• Our global coal team expects international thermal coal prices to pick
up in CY11 ($101/ton for Newcastle coal vs. $95/ton in CY10), backed
by high China / India demand and supply / export constraints.
• We expect Indian IPPs to remain resilient to rising coal costs in the
medium term. 1) 81% of system-wide thermal coal is sourced from COAL
IN, which has seen a nominal 4.9% CAGR in prices over the last 10 years,
and is at a ~40-50% discount to international prices; 2) 73% (36% exNTPC) of ongoing projects in our coverage universe are insulated due to
regulated returns, and some PPAs have fuel cost pass-through as well-we
estimate a 10% rise in coal costs can raise average genco tariff by 5-6%.
• Long-term risks on both supply and pricing: 1) Firm guarantee by COAL
IN for only 50% of contracted quantity. As per JPM India mining analyst,
India is headed for a thermal coal shortage of 181MT by FY14 and thermal
coal imports could rise 2.8x from current levels. In our view, plants are at
risk of operating at lower capacity utilization or increasing their use of
imports, pushing up costs. Ongoing delays in developing captive coal
mining blocks could further tighten the situation. 2) Indian coal policy
makers are exploring pricing domestic coal at parity with imported coal, and
also a pool pricing mechanism. 3) End of regulated return era for new PPAs:
long-term risk of margin squeeze due to rising coal costs.
• Indian IPPs’ relative position and stock picks: TPWR benefits from
rising coal prices due to its stake in Indonesian coal mines, however past
coal price rises have been neutralized by cost hikes and bottom line flowthru has been limited. JSWE most at risk: 66% of its capacity is on ST
tariffs and all coal is sourced at international market rates. Lanco: Well
hedged fuel strategy, only 1.2GW on imported coal with regulated tariffs.
NTPC: All projects are regulated, coal cost is pass-through. Adani: sweet
coal pricing deal from Adani Enterprises protects it to large extent. RPWR:
captive mines + some pass-through protection in place for 38% of capacity.
• Indian IPPs shopping abroad for resources, with billions of dollars to
spend: we expect long-term benefits and the quest to intensify. Adani
Group spent an upfront US$455M for 7.8Bt Australian Galilee asset and will
pay royalties of A$2 for each ton of production. JSW Energy spent
US$414M for South African coal assets. TPWR was an early bird in
Indonesia, but has stated its appetite for more. GMRI has made smaller buys.
GVK and Lanco have reportedly bid ~US$1B for Australia’s Griffin Coal
which has 250-300MT of reserves. We expect a 5-year cycle for coal mine /
infrastructure development and hence benefits to accrue only post that.
Sunday, December 24, 2006
Sunday, October 22, 2006
Sterlite completes acquisition of Skorpion zinc mine., Kotak Sec,
Sterlite Industries (STLT)
Metals
Sterlite completes acquisition of Skorpion zinc mine. Sterlite completed acquisition
of Skorpion zinc mine in Namibia at a consideration of US$707 mn from Anglo
American plc. Sterlite expects to complete acquisition of remaining two zinc mines from
Anglo American by end-FY2011E. Acquisition of the entire portfolio of Anglo American
zinc mines will be EPS accretive though value accretion will be contingent on (1) longterm zinc price sustaining above US$1,900/ton and/or (2) significant accretion to
reserves.
Sterlite completes acquisition of Skorpion zinc mine; remaining two likely by end-FY2011E
Vedanta Resources had entered into a definitive agreement to acquire zinc assets of Anglo
American (Anglo) for a cash consideration of US$1.33 bn in May 2010. Vedanta stated at the time
of acquisition that (1) consummation of each of the three operational zinc assets in South Africa,
Namibia and Ireland would be done separately and (2) it would seek approval from HZ board and
Indian Government to complete acquisition through Hindustan Zinc (HZ), failing which the
acquisition will be done by Sterlite Industries.
Sterlite completed acquisition of Skorpion zinc mine in Namibia (after HZ failed to get approvals in
time) at a consideration US$707 mn (increase in consideration by US$9 mn since the initial
announcement is entirely attributable to accrued cash). Sterlite standalone entity can easily fund
the acquisition through its cash reserves of US$2 bn at end-Sep ’10. However, the acquisition of
Anglo zinc assets by Sterlite leads to inefficient capital and corporate structure.
Skorpion mine acquisition will be EPS accretive though value neutral
Skorpion mine has reserves of 911 kt of contained zinc metal, resources of 24 kt and annual
production of 150.4 kt of zinc at end-2009. Financials will be consolidated with retrospective
effect from Jan 1, 2010. Cost of production is at ~US$904/ton. We expect this acquisition to add
4.2% and 4.1% to our FY2012E and FY2013E EPS, at a zinc price of US$2,150 and US$2,250/ton.
We expect the acquisition to be value-neutral on disclosed reserves and long-term zinc price of
US$1,850/ ton. At the spot price of US$2,208/ ton, the acquisition will add Rs4 to our fair value.
Completion of remaining mines by end-FY11E and will entail further cash outflow of US$640 mn
Sterlite expects to complete acquisition of Lisheen mine in Ireland (935 kt of reserves and 102 kt of
resources) and Black Mountain mine in South Africa (480 kt of reserves and 378 kt of resources)
by end-FY2011E at a consideration of US$640 mn. Total consideration of all three mines stands at
US$1,347 bn, which Sterlite can easily fund through its cash reserves. Acquisition will add 8.3%
and 8.4% to our FY2012E and FY2013E EPS at zinc price of US$2,150/ton and US$2,250/ton,
respectively.
Acquisition of Anglo American zinc assets will make the company one of the largest zinclead producers in the world. Anglo American will add close to 400 ktpa of zinc-lead
production. The entire acquisition is value neutral; assuming mine life ends at the current
disclosed proven and probable reserves and assuming zinc prices of US$2,000, US$2,150
and US$2,250/ton for the next three years and long-term average of US$1,850/ton. The
entire acquisition becomes value accretive on (1) conversion of mineral resources of existing
mines to reserves and (2) option value of Gamsberg undeveloped mines. The conversion of
resources to reserves will add Rs10 to our fair value.
We compute value accretion of Rs7/share assuming long-term zinc prices stay at the current
level of US$2,208/ton. Anglo assets will likely generate EBITDA of US$310 mn in FY2012E at
the current zinc price; the acquisition consideration will appear inexpensive at 4.3X FY2012E
EBITDA.
Operating zinc assets are of high quality
Operating mines acquired/to be acquired from Anglo is of high quality; the cash costs of
these mines would in the 2
nd
quartile (range US$639/ton to US$1,018/ton). The three mines
acquired/to be acquired generated revenues of US$340 mn, EBITDA of US$171 mn and net
income of US$137 mn in 1HCY10 at an average LME zinc price of US$2,161/ton.
Details of mines acquired
` Integrated zinc mining and refining facilities named Skorpion in Namibia with annual
production capacity of 150 ktpa. The mine has reserves of 911 kt of contained zinc and
total resources of 24 kt at end-2009 with mine life of seven years. Vedanta has paid
US$707 mn for this mine. Cash cost of production in 1HCY10 was US$911/ton.
` Underground mine named Lisheen in Ireland with zinc and lead metal in concentrate
reserve of 935 kt (mine life of six years) and resources of 86 kt. Vedanta is expected to
pay US$308 mn for this mine. Cash cost of production in 1HCY10 was US$639/ton.
` 74% stake in Black Mountain mine in South Africa. Black Mountain is an underground
mine producing zinc (28.2 ktpa) and lead (49.1 ktpa) concentrate. Black Mountain mine
reported revenues, EBITDA and net income of US$54 mn, US$15 mn and US$11 mn in
CY2009.
In addition, Vedanta gets rights to the Gamsberg mine, one of the largest undeveloped zinc
deposits with potential resources of 186 mn tons. Vedanta indicates the potential to
produce 400 ktpa of zinc and lead. Vedanta has paid US$1.3 bn for these assets. Note that
the Gamsberg mine will ramp up to 400 ktpa of production only by 2018E. Press reports
indicate a capex of US$1.8 bn to ramp up the projected capacity.
Metals
Sterlite completes acquisition of Skorpion zinc mine. Sterlite completed acquisition
of Skorpion zinc mine in Namibia at a consideration of US$707 mn from Anglo
American plc. Sterlite expects to complete acquisition of remaining two zinc mines from
Anglo American by end-FY2011E. Acquisition of the entire portfolio of Anglo American
zinc mines will be EPS accretive though value accretion will be contingent on (1) longterm zinc price sustaining above US$1,900/ton and/or (2) significant accretion to
reserves.
Sterlite completes acquisition of Skorpion zinc mine; remaining two likely by end-FY2011E
Vedanta Resources had entered into a definitive agreement to acquire zinc assets of Anglo
American (Anglo) for a cash consideration of US$1.33 bn in May 2010. Vedanta stated at the time
of acquisition that (1) consummation of each of the three operational zinc assets in South Africa,
Namibia and Ireland would be done separately and (2) it would seek approval from HZ board and
Indian Government to complete acquisition through Hindustan Zinc (HZ), failing which the
acquisition will be done by Sterlite Industries.
Sterlite completed acquisition of Skorpion zinc mine in Namibia (after HZ failed to get approvals in
time) at a consideration US$707 mn (increase in consideration by US$9 mn since the initial
announcement is entirely attributable to accrued cash). Sterlite standalone entity can easily fund
the acquisition through its cash reserves of US$2 bn at end-Sep ’10. However, the acquisition of
Anglo zinc assets by Sterlite leads to inefficient capital and corporate structure.
Skorpion mine acquisition will be EPS accretive though value neutral
Skorpion mine has reserves of 911 kt of contained zinc metal, resources of 24 kt and annual
production of 150.4 kt of zinc at end-2009. Financials will be consolidated with retrospective
effect from Jan 1, 2010. Cost of production is at ~US$904/ton. We expect this acquisition to add
4.2% and 4.1% to our FY2012E and FY2013E EPS, at a zinc price of US$2,150 and US$2,250/ton.
We expect the acquisition to be value-neutral on disclosed reserves and long-term zinc price of
US$1,850/ ton. At the spot price of US$2,208/ ton, the acquisition will add Rs4 to our fair value.
Completion of remaining mines by end-FY11E and will entail further cash outflow of US$640 mn
Sterlite expects to complete acquisition of Lisheen mine in Ireland (935 kt of reserves and 102 kt of
resources) and Black Mountain mine in South Africa (480 kt of reserves and 378 kt of resources)
by end-FY2011E at a consideration of US$640 mn. Total consideration of all three mines stands at
US$1,347 bn, which Sterlite can easily fund through its cash reserves. Acquisition will add 8.3%
and 8.4% to our FY2012E and FY2013E EPS at zinc price of US$2,150/ton and US$2,250/ton,
respectively.
Acquisition of Anglo American zinc assets will make the company one of the largest zinclead producers in the world. Anglo American will add close to 400 ktpa of zinc-lead
production. The entire acquisition is value neutral; assuming mine life ends at the current
disclosed proven and probable reserves and assuming zinc prices of US$2,000, US$2,150
and US$2,250/ton for the next three years and long-term average of US$1,850/ton. The
entire acquisition becomes value accretive on (1) conversion of mineral resources of existing
mines to reserves and (2) option value of Gamsberg undeveloped mines. The conversion of
resources to reserves will add Rs10 to our fair value.
We compute value accretion of Rs7/share assuming long-term zinc prices stay at the current
level of US$2,208/ton. Anglo assets will likely generate EBITDA of US$310 mn in FY2012E at
the current zinc price; the acquisition consideration will appear inexpensive at 4.3X FY2012E
EBITDA.
Operating zinc assets are of high quality
Operating mines acquired/to be acquired from Anglo is of high quality; the cash costs of
these mines would in the 2
nd
quartile (range US$639/ton to US$1,018/ton). The three mines
acquired/to be acquired generated revenues of US$340 mn, EBITDA of US$171 mn and net
income of US$137 mn in 1HCY10 at an average LME zinc price of US$2,161/ton.
Details of mines acquired
` Integrated zinc mining and refining facilities named Skorpion in Namibia with annual
production capacity of 150 ktpa. The mine has reserves of 911 kt of contained zinc and
total resources of 24 kt at end-2009 with mine life of seven years. Vedanta has paid
US$707 mn for this mine. Cash cost of production in 1HCY10 was US$911/ton.
` Underground mine named Lisheen in Ireland with zinc and lead metal in concentrate
reserve of 935 kt (mine life of six years) and resources of 86 kt. Vedanta is expected to
pay US$308 mn for this mine. Cash cost of production in 1HCY10 was US$639/ton.
` 74% stake in Black Mountain mine in South Africa. Black Mountain is an underground
mine producing zinc (28.2 ktpa) and lead (49.1 ktpa) concentrate. Black Mountain mine
reported revenues, EBITDA and net income of US$54 mn, US$15 mn and US$11 mn in
CY2009.
In addition, Vedanta gets rights to the Gamsberg mine, one of the largest undeveloped zinc
deposits with potential resources of 186 mn tons. Vedanta indicates the potential to
produce 400 ktpa of zinc and lead. Vedanta has paid US$1.3 bn for these assets. Note that
the Gamsberg mine will ramp up to 400 ktpa of production only by 2018E. Press reports
indicate a capex of US$1.8 bn to ramp up the projected capacity.
Thursday, September 28, 2006
Steel Sector Under The New Regime:: Ambit
Metals & Mining — Steel Sector Under The New Regime
Material costs are usually the single largest cost item for a steel producer. Given that raw material price acts as a swing factor in steel companies’ gross and operating margins and given the volatility of input prices in the recent quarters, we highlight the impact of high input prices on the steel industry’s margins. We find that over the last 4-5 quarters, the steel industry’s margins have been compressed significantly. Pricing power is likely to remain with the miners for a couple of years until excess capacity in the steel sector dries up and fresh mining capacity is added.
Operating margins in the steel sector have dropped: Analysis of the differential between steel prices and key raw material prices (which is the biggest cost for a steel producer and usually a swing factor for margin trends) shows that gross and operating margins in the steel sector have dropped since 2008 . Further, markets have taken cognizance of the greater volatility in input prices –stock prices in the sector seem to reflect the spread between steel and input prices rather than the absolute level of steel prices
The change catalyst has been demand rather than the cartel among suppliers: The fragmented nature of the global steel industry and the dominance of a few companies/countries in the global iron ore market are factors that have been prevalent for a long time. In our view, the emergence of China as a major steel producer and importer of iron ore, and the resulting robust demand growth (China’s import of iron ore increased by about 30% p.a. in the 2003-2005 period and has continued to be at more than 15% even in subsequent years), have been the main reason for the substantial iron ore price increase since 2004.
The current level of margins could prevail for a couple of years: Pricing power is likely to remain with the miners for a couple of years until excess capacity in the steel sector dries up and fresh mining capacity is added. Until that time, the current (lower) levels of operating margins are likely to continue, as with the quarterly contract system, miners will be in a position to pull away the benefit of any steel price increase. For the January-March 2011 quarter, we expect iron ore contract prices to settle about 8% higher sequentially while coking coal contract prices should be ~7% higher (in the range of US$220-US$225/t). We expect the steel companies to largely pass on the input price hike to consumers. But a significant expansion in margins, led by any large steel price increase seems unlikely.
How are the Indian companies placed? To understand the risk of higher-than-expected input costs, we look at the level of integration with respect to the key inputs of iron ore and coking coal, as well as the companies’ cost structure. Among the three Indian large-cap steel companies, SAIL is most integrated as far as iron ore is concerned (followed by Tata Steel), and only Tata Steel has protection (although still a relatively low level) with respect to coking coal price increases. JSW Steel’s profitability is most at risk due to higher-than expected RM price increases. Our recommendation on stocks in the sector ( BUY on Tata Steel and JSW Steel and HOLD on SAIL ) relies on: (i) the level of raw material integration; (ii) demand pattern in key markets; and (iii) expected capacity growth.
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