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| Edited By: Promit Mukherjee |Source: DNA |Updated: Mar 30, 2018, 03:48 AM IST
Tata Steel, India’s largest private sector steel manufacturer, is poised to make substantial gains from its investment in Sydney-based Riversdale Mining Ltd, after Rio Tinto, the world’s third biggest miner, announced interest to acquire Riversdale on Monday.
Tata Steel controls over 24.1% equity in Riversdale.
Pinakin Parekh and Neha Manpuria, analysts with JP Morgan, in a note on Monday allude to this.
“As of now, Tata’s 24% stake in Riversdale and 35% stake in Benga project mean it is well positioned to benefit from any increase in value of Riversdale,” they said.
A press statement issued by the Africa-focused Riversdale said that it has held discussions with Rio Tinto concerning a possible transaction at the corporate level for a sale of Australian $15 per share.
At A$15 per share, the total value of Riversdale stands at A$3.5 billion or US $3.4 billion, approximately Rs15,300 crore.
The carrying value (or the cost of acquisition) in Tata Steel’s balance sheet is $232 million for a 21% stake, Parekh and Manpuria said. The company subsequently bought 3.1% more shares.
The value of Tata’s holding in Riversdale is estimated at $840 million by Parekh and Manpuria.
While discussions with Rio Tinto are ongoing, there is no certainty that Rio Tinto or any other party will proceed with any proposal for the acquisition of Riversdale, the statement said.
It added that from time to time the company enters into confidential, non-binding discussions with third parties concerning possible transactions at either the corporate level or the asset level.
But a formal proposal has not been submitted by Rio Tinto so far.
Analysts said Tata Steel also has offtake agreement from one of Riversdale’s most prolific mines in Mozambique. This puts Tata Steel in a very advantageous position to negotiate an attractive exit price, they said.
“In the medium term, Tata Steel will get respite because if it goes ahead with the offer of Rio Tinto, $750 million in cash will come into the company,” said Ravindra Despande, steel analyst with international brokerage firm Elara Capital.
He said the cash flow will bring in the debt-equity of the company from 1.9 to 1.8.
If the past is anything to go by, the Tata Group’s beverages firm Tata Tea had decided
to accept a generous offer from Coca-Cola Co,
for its minority investment in Glaceau, the
specialty water maker.
Tata Tea profited by $523 million from the deal.
However, the circumstances are different in this case, as one of the main motives behind investing in Riversdale was to get control of captive mines to feed its manufacturing units in Europe.
From a longer term perspective, there is no clarity on Tata Steel’s raw material security and also on its stand on the Mozambique project.
The other major investors in Riversdale are Brazilian company Companhia Siderurgica Nacional (CSN) with 13.2% and investment firm Passport Capital with 13.3%.
China’s Wuhan Iron & Steel Co also holds 8% in the company with investment agreement of $800 million in the Zambeze project, one of Riversdale’s major ones.
Tata Steel holds the 35% stake in Riversdale’s Benga project through a joint venture with a 40% offtake agreement.
The Benga project is among the two biggest ones that Riversdale has in Mozambique - the other being the Zambeze project.
The two projects together have 13 billion tonnes of coking and thermal coal resources.
According to Tata Steel’s annual report for last fiscal, the joint venture is currently developing Stage 1 of the Benga project, which entails production of 1.7 million tonnes of coking coal and 0.3 million tonnes of thermal coal.
A Tata Steel spokesperson said it views Riversdale as a valuable strategic investment and continues to be interested in developing the assets of the company.
“We will continue to monitor the situation and will take appropriate action as deemed necessary,” the spokesperson said.
Parekh and Manpuria of JP Morgan said any potential acquirer of Riversdale would provide an opportunity for Tata to monetise investments and given the Indian company’s stretched balance sheet, it would allow for de-leveraging.
However, they said, a counter bid to the offer is likely, except by Tata Steel, as its balance sheet does not support a counter bid capability.
In any case, it is a big positive for the company as a bid and a counter bid will increase the value of the mine, they said.
