CLSA Asia
“Sterlite has driven a hard bargain acquiring Asarco for 50% lower price. At 5.2x EV/EBITDA assuming long term copper prices, the new acquisition price does not look expensive on a long term view - especially given potential for reserve enhancement and cost reduction. Near term, copper prices could see a sharp drop, which could severely impact consolidated profits. The acquisition will also substantially reduce Sterlite’s net cash position. We believe stock will ontinue to be driven by nearer term profitability issues and maintain U-PF”
Credit Suisse
“The new price of US$1.7 bn has a NPV of US$1.4 bn, US$400 mn higher than our previous estimate: to take Rs30/share out of fair value. As per Sterlite’s management, Asarco can produce 200 kt of refined copper: the 237 kt CY08 sales volume includes tolled production. The cost (ex. tolling) is US$1.5/lb. At the current cost, production and prices, valuation is 10.5x EV/EBITDA, versus the sector average of 8.2x CY09. Sterlite expects production to rise 25% to 250 kt and costs to fall 20% to US$1.2/lb, bringing down EV/EBITDA to 4.2x (Fig. 2) at current Cu prices. Sterlite’s expectation of a three-year payback seems to be based on a Cu price of US$4,100/t (now US$3,662/t). Asarco’s Jan. 2009 P&L shows a US$1.5/lb cost of production, a sharp fall MoM. EBITDA of US$1.8 mn turned positive after four months. The US$1.1 bn in upfront payment will make Sterlite a net debt company, though gearing will remain nominal. Subsequent payments should be possible from Asarco operations. We would have been more positive if the transaction had not taken place or if the acquisition price was lower than US$1 bn. We remain positive on Sterlite due to its Zn and power businesses.”
BOA – ML
“Asarco is value dilutive in our view; Reiterate Neutral. Sterlite announced that it has signed a new agreement with Asarco to purchase its operating assets for up front cash payment of $1.1bn and staggered payment of $600m over next nine years. On NPV basis, this implies total cost of $1.35bn. We value Asarco at $750m and hence believe this acquisition is value dilutive. On a near-term 1 year horizon, we estimate, it is earnings dilutive by 7%. However, we think a good part of the bad news has already been reflected in the current share price. Asarco can be funded internally given that Sterlite (stand alone) has cash of ~$2bn.”
“Asarco needs copper price of US$4,600/ton to be value neutral
Our value of $750m for Asarco is based on the assumptions of: Cu price in FY10/11 of $3500/3761/t, cost of production at $3087/t & WACC of 13.7%. We get EBITDA/t in FY10/11 of $588/862 and from FY12 onwards we take $1000/t. To be value neutral, we need Asarco to earn EBITDA of $1650/t. Given that Asarco is a high cost asset (in 3rd quartile globally), contrary to management expectations we believe cost reduction will be challenging. Hence, for the acquisition to be value neutral, we need copper price to be (and sustain over the
25-year mine life) at $4600/t vs spot of $3700/t.”
Goldman Sachs
“This is an earnings accretive transaction, with valuation multiple of about 3.0x CY08E EV/EBITDA (GS estimate based on limited disclosures by the company) vs Sterlite at our target price implied multiple of 2.7x FY09E EV/EBITDA. We await further details on the operating financials of Asarco. We also believe significant uncertainties exist before conclusion of this
transaction.”
Implications
“We reaffirm our Buy rating on the stock, for the following reasons: 1. Valuation – In our view after deducting immediate cash payment for this acquisition: a) Sterlite is still trading at 0.8x FY2010E P/B with FY2010E ROE of 11.8%, vs global comps trading at 0.9x P/B with 6% ROE. b) Net cash on balance sheet accounts for roughly 35% of market cap. 2. Competitive industry position – We believe that: a) Sterlite is among the lowest cost producers of zinc in the world, and b) possesses strategic advantages in its forthcoming aluminium projects, in our view.
Our target price is unchanged. Risks: M&A risks, metal prices, project funding & execution, delays in securing balance stakes in key subsidiaries, and delays in securing coal blocks.”
Kotak Institutional Equities
“Sterlite has announced the acquisition of ASARCO for a consideration of US$1.7 bn—of this, US$1.1 bn would be paid upfront and the balance US$600 mn would be paid over a period of nine years which would be in the form of a senior secured, non interest bearing promissory note. The deal has been backed by two letters of credit totaling US$100 mn issued by ABN AMRO, Chicago and an additional US$25 mn letter of credit would be issued if the bankruptcy court approves the disclosure statement for ASARCO’s reorganization plan. Upon closing, ASARCO will release Sterlite from any claims arising out of the first purchase and sale agreement signed in May 2008.
In NPV terms, the acquisition value is US$1.3 bn. Sterlite would be acquiring the operating assets of ASARCO which include smelting capacity of 270,000 tons, refining capacity of 500,000 tons and copper mines with an estimated reserve of 5 m tons of copper (to last 25 years). Sterlite has indicated that it would not be acquiring any liabilities and would be completely ring-fenced from existing environmental liabilities. We believe the acquisition will likely be positive for Sterlite given (1) the mining reserves of ASARCO, (2) Sterlite’s past operational track record, no other company would be better equipped to reduce costs at ASARCO and (3) attractive acquisition price given current copper prices. Our DCF calculation indicates that, at a long-term copper price of US$3,800/ton, the ASARCO deal would be value neutral to Sterlite. Current copper prices are at US$3,850 ton.”
Macquarie Research
“The deal – better than expected: The new offer includes an upfront payment of US$1.1bn and deferred payments of US$600m over the next 9 years (non interest paying and non recourse, US$20m each year and US$460m bullet payment in the 9th year). This represents an effective cost of US$1.4bn against the street’s expectation of US$1.5-2.0bn. This is a substantial improvement over the previous bid of US$2.6bn and is better structured with a lower initial cash outflow. EPS accretive and positive NPV: Based on our copper price forecasts, the deal has a NPV of US$350m and would add Rs23 to our target price. It is marginally EPS decretive in FY10, but would add around Rs5, or 10%, to our FY11 EPS estimate. Asarco assets – sufficient scope to improve: Asarco operated at a cash cost of US$1.45/lbs of copper in the December quarter and in January at US$1.37/lbs against the current copper price of US$1.6c/lbs. Also, it has 5m tonnes of copper reserves which, on the current production of 200kt,
represent 25 years of mine life. Smelter capacity is even higher at 270ktpa.
Management expects to increase production by 25% and reduce costs further
to US$1.25/lbs, to bring Asarco to the second quartile of the cost curve. Well funded for the acquisition: On its standalone balance sheet, Sterlite has US$2bn of cash and doesn’t need to raise debt for this acquisition. It has already provided for equity contributions of US$500m each for its energy business and the Vedanta alumina ventures and is still left with US$1bn for reducing minorities in Hindustan Zinc and Balco (estimated cost US$1.5bn).”
Nomura
“Although the bid price was expected to come down as management was renegotiating the deal, the structure of the deal is favourable for Sterlite as just US$1.1bn will be paid upfront and the balance of US$600mn will be paid over a further nine-year period. While earlier we were building in US$-1.3bn on account of the Asarco acquisition, at current copper prices with new bid price there will be value destruction of US$670mn only. We have valued Asarco at the current copper price of US$3,681/tonne and total reserves of 5mn tonnes. Total net profit from Asarco will be in the range of US$45-50mn, which will be close to INR3.3/share of Sterlite, according to our estimates. However, total cash and cash equivalents for Sterlite will also be reduced by US$1.1bn, which will result in a similar fall in other income.”
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