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Sterlite – Asarco Deal – Analysis and Ratings

March 9, 2009

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.

Earnings Estimates:
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.

Our Views:
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.

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