Sterlite, the cables and copper-maker, has already acquired 2,200 acres of land in Orissa and obtained mining rights to two bauxite deposits, which will meet its raw material requirement for 30 years. A memorandum of understanding (MoU) for technical collaboration with Aluminium Pechiney of France, the world's largest aluminium company, has already been signed.

Chairman and managing director Anil Agarwal said that the greenfield project in Orissa may be set up through a separate company and not through Sterlite. "In that case, we will examine the option of offering an equity stake to a strategic partner."

The detailed feasibility report for the project has been conducted by Mecon of UK. It has estimated a cost of$1,158 for producing a tonne of aluminium against a world average of $1,200 per tonne. Proximity to rich bauxite reserves makes the average cost of Indian aluminium companies lower than the international average.

The company has yet to take a firm decision on the funding options but a debt-equity ratio of around 1.5:1 is being examined, chief financial officer Tarun Jain said. No financial advisor for the project has been appointed, he added.

The company, Agarwal said, has got approval from US-based investment bank Merrill Lynch for a $350 million unsecured loan for the aluminium project. "But because of the steady depreciation of the rupee, we have not decided whether we will raise it ultimately," he added.

The project will be set up in two phases, Agarwal explained, with the first phase having an aluminium smelter of 125,000 tpa capacity and a 375mw coal-based captive power plant. Completion of the first phase will take three years from zero-date.

In the second phase, the smelter capacity will beexpanded to 250,000 tonne and that of the power plant to 675MW.

However, the company does not propose to set up any alumina refinery at the initial stage. Agarwal said: "We may backward integrate at a later stage. We will meet our alumina requirement from Nalco which has huge surplus alumina reserves." Nalco is India's largest aluminium company and the largest exporter of alumina.

In the aluminium making process, three tonne of bauxite is refined into one tonne of alumina, and two tonne of alumina is processed in a smelter to produced one tonne of primary aluminium. Hence, to meet its requirement captively, Sterlite will have to set up a 500,000 tonne smelter.

Agarwal said that the US-based engineering giant Bechtel has emerged as a strong contender for bagging the engineering procurement construction management (EPCM) contract.

Investment may bloat balance sheet

Sterlite is well placed to set up the aluminium smelter and captive power plant in Orissa owing to the following reasons: one, ithas tied up with Pechiney for AP30 technology; two, it has proximity to bauxite reserves which will last for 30 years; three, coal can be sourced from the Ib Valley coal fields; and four, the requisite amount of water can be sourced from the Hirakud reservoir. But the Rs 3,400-crore investment may end up bloating Sterlite's balance sheet if the project is not set up by a separate company.