Commodities

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

India just won a tidy $860 million surprise present, for which the country's taxpayers and government owe a vote of thanks to Vedanta Resources Plc.

The gift came in the form of a special cash dividend announced Wednesday by Hindustan Zinc, a former state-controlled miner that was privatized 14 years ago. Vedanta's Indian unit, which owns about 65 percent of the zinc producer according to Bloomberg data, would love to buy the 29.5 percent stake still held by cash-strapped authorities, who would be glad to sell, except that any deal can't go through because the country's top court is yet to decide whether the 2002 privatization was legal in the first place.

But Hindustan Zinc is sitting on something that's extremely valuable for Vedanta's lenders: $5.3 billion in cash.

Vedanta's 2019 dollar bonds, which have mostly traded around the 60-cent mark this year, jumped 13 percent Thursday on the dividend announcement. It's quite possible, as UBS says it suspects, that Indian unit Vedanta Ltd. will kick all of its $960 million share of the payout to the global parent, including an inter-company loan repayment. That leaves $860 million of the $1.8 billion dividend going to the government as taxes and as a reward for being a reluctant but lucky owner.

This is a cycle of dependence in which Vedanta's misery is India's bounty. Vedanta needs to retire or refinance $1.7 billion of debt by March next year, and the zinc unit's dividends will come in handy, even if a hefty chunk must be surrendered to the government:

Mining Cash to Placate Bondholders
Vedanta's Indian zinc unit has stepped up payouts as prices of the global miner's debt has crumbled
Source: Bloomberg

Copper, which accounts for more of Vedanta's revenue than any other metal, has started cracking again on fresh worries about Chinese demand. The mainland's aluminum glut might be easing, but global prices are still weak.

Zinc Zing
Three-month returns of metals represented on the UBS Bloomberg CMCI Index
Source: Bloomberg
* Data as of March 31.

Zinc presents a contrast: Over the past three months, it's been one of the top-performing metals on the UBS Bloomberg CMCI Index. While prices are still almost 60 percent cheaper than their 2006 record, ICBC Standard Bank warns of  ``unprecedented concentrate deficits.'' If those shortages drive prices higher, Hindustan Zinc might just present itself as an even bigger solution to Vedanta's debt woes.

The Indian government can certainly expect a good price for parting with its stake eventually. Until then, sitting on those shares should be pleasurable enough.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net