Sterlite: Striking too soon

The $1.7-billion tab for Asarco may still be a tad too high, say analysts, wishing the deal hadn’t happened.

The Street doesn’t seem to be as disappointed as the analyst fraternity about Sterlite buying out copper producer, the $1.9 billion Asarco. Brokerages say they would have been happier had the deal not gone through but the Sterlite scrip lost just 2 per cent on Monday to close at 245, possibly because the acquisition has been in the works for some time. Also, the stock has already been mauled, losing 68 per cent over the past year, partly because of the management’s attempt to hive off the aluminium business, a move that was later withdrawn.

Obviously given what has happened with a Hindalco and Novelis, analysts are concerned about what the Asarco buy could do to Sterlite, whose revenues in 2008-09 are tipped to fall from Rs 24,705 crore in 2007-08. To begin with even though the final tab at $1.7 billion is about 50 per cent lower than the original price that was to be paid, the net present value works out to between $1.3-1.4 billion.

That’s much higher than the range of $1 billion –$850 million, as a net present value, that analysts are comfortable with. The anxiety stems from the belief that copper prices on the LME, which have already corrected by 48 per cent since September 2008, from $7,250 per tonne to $3,720 per tonne, could fall further. And that could severely impact consolidated profits as has been the case with Hindalco. Ostensibly, the fact that copper prices have moved up by about 10 per cent since the start of the year, isn’t making a difference to their outlook—the price that has been factored into the calculations is around $3, 500 –$3,700 per tonne for 2010-11.

That, say analysts, would translate into an operating profit per tonne of sub $900 per tonne which is not good enough for the deal to be value neutral. Also, Asarco’s cost of production is somewhat on the higher side relative to peers and while it’s possible, bringing down costs will not be easy. Therefore, unless copper prices move up significantly, to levels of over $4700 per tonne, the earnings could get diluted.