Oil Gambit Helps India Mining Billionaire Lead Rio: Commodities

Until three years ago, Anil Agarwal never thought he should branch into oil. Today the business helps the Indian mining magnate keep his place among billionaires.

Agarwal’s $8.7 billion purchase of Cairn India Ltd., the country’s biggest onshore oil producer, diversified investors in his Sesa Sterlite Ltd. metals group against a slump in mining stocks. Sesa jumped in recent months and gained 5.4 percent since the 2011 deal, while BHP Billiton Ltd. rose 1.1 percent and Rio Tinto Group fell 4.5 percent.

Cairn India helps the 59-year-old counter a mining slump after government and environmental challenges halted his iron ore mines and a multibillion dollar investment to build an integrated aluminum producing complex. He won access to India’s biggest oil deposit on land and a market where energy demand is forecast to increase 14 percent in the five years to 2015.

“It’s common sense, it’s survival and it’s paying off now,” said P. Phani Sekhar, a Mumbai-based fund manager at Angel Broking Ltd., which owns Cairn India shares. “Agarwal is wedded to commodities and oil was a commodity he didn’t have. It balanced his businesses and helped him ride the downturn in the other sectors.”

Agarwal, whose net worth declined 9 percent this year to $3.4 billion according to the Bloomberg Billionaires Index, combined the nation’s biggest copper producer Sterlite Industries (India) Ltd. with iron-ore miner Sesa Goa Ltd. in August and transferred ownership of Cairn India to the merged entity. The move lifted Sesa Sterlite shares by 50 percent since the merger was completed on Aug. 17.

Vedanta Earnings

Sesa, 58.3 percent owned by Agarwal’s London-based holding company Vedanta Resources Ltd., today reported a second-quarter profit of 23.9 billion rupees ($388.7 million). Vedanta spokesman Pavan Kaushik didn’t respond to an e-mail seeking comment from Agarwal and on shareholder returns.

Rising oil prices have benefited Agarwal. Brent crude traded in London has increased about 40 percent to $109 a barrel through yesterday from its level in August 2010 when Agarwal announced the Cairn India acquisition.

Agarwal was born in Rajasthan province as the son of a cable maker. At 18, he took charge of his father’s trade after completing high school in Patna in eastern Bihar state. He established Vedanta in 1976 as a scrap-metal dealership in Mumbai, a business that showed him the importance of raw materials, he said in an interview in August 2010.

Childhood Question

“I never thought I’d go into oil,” Agarwal said then in his home in London. “Since my childhood I heard we have an oil deficit. I used to feel why can’t we discover our own oil?”

Yet Agarwal focused on metals, beginning to build his empire by acquiring copper-cable producer Shamsher Sterling Corp. from the king of Nepal in 1979. Adding Australian copper mines in 1999, aluminum and zinc producers over the next three years and iron-ore exporter Sesa Goa Ltd. for $981 million in 2007, the entrepreneur parlayed his scrap-metal startup into a $30 billion group of companies.

In 2004, Agarwal started building a $7.8 billion aluminum refining complex and bauxite mine in the eastern state of Odisha, aiming to emerge as the nation’s biggest producer of the lightweight metal used in beverage cans and aircraft parts. Trouble began when inhabitants of the remote Niyamgiri hills, the site of the mine, opposed the plan because they believed their god lived in the hills, prompting the government to reject Agarwal’s request for a bauxite mining permit.

Iron Ore Ban

The Niyamgiri debacle halted Agarwal’s plan to start 1.25 million tons of new metal capacity at Lanjigarh, in the foothills of Niyamgiri. Sesa is running a 500,000 ton smelter in Lanjigarh with alumina purchased externally or sourced from its own unit there.

A ban on iron-ore mining in the states of Karnataka and Goa two years ago compounded Agarwal’s woes. Earnings at the erstwhile Sesa Goa fell to a six-quarter low in the three months ended March 31. Sesa is close to restarting some of its iron ore mines in Karnataka as early as next month, two officials familiar with the matter said Oct. 25, asking not to be identified before an announcement.

Cairn India’s earnings before interest, tax, depreciation and amortization as a percentage of sales was 74.6 percent in the year ended March 31, according to data compiled by Bloomberg. That’s the highest among Asia-Pacific oil and gas producers with a market value of at least $5 billion.

Cairn Output

The explorer plans to spend $3 billion in three years to raise output, according to an Oct. 22 statement. Cairn India, whose output from its biggest field remained at 175,000 barrels a day for at least five quarters, plans to increase production to 300,000 barrels day. Oil and zinc are the only two of Sesa’s businesses that have more cash than debt.

“Sesa’s earnings from Cairn India and Hindustan Zinc are like bread and butter at present, considering they have almost 90 percent of the cash balance,” Hemant Dharnidharka, Bangalore-based head of credit research at SJS Markets Ltd., said by telephone on Oct. 28. “The dependence on Cairn should reduce as the iron ore business restarts.”

Agarwal’s plan to buy the government’s stake in Hindustan Zinc, in which Sesa owns 65 percent, has been delayed because of legal hurdles, limiting his access to the company’s $3.8 billion of cash. Vedanta got shareholder approval yesterday to spend as much as $3.48 billion for the government’s 29.5 percent stake in Hindustan Zinc and 49 percent in Bharat Aluminium Ltd., in which Sesa owns 51 percent.

The setbacks in India have prompted Sesa to seek mines overseas. The company is in the process of investing as much as $2.4 billion in four years to develop assets in Liberia in its first overseas expansion.

“For now, it’s about Agarwal putting his head down and hoping the price of oil doesn’t collapse,” Phani Sekhar said.

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