RBS:: Sterlite Industries – completes Skorpion acquisition

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Sterlite Industries (STLT IN, Rs165.85, Buy) – Sterlite completes Skorpion 
acquisition

Sterlite announced the completion of the acquisition of Skorpion Zinc mine from Anglo American
for US$707m. The acquisition was made at the Sterlite level rather than through Hindustan Zinc.
We expect the acquisition of Anglo's zinc assets to be value accretive to Sterlite and this first step
is positive.


Completes Skorpion acquisition
Sterlite Industries announced the completion of the acquisition of Skorpion Zinc mine,
Namibia, for US$707m. The Skorpion mine is one of the three main assets of Anglo
American, which Vedanta Resources (Sterlite's parent company) agreed to purchase in May
2010. The Skorpion asset is one of the world's largest open cast and integrated zinc refining
facilities with a unique technology to extract zinc metal from zinc oxide ore. The mine had a
zinc production of 145kt and 150kt in 2008 and 2009 respectively and has reserves and
resources of 8.3mt. The mine has a cash cost of production of US$902/tonne and is among
the lowest of Anglo American's zinc assets. Hence, although the Skorpion mine with 2009
revenues of US$236m contributed only 35% of Anglo Zinc's total revenues, its EBITDA
contribution at US$100m was 47%.

Acquired through Sterlite
The acquisition of the asset was carried out through Sterlite Infra Limited (a
subsidiary of Sterlite). It was intended that the acquisition would be carried out through
Hindustan Zinc (HZL). Sterlite owns 64.9% of Hindustan Zinc and this would have been the
natural place for Anglo's zinc assets. HZL is also cash rich with almost US$3bn at the end of
2QFY11. However, the Government of India (GoI) holds a 29.5% stake in HZL and was
required to approve the transaction within the stipulated time, which did not come through. As
a result, the assets were placed as a part of Sterlite. Sterlite has the necessary cash to fund
the entire acquisition and had cash of US$2bn as at September 2010.

Acquisition is EPS accretive, potential upside of Rs17/share
Vedanta Resources signed a definitive agreement in May 2010 to acquire Anglo's
Zinc assets for US$1,338m. Anglo Zinc comprises of the 100% owned Skorpion mine, the
100% owned Lisheen mine in Ireland and the 74% owned Black Mountain Mines, which
includes the Black Mountain mine and Gamsberg project in South Africa. The pending
acquisitions of Lisheen and Black Mountain are expected to be completed on time according
to the company. Exxaro Resources has a 26% stake in each of Black Mountain and
Gamsberg and has a pre-emptive right to acquire the remaining 74% stake. We expect
Anglo's zinc assets to report EBITDA of US$412m and US$419m for 2011 and 2012
respectively, and EPS accretion of 15% for FY12F. We see potential upside of Rs17/share on
the successful acquisition of all the assets.

We have a Buy rating on Sterlite with target price of Rs201.