Global rating agency Moody's today said Vedanta Resources' $1.7 billion buyout of US-based copper producer Asarco has put pressure on its ability to withstand operating challenges and fluctuations in base metal prices.
However, Moody's retained Vedanta's rating at Ba1, a low grade rating indicating risky fundamentals of the company.
"Vedanta's proposed acquisition of Asarco for $1.7 billion can be accommodated within the company's Ba1 rating. However, its flexibility to withstand operating challenges and further sustained weaknesses in base metal prices has declined," Moody's Investors Service said in a statement.
Also, Moody's warned that Vedanta's failure to achieve cost reduction targets across its operations, and further weakening of its operating and financial performance beyond expectations, would add downward pressure to its rating.
Sterlite Industries, the Indian arm of Vedanta Resources, on Saturday entered into a deal to buyout America's third largest copper producer Asarco for $1.7 billion. The Indian firm had last year entered into a pact to acquire the firm for $2.6 billion and later revised the offer price.
"Moody's had factored the potential acquisition of Asarco into Vedanta's rating -- although at a slightly lower price than the final consideration of $1.7 billion -- when it downgraded the company's corporate family rating to Ba1 from Baa3 on December 22, 2008," Moody's analyst Ivan Palacios said.
The deal, coupled with Vedanta's lower-than-expected quarterly financial result and the pressure on Asarco's profitability amid declining copper prices has led to decline in company's financial flexibility and cushion within the current rating.
For the quarter ended December 2008, Vedanta reported an EBITDA of $10.1 million. It had an EBITDA of $672 million in the same quarter of last year, the statement said.
On Asarco quarterly performance, Moody's said that as a result of the firm's high fixed-costs base and rapidly declining copper prices, its performance was weak during the quarter ended December 2008 leading to a quarterly EBITDA loss of $67 million.
However, Asarco reported EBITDA of $1.8 million for the month of January 2009 through better cost management.