Vedanta buying Asarco for US$1.7B

Vancouver – Beleagured US copper giant Asarco has agreed to Vedanta Resources‘ (VED-L) revised US$1.7 billion offer for its assets following the breakdown of a previously announced US$2.6 billion deal. Vedanta is India’s largest mining company.

The US Bankruptcy Court of the Southern District of Texas, Corpus Christi Division, must re-approve the sale as Asarco has been under bankruptcy protection for the past three years in order to insulate itself from more than US$1billion in environmental liabilities.

The new deal has Vedanta buying Asarco’s operating assets through its 59.9%-owned subsidiary Sterlite with US$1.1 billion in cash and a US$600 million non-interest bearing loan payable over nine years. Asarco itself is a 54.8%-owned subsidiary of Grupo Mexico.

The agreement would transfer operational but not legacy liabilities, of which the list is long, to Vedanta.

The assets are three open-pit copper mines in Arizona – Mission, Ray and Silver Bell – solvent extraction and electrowinning facilities at the latter two mines and copper smelters in Hayden, Arizona, and in El Paso, Texas.

In 2008 these operations produced 233,000 tonnes of refined copper and revenues of US$1.9 billion.

They would add significantly to Vedanta’s copper wing. In the third quarter ending Dec. 31, 2008 Vedanta mined 27,000 tonnes of copper and produced 155,000 tonnes of copper cathodes and rods.

Vedanta is also a major miner and producer of alumina/aluminium, refined zinc and iron ore. All told it has annual revenues of about $8 billion and as of Dec. 31, 2008, it had cash and cash equivalents of US$5.3 billion.

The terms of the new sale agreement give Asarco a $100 million secured letter of credit with an additional $25 million available if the transaction receives court approval.

Until April 15, when Asarco anticipates a court decision concerning the sale, Asarco can continue to entertain other potential suitors for its assets under the terms of a “Go Shop” clause. If the court rules in favour of the transaction Asarco can no longer look for alternative buyers.

The US$2.6 billion deal agreed to in May, 2008, fell apart after Vedanta told Asarco at a court ordered bankruptcy status conference Oct. 14 that due to tightening credit markets and resultant changes to how it was financing its own operations it no longer considered the acquisition viable unless Asarco reduced its price.

In the following months the two companies continued talks, and although these initially failed to produce a new agreement, they eventually led to Asarco consenting to slash $900 million from its price-tag.

A source close to the transaction who wished to remain unnamed said the US Department of Justice considered the bankruptcy case one of the most complex in American history.

By and large Asarco sought bankruptcy protection in 2005 due to environmental liabilities, though pension obligations and labour issues contributed. 

It has about 95,000 asbestos-related personal claims pending against it from the company’s asbestos mining and cement pipe manufacturing operations which ended in the late eighties and early nineties respectively.

And on top of the asbestos injury claims it is on the hook for cleanup costs at dozens of historic mining sites across the US, messes it has allegedly created over the past 110 years.

One of the primary roles of the courts has been to try and unravel who among federal, state and private claimants would be owed what by Asarco and how Asarco would pay them.

To make matters more complicated, while Asarco has been under bankruptcy protection it has had to negotiate with striking workers, fill a  CEO-vacumn created by the resignation of Daniel Tellechea and acclimatize to a new board of directors after the court stripped control of the board from Grupo Mexico, which, adding to Asarco’s headaches, has opposed any sale of its assets.

Until it fell through, the US$2.6 billion deal with Vedanta, which the court approved, seemed to begin the last chapter of a long and complicated court-mediated process.

Although nothing was set in stone, after the deal was announced Bloomberg news reported that about US$2.1 billion of it would go towards resolving environmental liabilities.

Asarco itself was recommending that US$1.6 billion would be put in a trust in a global settlement “to pay its fair share of environmental liability at over 75 sites across the country – making this the largest environmental settlement in history,” the company said

At the moment, with pending court proceedings that must consider the Vedanta-Asarco deal all over again, it is unclear how much Asarco will be setting aside for liabilities.