JP Morgan:: Sterlite Industries- Stlt completes one leg of zinc acquisition

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Sterlite Industries
Overweight
STRL.BO, STLT IN
Stlt completes one leg of zinc acquisition; however not
done via Zinc subsidiary -





• STLT completes acquisition of Skorpion zinc mine: STLT has
acquired the Skorpion zinc mine in Namibia from Anglo for a total cash
consideration of $707mn. This is  part of the proposed acquisition on
Anglo's zinc assets acquisition announced earlier in the year for
$1.338bn for 3 mines - Skorpion (2009 prod of 150kt, 8.3Mt reserves,
Zn grade 11.3%, CoP$902/mt), Lisheen (2009 prod of 191kt, 8.7Mt
reserves, Zn grade 11.9%, CoP$1287/mt) and Black Mountain +
Gamsberg in South Africa (Black Mountain- 2009 prod of 57kt, 189Mt
reserves, Zn grade of 1.5%, CoP$1237/mt). However, against earlier
guidance of acquiring the asset via its Zinc subsidiary (HZL, NR), STLT
has completed the acquisition via its own fully owned subsidiary, Sterlite
Infra. As per STLT, this has been done because approval from the Indian
Government (who is a share holder in the zinc subsidiary, HZ), 'was not
received within the contractual completion timeline for Skorpion'. STLT
expects to complete the acquisition of the remaining assets within the
stipulated time (the original press  release in May-10 of the transaction
talked about completion within 12 months subject to regulatory
approvals).
• Near term financial impact- EPS accretion of 5-6%: Assuming
$2200/mt zinc price and 10% cost escalation from 2009 reported CoP of
the zinc assets, we expect the acquisition to be EPS accretive (assuming
the remaining 2 mine acquisition is also done via Sterlite Infra only). As
per our estimates, STLT's net cash as of FY10 (standalone) stood at
Rs102bn ($2.3bn). Post March, it has received Rs50bn of ICD back from
VAL.
• ...However, structure become more  complicated, non usage of zinc
subsidiary cash balance negative: Lack of the required approval means
that the complete acquisition is likely to happen via STLT Infra. A key
investor concern has been the over capitalized balance sheet of STLT
and the subsequent large inter company loans to VAL (most of which
have been returned), and hence while the usage of STLT's cash would be
looked upon as favorably, we believe the entire structure now becomes
more complicated given zinc assets are split between 2 entities (similar
to aluminum) for STLT. More importantly, how the cash at zinc
subsidiary would now be put to any meaningful use (currently earning
only interest income), would emerge as a key issue (given it has already
completed large capacity expansion and given its large free cash
generation).