Tuesday, February 7, 2012

>ZUARI INDUSTRIES: Peru mine buy positive for proposed NPK plant

Zuari Industries (Zuari) has announced backward linkage for its proposed 1mn MT greenfield complex fertiliser plant in Karnataka. The company has acquired effective 9% stake in a Peruvian rock phosphate mine (yet to be developed) and put in place a firm offtake agreement for 100% of the phosphoric acid requirement. We view the development as a positive step for Zuari in terms of enhancing its business prospects as well as its commitment to grow in its core business of fertilisers. Maintain ‘BUY’.

■ Zuari’s JV buys 30% stake in Peru rock phosphate mine
MCA Phosphates (MCA) has bought 30% stake in a Peruvian mine Fosfatos del Pacifico (Fospac) for USD46mn. Singapore-based MCA is a JV between Zuari and Mitsubishi Corp of Japan, wherein Zuari has invested USD20mn for a 30% stake. Fospac has proven reserves of ~200mn MT of rock phosphate and is likely to have an initial production of 2.5mn MT/annum by 2015. Out of this, Zuari has a take–orpay agreement for 1.25mn MT and a right to refusal for 0.75mn MT. The 1.25mn MT rock phosphate will suffice the requirements of Zuari’s proposed 1mn MT complex fertiliser plant. The balance 70% stake in Fospac is held by Cementos Pacasmayo, the second largest cement company in Peru.

Key highlights
• Capex to develop the mine will be ~USD400mn over the next 2.5 years, of which USD200mn will be the equity component. In this context, Zuari’s contribution to this capex equity is likely to be ~USD20mn.
• Zuari is likely to invest ~USD700mn for the integrated facility comprising phosphoric acid facility and complex fertiliser granulation facility. Management indicated a timeline of two years for completion of this project.

Outlook and valuations: Capex cycle to kick off; maintain ‘BUY’ With backward linkage for raw materials in place, capex for the planned NPK plant is likely to kick off and be completed in 2015. We currently have a ‘BUY’ recommendation on the stock with SOTP target of INR907/share.

To read the full report: ZUARI INDUSTRIES