Govt queers Vedanta buy

Vedanta's problems with the government show no signs of an early resolution.

The mining ministry's inordinate delay in giving approval to group firm Hindustan Zinc to buy London-based Anglo American's zinc mines has forced the company to route it through Sterlite.

The government holds 29.5 per cent stake in HZL and has board representation. Sterlite Industries owns 64.9 per cent. The remaining stake is with the public and institutions.

Sterlite Infra, a subsidiary of Sterlite Industries, has just completed the acquisition of the first asset of Anglo, the Skorpion zinc mine, for $707 million.

A company official, who declined to be quoted, said government approval was necessary for HZL to buy the mines, adding: "It hasn't come until now." The official said approvals for the deal are being worked out in the government and once a green signal is received, Anglo's assets will be transferred from Sterlite to HZL.

This means the mammoth $3 billion in cash with debt-free HZL lies unused. Sterlite, on the other hand, has to shell out $1.3 billion to buy out Anglo's assets.

The transaction is an all-cash deal and by the end of the second quarter of the current fiscal, Sterlite had $2 billion in cash and cash equivalents.

Government officials say they cannot grant approval without proper independent diligence.

"We were not party to the original agreement between Anglo American and Vedanta. Without an independent diligence we cannot move forward.

"The mines ministry has recently got access to some documents. We have to look at it and then take a call," said a senior government official.

The mining ministry will also rope

in the law and finance ministry to ensure due diligence of the deal and, if required, may even rope in a technical expert to assess the quality of the mine.

"They are working mines, so technical diligence should not be an issue," the official added. He, however, refused to give a specific timeline and said it is still not clear if the matter has to go to Cabinet."

Analysts are surprised by the developments. "Consummation of the transaction through Sterlite Industries, instead of HZL, is a surprise.

Skorpion has advantages of low cash cost, and the valuation is low at EV/EBITDA of only 3.5-4.0x (assuming flat volumes).

"However, the low mine life of only six years is a concern; synergy benefits are not clear at this stage. This negates the advantages leaving us neutral on the transaction; upsides would then be only due to addition of resources," wrote Prasad Baji and Manan Tolat, mining analysts at Edelweiss, in a recent report.

According to the original deal, HZL was supposed to buy the three mines of Anglo for $1.3 billion. The Skorpion zinc mine has been bought by Sterlite for $707 million.

When announced, Vedanta had said that the company will pay $698 million for the mine. The company expects the other two mine buys to be complete within six months.

HZL has a total capacity to produce of 964,000 tonne of zinc and lead combined. Anglo is one of the top five global zinc producers.