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• Sale of 26.27% stake in
Riversdale for A$1.06bn
(US$1.128bn)
• We estimate the profit on this
sale at US$678m
• Cash infusion should lead to
balance-sheet deleveraging or
fast tracking of Orissa project's
capex
ƒ What's new
Tata Steel has announced (on 16
June 2011) that it has agreed to sell
its entire 26.27% stake in Riversdale
Mining Limited (RIV) (Not rated) to
Rio Tinto (RIO AU, A$78.40, Buy
[1]) at A$16.50/share for a total
consideration of A$1.06bn
(US$1.128bn).
ƒ What's the impact
Tata Steel’s total investment for a
21.2% stake in RIV was US$242m at
the end of FY10. Since then, it has
acquired a further 11.8m shares in
RIV through open-market purchases.
Assuming a purchase price of
A$16.5/share, we estimate the cost
of the incremental purchases at
US$207.8m. Thus, we estimate the
total cost of its investment in the
listed company RIV at around
US$450m (Rs20.47bn).
Tata Steel will receive A$1.06bn
(US$1.128bn, Rs50.66bn) on the
sale of its entire 26.27% stake, so
should realise a profit of US$678m
(Rs30.19bn). Tata Steel will retain
its 35% stake in the Benga project,
where it has a right to 40% of the
offtake throughout the life of the
mine at market prices.
The Benga project is being
developed to produce high-grade
coking coal and thermal coal. The
first phase is expected to deliver
5.3mt of run of the mine (ROM)
which will be processed into 1.7mt of
prime-grade low-ash coking coal
and 0.3mt of thermal coal.
The project has been delayed by
almost eight months. Initially, the
first coal delivery from the project
was expected in 2Q11. However, this
date has now been revised to 4Q11.
The Benga project has total coal
resources of 4mt and coal reserves
(proven and probable) of 502mt.
ƒ What we recommend
We see this move as quite positive
for Tata Steel, as it will retain its
interest in the Benga project while
exiting its holding in the parent
company RIV. This transaction will
add US$1.128bn of cash to the
balance sheet and could reduce its
gearing for FY11 from 1.4x to 1.1x.
We retain our Buy (1) rating and sixmonth target price of Rs697, based
on a target 5.0x EV/EBITDA
multiple on our FY13 forecasts. The
key risks to our target price are
higher-than-expected raw-material
costs, lower-than-expected steel
prices and steel sales volume, and a
delay in the Jamshedpur steel
plant’s expansion.
ƒ How we differ
Our FY12-13 EPS are 15-22% below
those of the Bloomberg consensus.
We maintain our target price as we
await clarity on the utilisation of the
proceeds from the stake sale. If the
company fast tracks its Orissa
project, then there should be no
balance-sheet deleveraging.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
• Sale of 26.27% stake in
Riversdale for A$1.06bn
(US$1.128bn)
• We estimate the profit on this
sale at US$678m
• Cash infusion should lead to
balance-sheet deleveraging or
fast tracking of Orissa project's
capex
ƒ What's new
Tata Steel has announced (on 16
June 2011) that it has agreed to sell
its entire 26.27% stake in Riversdale
Mining Limited (RIV) (Not rated) to
Rio Tinto (RIO AU, A$78.40, Buy
[1]) at A$16.50/share for a total
consideration of A$1.06bn
(US$1.128bn).
ƒ What's the impact
Tata Steel’s total investment for a
21.2% stake in RIV was US$242m at
the end of FY10. Since then, it has
acquired a further 11.8m shares in
RIV through open-market purchases.
Assuming a purchase price of
A$16.5/share, we estimate the cost
of the incremental purchases at
US$207.8m. Thus, we estimate the
total cost of its investment in the
listed company RIV at around
US$450m (Rs20.47bn).
Tata Steel will receive A$1.06bn
(US$1.128bn, Rs50.66bn) on the
sale of its entire 26.27% stake, so
should realise a profit of US$678m
(Rs30.19bn). Tata Steel will retain
its 35% stake in the Benga project,
where it has a right to 40% of the
offtake throughout the life of the
mine at market prices.
The Benga project is being
developed to produce high-grade
coking coal and thermal coal. The
first phase is expected to deliver
5.3mt of run of the mine (ROM)
which will be processed into 1.7mt of
prime-grade low-ash coking coal
and 0.3mt of thermal coal.
The project has been delayed by
almost eight months. Initially, the
first coal delivery from the project
was expected in 2Q11. However, this
date has now been revised to 4Q11.
The Benga project has total coal
resources of 4mt and coal reserves
(proven and probable) of 502mt.
ƒ What we recommend
We see this move as quite positive
for Tata Steel, as it will retain its
interest in the Benga project while
exiting its holding in the parent
company RIV. This transaction will
add US$1.128bn of cash to the
balance sheet and could reduce its
gearing for FY11 from 1.4x to 1.1x.
We retain our Buy (1) rating and sixmonth target price of Rs697, based
on a target 5.0x EV/EBITDA
multiple on our FY13 forecasts. The
key risks to our target price are
higher-than-expected raw-material
costs, lower-than-expected steel
prices and steel sales volume, and a
delay in the Jamshedpur steel
plant’s expansion.
ƒ How we differ
Our FY12-13 EPS are 15-22% below
those of the Bloomberg consensus.
We maintain our target price as we
await clarity on the utilisation of the
proceeds from the stake sale. If the
company fast tracks its Orissa
project, then there should be no
balance-sheet deleveraging.
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