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Sterlite Industries has announced the acquisition of Skorpion zinc mine, a part of Anglo American’s zinc-lead business, for USD 707 mn. Originally, Hindustan Zinc (HZL) was to acquire the entire zinc & lead business (including other mines) of Anglo American for USD 1,338 mn. The consideration is on cash and debt free basis; hence, effectively it is equal to equity valuation.
In the original transaction proposed by HZL, assets included Skorpion mine, Namibia (100% owned), Lisheen mine, Ireland (100%), and Black Mountain Mining (74% owned; includes the Black Mountain mine and Gamsberg project, in South Africa) (see our Hindustan Zinc company update dated May 10, 2010). Since HZL did not obtain the approval of Govt. of India (GoI) as a shareholder in time, Vedanta decided to consummate this part of the transaction through Sterlite Industries.
The Skorpion zinc mine has the following details:
· Reserves and resources in ore terms of 8.3 mt with 11.3% zinc content, located in Namibia.
· Low cash cost of production; CY09 cash cost is ~USD 900/t.
· Zinc production of 150kt in CY09; H1CY10 production is 75 kt which in line with CY09 levels.
· The mine life is low at six years.
n Our preliminary view
The consummation of the transaction through Sterlite Industries, instead of HZL, is a surprise. Skorpion has advantages of low cash cost, and the valuation is low at EV/EBITDA of only 3.5-4.0x (assuming flat volumes). However, the low mine life of only six years is a concern; synergy benefits are not clear at this stage. This negates the above advantages leaving us neutral on the transaction; upsides would then be only due to addition of resources. Sterlite has ~USD 2.4 bn cash on its standalone balance sheet. As per management rest of the transaction is on time for completion within 6 months. It is unclear whether on receipt of approval from GoI this asset would be transferred to HZL as originally intended.
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