Shares of Sterlite Industries (India) Ltd rose by 6.4% to Rs280.40 on the National Stock Exchange on Monday, more than double the rate at which broad market indices rose.
The stock has now risen by about 40% from its lows in mid-November.
The company has been in the news lately, with reports suggesting that it’s close to a new deal to buy Asarco Llc. from bankruptcy. Asarco is an integrated copper producer based in the US and has been plagued by lawsuits related to environmental damages.
Sterlite had announced a plan to buy Asarco for $2.6 billion (about Rs12,640 crore today) last June, which got scuttled partly because of a parallel buyout attempt by Asarco’s parent company and partly because of the sharp fall in copper prices. News reports suggest that the bid would now be around $2 billion, but analysts say that would be way too high given Asarco’s high cost base.
The US miner’s cost of production is around $3,300 a tonne, while copper prices are around $3,400 a tonne currently. The fear is that even a slight drop in copper prices from current levels could result in cash losses at the firm.
Of course, with the drop in prices of most commodities, even Asarco’s cost of production, would come down, especially in terms of energy costs.
Still, some analysts believe that a bid of more than $1 billion would be too high for the bankrupt firm. Note that the $2.6 billion bid was made when copper prices were above $8,000 a tonne and Sterlite had assumed long-term copper prices at $5,500 a tonne.
While Sterlite will be ring-fenced from the existing environment-related lawsuits, the fact that it would operate in a developed country may make it susceptible to similar lawsuits in the future.
What’s more, from having a comfortable cash surplus of about $900 million, Sterlite would turn into a net debt company after the acquisition. It requires funds for its own expansion plans and for funding its subsidiaries, which implies that debt levels may rise substantially. It’s interesting that the company’s shares have risen smartly despite these concerns.
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