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Sterlite Industries India (updated - 21 Aug 2009)
Sterlite Industries has upped the ante in its bid for the operating assets of Asarco and is now willing to pay $2.1 billion in cash and $207 million in staggered note payments. At this price, Asarco is being valued at approximately three times December 2009 EV/ebitda (enterprise value/earnings before interest tax and depreciation).

According to Rakesh Arora, who tracks the metals space at Macquarie Securities, this is areasonable valuation given that spot copper prices are currently in the region of $6,100 a tonne and there doesn’t appear to be to much downside to prices. While recent deals in the space may have been slightly more expensive, in Asarco’s case there is some litigation. Should one assume longterm copper prices at around $4500 a tonne, the deal, say analysts, will be value-neutral.

For the Sterlite management, this is agood opportunity to build scale and turn Asarco into a more efficient producer.

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Sterlite Industries India (updated - Mar 2009)
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the past year, partly because of the management’s attempt to hive off the aluminium business, a move that was later withdrawn.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.
source - BS

Asarco has mining reserves of five million tonnes and a copper production capacity of 2,40,000 tonnes per annum. However, its cost of production, estimated at $3,100 a tonne, is very high, making it vulnerable to any sharp fall in copper prices. So, it could take Sterlite a while to make Asarco a more efficient player. Sterlite can afford to raise the bid further because it has cash 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 the acquistion of Asarco.

Sterlite’s net sales in the June 2009 quarter were lower by 21 per cent to Rs 4,530 crore compared with the comparable period of the previous year because of fall in 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 profit, at Rs 670 crore, came off by by just 42 per cent, courtesy 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 619, the stock trades at just under nine times EV/ebitda for 2009-10 and is not cheap, though there could be considerable upside in the power business.
source - BS

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.

Sterlite Industries India (updated - 12 Sept 2009)
The Sterlite stock closed 3per 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 $450500 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.

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
source - BS