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Sterlite’s Costly Acquisition
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The average ore grade for Asarco is 0.5 per cent, which is a lower grade. Mission, for instance, has average grade of 0.67 per cent, and for every tonne of ore it produces, three tonnes of waste rock need to be removed. As per mining experts, only enormous scale and efficiency of open pit mining operation could make such low-grade deposit economically viable. While the operation is profitable now, a lot depends on the future trajectory of copper prices.
For the moment the prices are just hovering above the marginal cost of mining. At current copper price of $3,600 per tonne, Asarco’s marginal cost is just about $450 lesser.
But then, unlike other metals such as aluminium and zinc, the downside price risk is greater for copper, according to a research report by IIFL, the institutional arm of India Infoline. “Aluminium and zinc are currently 20-30 per cent below marginal cost of production. The current copper price is more than three times the bottom of $1,333 per tonne, whereas aluminium is close to its 10-year bottom and zinc about 50 per cent higher than its bottom,” it says.
Asarco operations are unlikely to help source copper concentrate for its Indian smelting operations. In contrast, “Asarco will operate as an integrated producer with its mining, smelting and refining operations in the US, while Indian smelting operations will continue to source copper concentrate from third parties,” says Sumanth Cidambi, director for investor relations at Sterlite Industries.
So, Sterlite is far from becoming an integrated copper producer. Till date, the company has largely remained a custom smelter. It sources 92 per cent of its copper concentrates from third parties while the rest comes from its Australian mines.
Non-integrated operations would mean having to live with higher profit fluctuations, which do not always move in tandem with copper prices. In 2007, higher copper prices combined with a marked deficit in copper concentrate led to substantial percentage of profits going to the miners.
Cidambi says the company when arriving at the valuation for Asarco did its math based on long-term copper price of $4,000 per tonne (till 2013). Longer recessionary trends in the global economy and delay in infrastructure spending from China could affect copper demand significantly, bringing down prices.
Reena Walia, base metals analyst at Angel Commodities, is bullish on the red metal. “We have a bullish view for FY2009 and feel that prices could trade at higher levels between $4,500 and $5,500,” she says.
For the moment at least, the Sterlite management would not be red faced.
(Businessworld Issue Dated 17-23 March 2009)