Grupo exit clears way for Sterlite-Asarco deal

Sterlite may bag US firm for less than its original $2.6 bn bid

MUMBAI: The ways appears to be clear for Sterlite, India’s third-largest copper producer, to acquire Asarco, the bankrupt copper mining firm. The US firm’s parent, Grupo Mexico has decided not to pursue its $2.7 billion counter bid for the company. It said falling copper prices and the current market conditions forced it to take back the bid.

After making a $2.6 billion bid for Asarco, Sterlite had in October decided to cancel the offer, citing the steep fall in copper prices (The metal’s prices have fallen 43% this year on the London Metals Exchange). It decided to make a substantially lower bid.

A Sterlite official said, “Prices have come down to below $3,600 per tonne now from $8,129 per tonne when the offer was made.”

“We will now make a fresh offer, but at a fraction of the earlier bid.”

With Grupo backing out completely, the road ahead for Sterlite has become smoother, said an analyst. “The decision is to be made by the bankruptcy court and, with Sterlite being the sole buyer, it is easier for them to take-over Asarco at a fraction of the original bid,” the analyst said.

However, analysts also believe that, given the current price drop of copper, buying out Asarco will be a loss-making deal. Bijal Shah and Sumit Pathak of India Infoline, in their report on November 14, said, “Asarco falls in the highest quartile in terms of cash cost of production, unlike Sterlite’s existing businesses, where it is a cost leader. Hence, any further drop in copper prices would make the Asarco acquisition loss-making and value-dilutive for Sterlite.”

They said Asarco’s cost of production, at US$3,300 per tonne, is very close to the marginal cost of copper production and the company will incur losses if copper price falls below $3,000 per tonne.

Another analyst with a research firm said, “Loss on copper production for Sterlite cannot be ruled out as prices of other metals like aluminium and zinc are already below their marginal cost of production.”

The analyst said the demand for copper is weakening and the supply will continue to be restrained till 2010 when some capacity additions are expected to come on board.

“This may well result in copper prices dropping below the marginal cost of production. In such a scenario, Asarco could become a loss-making proposition for Sterlite,” he said.

At the current rate of production, Asarco has copper to sustain for the next 26 years.

Asarco had filed for bankruptcy due to several environmental-related liabilities and Sterlite, in June, entered into agreement to acquire its assets. Its operating assets include three copper mines and copper smelting and refining operations each.