Sarda
We are getting the supply, but availability is going down and down in coming months, the prices are going high, you have seen that NMDC also increased their prices by almost Rs.
150 per MT to Rs.
200 per MT a couple of days back, so the rates are going up.
Padam Kumar Jain
But we have sufficient backup so as to maintain the base of our production
Parthiv Shah
In terms of the production, right?
Pankaj Sarda
Yes.
Sarda Energy & Minerals Limited November 10, 2020
Moderator · Conference Operator
Thank you.
The next question is from the line of Amit Jain, an Individual Investor.
Please go ahead.
Amit Jain
Good Afternoon Sir and Congratulations for navigating this tough environment and coming up with good set of operational performance, my question is related to last question which was about the pellet prices, if I heard it rightly so the price realization for the last quarter was approximately Rs.
6,100 per MT and though ongoing prices I understand is more than Rs 9,000 per MT, but I understand considering the various constraints their expected realization for the ongoing quarter can be upwards of Rs.8,000 per MT, which is approximately 33% increase, is that a right assumption?
Padam Kumar Jain
Yes, you have correctly understood, it would be Rs 8,000 per MT plus what we have said because there are pipeline orders all those things, so we have to take average and how long this price continues at Rs 9,000 per MT plus all depends, considering that on average it will be more than that only, to what extent it goes up it is very difficult to predict.
Amit Jain
Yes, as well as the iron ore prices when we check on the China stock exchange which is Dilan stock exchange that is also touching multi-year high, so with greater probability and more certainty your commentary is based on that we will be able to definitely realize more than Rs.
8,000 per MT?
Padam Kumar Jain
Definitely, we will realize more than that.
Moderator · Conference Operator
Thank you.
The next question is from the line of Shubham Agrawal from Aequitas.
Please go ahead.
Shubham Agrawal
Thank you again Sir, my last question is regarding this coal mine again, so what is the total upfront payment required for both these coal mine?
Padam Kumar Jain
For the coal mine in Madhya Pradesh, it is somewhere about Rs 34 crores and for the Chhattisgarh coal mine, it is Rs 86 crores, but it is payable in four installments depending upon the progress.
For the Madhya Pradesh coal mine, we will get almost from today you can consider 4.5 years in the installment and for Chhattisgarh also it will depend, it is payable in 4 installments, one on the agreement and another on the mining lease then mine opening and then after production and that is also immediately refundable against the revenue share, 50% of the revenue share will be adjusted against the upfront payment, so if the mine starts immediately we will start to get back the amount.
Shubham Agrawal
Okay got it, and Sir regarding this Madhya Pradesh coal mine, what would be the total investment required over this next four years to get the mine started?
Sarda Energy & Minerals Limited November 10, 2020
Padam Kumar Jain
I think in the initial two years, there will be hardly negligible amount, it will not be, major CAPEX will be only in the last two-and-a-half or three years, whatever it takes, so initial two years there will be very low, but total investment will be 200 crores plus/minus.
Shubham Agrawal
Any investment for Gare Palma coal mine over the next one year?
Padam Kumar Jain
There will not be material except this upfront payment will also go in the installment and there will be some on the mining lease execution etc. because land is already in position, it was operating mine so may be about I think we have to give may be Rs 25 crores to Rs 30 crores to the existing prior allottee and there will be some restarting CAPEX.
Shubham Agrawal
Lastly regarding the ferro alloy expansion, so when do we think we will start working on this, Rs 125 crores expansion?
Padam Kumar Jain
I think next financial year, we will start work on this.
Moderator · Conference Operator
Thank you.
The next question is from the line of Sachit Khera from Smart Equity.
Please go ahead.
Sachit Khera
Good Afternoon Sir, I am new to your company, pardon me if the questions are a bit naive, regarding the Sikkim hydro project you mentioned that the first unit would get commissioned by January latest, right?
Padam Kumar Jain
Yes.
Sachit Khera
What about the remaining unit, Sir?
Padam Kumar Jain
It will depend on availability of water, the plant can run only at full load only during rainy season, it does not run throughout the year.
This is run of the river project, the full capacity of both the units will be running only during the rainy season not throughout the year.
Sachit Khera
You do not envisage any problems in being able to sell as much as you produce, correct?
Padam Kumar Jain
We have already entered into PPA with the distribution utility, so there is no problem of sale.
Sachit Khera
Yes, it is just that the rate would be finalized a bit late?
Padam Kumar Jain
Yes, rate would be finalized later
Sachit Khera
The second question is regarding the mines, when you bid for the mines, this is again a broader question, how do you sort of calculate the kind of payback or IRR while bidding for the mines?
Sarda Energy & Minerals Limited November 10, 2020
Padam Kumar Jain
This is directly linked with our landed cost and basically production cost, what is my landed cost and what is my production cost depending on that we arrive at the formula definitely, one is raw material security and another is saving based on the investment and risk taken.
Sachit Khera
So for example Gare Palma, the agreement to pay let us say 66% is based on the decision that the upfront payment is less and that it is a running mine for example?
Padam Kumar Jain
Upfront amount will be recovered within a year or two, it is only a temporary advance or deposit you can say, that is not basically quote, what I am paying upfront that I will get refund maybe in a year or two at the best.
Sachit Khera
The 66% is on base of Rs 2,600 you mentioned?
Padam Kumar Jain
Basically, 66% is of the value, average cost of National Coal Index is declared for every grade by the Government; depending upon the basket of the import, auction linkage, they will arrive at pricing for every grade of the coal based on the exact outflow of the coal from the mine, we have to pay price of that grade.
Sachit Khera
And this varies every month or how does it work?
Padam Kumar Jain
Yes, it will vary depending upon the quality of output from the mine.
Pankaj Sarda
The index also varies every month.
Sachit Khera
Makes sense, and this is on the gross, there is no floor plus concept, it is on whatever the index value is declared flat 66% will be shared with the Government?
Padam Kumar Jain
Yes.
Sachit Khera
Will the mining cost be deducted or that would be coming out of your 34% share?
Padam Kumar Jain
That will be coming out of our 33% share.
Sachit Khera
Okay, including the freight and transportation cost, everything is yours?
Padam Kumar Jain
Yes, everything is ours.
Moderator · Conference Operator
Thank you.
The next question is from the line of Amit Jain, an Individual Investor.
Please go ahead.
Amit Jain
This is in continuation to my previous question, I realized that it is better if I get some clarification here, according to the press release last Q1FY21, the company produced approximately 144 MT of the pellets and the sales were approximately 77 MT of the pellets, so Sarda Energy & Minerals Limited November 10, 2020 does it mean that there is an inventory of ~70 MT available with the company because the production in Q2FY21 is a similar number which is ~ 140 plus MT?
Padam Kumar Jain
No, it is not like that, basically rest of the stock is consumed captively for production of sponge iron, that is also mentioned in the notes in the press release if you see, part of the production is consumed at every stage, part of the sponge iron is also consumed in production of billet, part of the billet is consumed in wire rod then like that, so it is not the inventory buildup, our inventories are at low-level.
Amit Jain
Okay, and second question is that the 33% increased realization that we are expecting for this quarter in the pellet project that will directly add to the bottom line because most of the consumption of the raw material for the pellet production is our captive, correct?
Padam Kumar Jain
No, it is around 40% to 50% is our captive, remaining is market purchases.
Moderator · Conference Operator
Thank you.
As there are no further questions, I would now like to hand the conference over to Mr. Pankaj Sarda for closing comments.
Padam Kumar Jain
Thanks to all the participants for joining this conference call.
We hope we have clarified the questions to the satisfaction of the concerned investors.
If anyone has any doubt, they can always approach to our investor relations people which is also provided in our invitation as well as presentation.
Thanks to all.
Moderator · Conference Operator
Thank you.
On behalf of Sarda Energy & Minerals Limited, that concludes this conference.
Thank you for joining us and you may now disconnect your lines.