Zuari Industries - Peru mine buy positive for proposed NPK plant; company update; Buy :: Edelweiss

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Zuari Industries (ZUAR IN, INR 461, Buy)

Zuari Industries (Zuari) has announced backward linkage for its proposed 1 mn MT greenfield complex fertiliser plant in Karnataka. The company has acquired effective 9% stake in a Peruvian rock phosphate mine (yet to be developed) and put in place a firm offtake agreement for 100% of the phosphoric acid requirement. We view the development as a positive step for Zuari in terms of enhancing its business prospects as well as its commitment to grow in its core business of fertilisers. Maintain ‘BUY’.

Zuari’s JV buys 30% stake in Peru rock phosphate mine

MCA Phosphates (MCA) has bought 30% stake in a Peruvian mine Fosfatos del Pacifico (Fospac) for USD46mn. Singapore-based MCA is a JV between Zuari and Mitsubishi Corp of Japan, wherein Zuari has invested USD20mn for a 30% stake. Fospac has proven reserves of ~200mn MT of rock phosphate and is likely to have an initial production of 2.5mn MT/annum by 2015. Out of this, Zuari has a take–or-pay agreement for 1.25mn MT and a right to refusal for 0.75mn MT. The 1.25mn MT rock phosphate will suffice the requirements of Zuari’s proposed 1mn MT complex fertiliser plant. The balance 70% stake in Fospac is held by Cementos Pacasmayo, the second largest cement company in Peru.

Key highlights

·         Capex to develop the mine will be ~USD400mn over the next 2.5 years, of which USD200mn will be the equity component. In this context, Zuari’s contribution to this capex equity is likely to be ~USD20mn.

·         Zuari is likely to invest ~USD700mn for the integrated facility comprising phosphoric acid facility and complex fertiliser granulation facility. Management indicated a timeline of two years for completion of this project.

Outlook and valuations: Capex cycle to kick off; maintain ‘BUY’

With backward linkage for raw materials in place, capex for the planned NPK plant is likely to kick off and be completed in 2015. We currently have a ‘BUY’ recommendation on the stock with SOTP target of INR907/share.