Sterlite announced that it has signed a revised agreement to acquire the operating assets of Asarco for US$1.7bn in cash, with US$1.1bn payable on conclusion of the transaction which the company expects in the next 4-5 months, and the balance US$600mn payable in installments over nine years. Sterlite had net cash of only Rs 44 bn (US$900 mn) at the standalone level at 3Q09 end.
The assets include three open-pit copper mines, a copper smelter and down stream units. In 2008, Asarco sold 237kt of refined copper and reported revenue of US$1.9 bn, and PBT of US$393mn.
Merger and Operations:
As per the Sterlite management, Asarco’s production cost currently is about US$3,100/t, which it hopes to be able to cut by 15-20%. Sterlite also plans to enhance production from the current level of about 200kt to about 270kt. Asarco’s copper reserves are estimated by the company to be about 5 mt.
Credit Suisse estimates EPS to be Rs 42.4 for FY10 and Rs 59 for FY11 with a OVERWEIGHT Rating driven mainly by zinc and the power divisions,and a Target price of Rs 500. [Post Asarco Acquisition, target price maybe cut by Rs 100]
Morgan Stanley estimates EPS to be Rs 37 for FY10 and Rs 52 for FY11 with a EQUALWEIGHT Rating and a Target price of Rs 275. [Excludes Asarco earnings]
Citi expects Copper Prices to Average less than $3,000 in FY09-10 and hence expects Sterlite’s EPS to be Rs 28 and Rs 46 for FY10-11. Maintain a SELL Rating with a target price of Rs 235. [Excludes Asarco earnings]
Goldman Sachs previously has BUY ratings and maintains the same.
If you are holding the stock, you should continue to HOLD as Copper prices may FALL as expected by Citi, but China is a BIG BUYER and we don’t expect them to crash below $3,000 levels. Long Term Investors can add the stock around Rs 200 or below as commodity demand will certainly come back in 3 years.