Vedanta: Expanding global presence

The acquisition of Anglo American gets Vedanta group a dominant position in the global zinc and lead business.

Among the several acquisitions by India Inc, there are a few that match the right philosophy at the right price. Vedanta’s acquisition of the zinc assets of Anglo American could well qualify for this slot. The $1.34 billion acquisition will give Hindustan Zinc, through which the deal has been routed, access to the Skorpion mine in Namibia, the Lisheen mine in Ireland and a 74 per cent stake in Black Mountain Mining in South Africa. The valuation is based on 3-3.5 times the enterprise value to earnings before interest tax depreciation and amortisation (Ebitda), quite a deal considering that valuation rates for earlier deals have been in excess of five times.

 

Even Hindustan Zinc’s enterprise value is currently at more than five times its Ebitda. The acquisition is expected to enhance the company’s position in the global metal industry with additional 13.3 million tonnes (mt) of proven reserves and 7.4 mt of probable reserves.

The company expects to enhance its presence in the global metal industry, taking its share to 11 per cent of the global zinc market, also raising its lead production by 37 per cent to 1.4 mt a year. Hindustan Zinc’s in-house exploration efforts had been gaining success as it reported an increase of 33.7 mt to its reserves and resources, prior to a depletion of 7.1 mt in financial year 2010, say analysts.

Importantly, these operations are already profit making at the operating level. The company pips others like Xstrata, China Metallurgical and Glencore, who were also in the fray for Anglo American assets. Moreover, the all-cash deal will help Hindustan Zinc better utilise its scarce resources. With around $2.6 billion in cash, said the management, the company was earning 5-5.5 per cent in treasury income.

The management holds that the company has been valued at a cost of production of around $1,800 a tonne and a long-term cost of $2,200 a tonne. This could be a tad expensive as Hindustan Zinc has an estimated production cost that is much lower at $900 a tonne (excluding royalties), even after a jump in coal prices. The ability of the management to integrate this business will be the critical factor, reckon analysts.