Vedanta Buys Anglo American Zinc Assets for $1.3 Billion

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Researched by Industrial Info Resources (Sugar Land, Texas)--Vedanta Resources plc (LSE:VED) (London, England) and Anglo American plc (OYC:AAUKY) (London) recently announced Vedanta's purchase of Anglo American's zinc assets for $1.3 billion. The purchase has cemented Vedanta's position as the world leader in zinc production, as the company now holds an 11% share in the global zinc market.

The transfer of the assets will be backdated to January 1, 2010. After all approvals are granted, the actual acquisition will be brought to fruition by Vedanta's 65% subsidiary Hindustan Zinc Limited (BSE:500188) (HZL) (Udaipur, Rajasthan).

HZL will dip into Vedanta's existing monetary base to fund the transaction. As of March 31, 2010, Vedanta boasted cash reserves of $7.2 billion, which includes cash, equivalents of cash and liquid investments, according to the company.

Anglo American has extensive zinc assets, which include 100% shares in the Namibian Skorpion mine and the Lisheen mine in Ireland, as well as a 74% stake in South Africa's Black Mountain Mining, which includes the Black Mountain mine and a mining project in Gamsberg. Of the total financial assets relating to these mines, Skorpion mine accounts for $698 million, the Lisheem mine accounts for $308 million, and Anglo American's major stake in Black Mountain Mining gives it control of $332 million.

In the calendar year ending December 2009, Anglo American Zinc boasted gross assets amounting to $845 million and posted profits of $154 million. In this period, the company manufactured 343,000 tons of zinc and 55,000 tons of lead.

Vedanta calls Anglo American Zinc an 'excellent operational and strategic fit with Vedanta's existing zinc business,' the prime reason being that the deal lifts Vedanta's zinc and lead production capacity by a substantial 37%, to 1.5 million tons from 1 million tons, and increases Vedanta's attributable resources and mineral reserves by 206 million tons, a 76% increase.

The Gamsberg mine in South Africa, one of the world's largest undeveloped zinc reserves, is said to harbor JORC mineral ore resources of about 186 million tons. A production capacity of 400,000 tons per year of zinc is being planned at the mine. The mine has an expected life of more than 20 years and has potential for addtional exploration.

There is major potential to extend mine life at the Black Mountain mine, and the Skorpion mine's potential lies in the ability to develop the recently discovered Gergarub deposit, which contains zinc and lead sulfite and is adjacent to the Skorpion mine.

Zinc demand and prices, both current and future, are expected to favor of Vedanta's Anglo American acquisition. Currently, zinc is trading at levels of $2,115 per ton, up from an average of $1,595 per ton in 2009. Since the peak of the economic recession, zinc prices have risen almost 150%. Vedanta Chairman Anil Agarwal, told local media that he was 'bullish on zinc' due to his belief that increasing quantities of steel would be galvanized as time goes by.

In the Vedanta press release, Agarwal said, "These high-quality assets complement Vedanta's existing portfolio, creating the largest zinc and lead producer in the world. We intend to rapidly develop Gamsberg, one of the largest, high-quality zinc projects in the world, leveraging our world-class, large-project development expertise."

Mirroring the success of the deal, Anglo American Chief Executive Officer Cynthia Carroll said, "This agreement represents an important milestone in our strategy to focus on our core commodity businesses and on the delivery of our exciting, near-term growth from our $17 billion worth of approved projects."

Apart from pending regulatory approvals and other clearances, there is one significant threat to the transaction. South African mining, extraction and processing company Exxaro Resources Limited (OTC:EXXAY) (Pretoria West, South Africa), which holds a 26% share in Anglo American's Black Mountain Mining, has the right to counter bid or match the offer presented by Vedanta for Black Mountain Mining.

However, Vedanta has said that if Exxaro makes a counter offer, Vedanta will still proceed with the other two mine purchases as listed in the agreement.

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