Sterlite: Upping the ante
Although expensive, Asarco’s assets will help Sterlite scale up.
The Sterlite stock closed 3 per cent lower on Friday, with the Street apparently not too happy about the company’s revised bid for the operating assets of Asarco. Sterlite has further upped its bid for Asarco from $2.14 billion to $2.57 billion, taking care of all cash payments to creditors.
Some analysts believe that Sterlite would be better off without Asarco’s assets at a price higher than $2.2 billion.
At the revised price, Asarco is being valued at approximately 5-5.5 times its December 2009 ebitda (earnings before interest, tax and depreciation), which are expected to be around $450-500 million. That is not cheap, point out analysts, even if long-term copper prices are estimated at around $4,000 per tonne and spot copper prices are currently in the region of $6,000 per tonne.
Also, while recent deals in the space may have been done at these valuations, Asarco’s cost of production, estimated at $3,100 per tonne, is high, making it vulnerable to any downtrend in copper prices.
While Sterlite’s objective will be to make Asarco a more efficient player, it could take time.
If one assumes long-term copper prices at a slightly higher $4,500 per tonne, the deal, say analysts, could be value–neutral.
Of course, Sterlite is not borrowing to fund the deal because it has cash reserves of close to Rs 8,000 crore on its books and recently raised $1.5 billion through an ADS issue, of which $500 million was brought in by its parent, Vedanta. The ADS issue was priced at Rs 590 per share and some of it is to be used for Asarco acquisition.
Asarco has mining reserves of 5 million tonnes and a copper production capacity of 240,000 tonnes per annum and that will help Sterlite build scale.
Sterlite’s net sales in the June 2009 quarter were lower by 21 per cent at Rs 4,530 crore, compared with the comparable period of the previous year, because of the fall in the prices of zinc and aluminium on the LME. That, together with an unplanned shutdown at a copper smelter, resulted in a fall in the operating profit of 46 per cent, though the net profits at Rs 670 crore, came off by just 42 per cent, thanks to lower depreciation and interest charges.
Since April 2009, the Sterlite stock has gained 74 per cent, outperforming the Sensex, which has gained 50 per cent. At Rs 746, the stock trades at 16 times estimated 2009-10 earnings and approximately 10 times EV/ebitda.