Metals and mining major Vedanta Resources will buy bankrupt US copper miner Asarco for $ 1.1 billion in cash and a note worth $ 600 million, the latter to be paid over a period of nine years.
Last year, Sterlite, a Vedanta Group company, had walked away from a $ 2.6 billion offer for Asarco's operating assets, citing weak copper prices and tight credit markets. Since then, the company has said it was keen to do a deal at the right price.
The new price tag on the deal reflects the slump in copper prices. Copper has dropped almost 60 per cent since the deal was attempted last year. On May 30, 2008, the day before the offer was unveiled, spot copper was trading at $ 7,760.98 a tonne in the Mumbai market. The price has dipped to $ 4,975.73 a tonne now.
The rationale for the deal is to expand Vedanta's presence in the US and to move towards being a fully-integrated producer of non-ferrous metals. Vedanta produces aluminium, copper, zinc, lead and iron ore in India and also has copper assets in Zambia and Australia.
Sterlite Chairman Anil Agarwal said: "The acquisition is in line with our strategy of leveraging our existing skills to become a diversified global copper producer and creating long-term value for shareholders."
The deferred component through a senior secured non-interest bearing promissory note will be payable as follows: $ 20 million per year from the end of the second year for a period of seven years; and a terminal payment of $ 460 million at the end of the ninth year.
In the event that the annual average of daily copper prices in a particular year rises beyond $ 6,000 per tonne, the annual payment in that year will be proportionately increased, subject to a maximum of $ 66.67 million, and the terminal payment in the ninth year will be correspondingly reduced, keeping the total payment at $ 600 million. The principal amount of the note will be adjusted for any variation in working capital on closing. The obligations under the note are secured against the assets being acquired and are without any recourse to Sterlite.
The agreement is subject to the approval of a US Bankruptcy Court. London-based Vedanta, which has the majority of its assets in India, is using Mumbai-listed subsidiary Sterlite as the acquisition vehicle.
Asarco is an integrated miner, smelter and refiner of copper. Asarco entered bankruptcy protection in 2005. Formerly known as American Smelting and Refining Company, Asarco is a 110-year-old company and is currently the third-largest copper producer in the US. It sold around 237,000 tonnes of refined copper in 2008.
Asarco's mines currently have estimated reserves of 5 million tonnes of contained copper. For the year ended December 31, 2008, Asarco had total revenues of nearly $ 1.9 billion and profit before tax of $ 393 million.
The integrated assets to be acquired include three open-pit copper mines and associated mills and SX-EW in Arizona, USA, a copper smelter in Arizona and a copper refinery, rod and cake plants and a precious metals plant in Texas.
Asarco, based in Tuscon, Arizona, faces $ 7.9 billion in claims. The company's main creditors are government agencies seeking payment for environmental clean-up and individuals who say they were damaged by asbestos-based products of an Asarco unit.
However, Sterlite will assume operating liabilities but not legacy liabilities for asbestos and environmental claims for ceased operations. The consideration being paid is towards the gross fixed assets and working capital of Asarco.