Friday, June 8, 2012

>SESA GOA: Sterlite signs bauxite supply agreement

Sterlite signs bauxite supply agreement with companies holding mining concessions
Sterlite Industries mentioned in its recent 6K filing to the SEC that it has entered into a tripartite agreement with Larsen & Toubro Limited (L&T) and Raykal Aluminium (Raykal). L&T holds certain prospecting licenses for bauxite mines located at Sijmali and Kurumali of Rayagad and Kalahandi districts of Orissa. STLT will acquire 100% of equity share capital of Raykal in a phased manner at a total consideration of INR18bn in a milestone based acquisition. We understand from the Directory of Geology, Government of Odisha, that the mines have c250mt of reserves and parts of land are under 'village forest' category, thereby requiring Forest Clearance under Stage 2 of Ministry of Environment & Forests (MoEF) approvals.

If mine eventually starts functioning after 3-4 years, we look at upsides in various scenarios Since L&T has a Prospecting License only, we understand that it would take significant amount of time for the company to finally sign a Mining Lease, if it manages to get the requisite approvals. Assuming that it takes 3-4 years for the mine to start, and STLT incurs additional exp of INR15b, we calculate potential upsides to our TP on a DCF-to-firm basis, based on these scenarios. Please refer exhibit 1 for a detailed summary of our assumptions 

A) Assuming current capacities at Vedanta Aluminium (VAL) alumina (1mtpa) and aluminium (0.5mtpa) are only functional we derive a potential upside of INR1 per share of SESA STERLITE.

B) Assuming that eventual approval from is obtained for operating expanded alumina capacities (alumina expansion currently put on hold), and accounting for the incremental USD1.5bn capex which VAL will have to incur, we derive a potential upside of INR14 per share of SESA STERLITE.

Valuations & risks: We value SESA on an SoTP basis at INR210 per share and rate SESA Neutral. 

To read report in detail: SESA GOA