Bankrupted by about $7.9 billion in asbestos-related lawsuits, US copper miner Asarco LLC, which is to be taken over by India's Sterlite Industries, said it would allow general unsecured environmental claims of about $835.7 million and give $275.3 million in cash to federal and state governments for environmental liability at about 54 sites across the United States.
The company filed a motion with a US bankruptcy court seeking approval to enter into five settlement agreements that will resolve the "vast majority" of its remaining environmental claims.
Earlier this month, Sterlite Industries (India) Ltd, a subsidiary of the London-based Vedanta Resources Plc, signed an agreement with Ascaro, a Tucson-based mining, smelting and refining company, for purchase of substantially all its operating assets. The deal is expected to become operational in four to five months.
The Anil Agarwal-promoted Sterlite Industries would acquire Ascaro, America's third largest copper producer, for $1.7 billion (Rs 8,756.6 crore). Under the deal, Sterlite will make a cash payment of $1.1 billion on closing; and a senior secured non-interest bearing promissory note for $600 million, payable over a period of nine years - $20 million per year from the end of second year for a period of seven years – as well as a a terminal payment of $460 million at the end of the ninth year, totaling $600 million. (See: Sterlite to buy US copper mining company Asarco for $1.7 billion).
Sterlite and Asarco's parent Grupo Mexico have been fighting in court over the deal for months. Asarco, which operates three copper mines in Arizona, sought bankruptcy protection when faced with heavy environmental lawsuits.
Good for Sterlite
Analysts see Sterlite's revised bid to acquire only the operating assets Asarco as largely positive, even though the high cost structure of Asarco and low copper prices are key concerns in the short-term.
A key element in the deal is that Sterlite will only pay for Asarco's assets and not for its non-operating liabilities, mainly in the form of environmental penalty claims.
Sterlite's expectations about cost reductions at Asarco and increase in mining output provide further comfort in terms of the long-term gains from the deal, which could reduce the payback period. ''Theoretically, if copper prices average over $6,000 in any three years, Sterlite would recover all its investment made to purchase Asarco,'' said one analyst.
Nonetheless, the revised offer, in terms of present value of the upfront and future payments, translates into a deal value of $1.35 billion, which is little more than half of the $2.6 billion which Sterlite was willing to pay for Asarco in June 2008. The reduction in offer price is not surprising given that in June 2008 copper prices were ruling around $8,000 per tonne; they are now down to about $3,650 per tonne.
Sterlite believes that Asarco's costs can be reduced by 15-20 per cent, which analysts suggest is possible given its track record of turning around acquired companies. After the acquisition, Sterlite is also hopeful of increasing Asarco's mining output by 20 per cent to 250,000 tpa without much extra capital expenditure.
Hence, analysts expect the deal to add to Sterlite's consolidated earnings by 10-15 per cent from fiscal 2011 onwards. But as the acquisition is likely to be completed around September 2009, and in view of the high costs and low copper prices, the deal could lower earnings by 1-2 per cent in the interim. The latter assumes a reduction in other income (about Rs300 crore) of Sterlite, as it would need to pay cash worth Rs 5,700 crore, and Asarco's net profit of Rs 175-200 crore in FY2009.
A few analysts, however, are of the view that Asarco is worth less than Sterlite's offer price. In its report, Credit Suisse says that the price should have been less than $1 billion.
Merrill Lynch values Asarco at $750 million and believes that on a one-year horizon, the acquisition is earnings dilutive by seven per cent.