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ENRC at market close in London
August 20, 2008:
Share price: 958 pence
Market capitalization: $22.98 billion
Net debt: $1.69 billion |
IT HAS BEEN a strange few months for Kazakhstan’s largest listed metals and mining group, Eurasian Natural Resources (ENRC). In May, the London Stock Exchange-listed ferrochrome miner lodged a £7.05 billion bid for Kazakhmys, a smaller domestic rival. Kazakhmys, also listed on the LSE, not only balked but bit back. First, it got the Kazakh government in July to sell its 7.66% stake in ENRC in exchange for allowing the state to hold 15% of Kazakhmys – helping the latter increase its stake in ENRC to 22.25%. A month later, Kazakhmys then entered the open market, paying £400 million to raise its own stake in ENRC by three more percentage points, to a whisker over 25%. ENRC declined to raise its bid, meaning that any new tender for its rival would need to wait until November 2008 at the earliest.
Rubbing salt into the wound, Kazakhmys, the country’s leading copper miner, also requested a seat on ENRC’s board. That proposal was haughtily rejected, with ENRC chairman Sir David Cooksey stating that as a competitor for resources in Kazakhstan, board representation by Kazakhmys was "not… in the interest of all shareholders". Johannes Sittard, ENRC’s chief executive, added that since both firms had the same natural resources-based expansion strategy in central Asia, a "natural conflict of interest would occur" if Kazakhmys’ representatives were allowed into board meetings.
Investors are now asking the pertinent question: what happens next for ENRC? When it floated shares in London in December 2007, raising £1.5 billion in one of the largest initial stock sales of the year, it sold itself to investors first and foremost as a strong mergers and acquisitions play: a company that would augment its strong organic investment plans in central Asia with several big-ticket acquisitions across the globe.
But investors expecting ENRC to make several bold market forays in the first half of 2008 have been largely disappointed. And eager investments banks, keen to hawk viable mining assets to the company, have seen their efforts largely frustrated. In sharp contrast, Kazakhmys, which admittedly listed in 2005, has been far more active in the M&A market, cutting $3 billion-worth of deals over the past two years.
True, a few small investments have been pushed through. In early May, ENRC bought a 50% stake in Brazilian iron ore miner Bahia Mineração Limitada (BML) for $300 million. A week later, it paid $14.5 million for half of a (very tiny) Chinese ferrochrome producer, Xinjiang Tuoli Taihang.
This hasn’t overly impressed analysts. Leila Kulbayeva, a metals and mining analyst at Visor Capital in Almaty, says ENRC must spend "billions [of dollars] on acquisitions regionally, rather than focusing on buying small plants around the world.
"The measure for shareholders is in how much they are receiving back – how much value they are adding to their valuation in each deal. If [ENRC is] buying half of a $30 million plant in China, what are they adding in respect to the company value? Virtually nothing."
Regional consolidator
For its part, ENRC’s response has been to tell the market to cool its shoes. Miguel Perry, the company’s chief financial officer, told Euromoney in an interview at the company’s London headquarters that it was assessing several acquisition opportunities, with some expected to be finalized this year. "Our focus remains on becoming a regional consolidator within the natural resources sector in Eurasia – China, Russia, Kazakhstan and the rest of [central Asia]," says Perry. "We will also consider M&A opportunities internationally whenever we get a chance to strengthen our position." Analysts say that ENRC’s strong balance sheet – including about $1.5 billion in net cash – would enable the firm to leverage itself up significantly, leaving it able to complete deals worth about $5 billion to $7 billion.
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"Our focus remains on becoming a regional consolidator within the natural resources sector in Eurasia – China, Russia, Kazakhstan and the rest of [central Asia]. We will also consider M&A opportunities internationally whenever we get a chance to strengthen our position"
Miguel Perry, ENRC |
Perry says ENRC has "already transformed itself into one of the world’s leading metals and mining companies". The company, as he points out, ranks either 11th or 12th in terms of the market cap of large-cap global mining firms, depending on whether one expects Russia to soon collectivize its leading metals and mining firms into one amalgamated bloc. "We still have a three-pronged strategy," the CFO says. "The first is improving existing assets; the second is organic growth; and the third remains mergers and acquisitions."
So the $7 billion question is: where do those potential acquisitions lie? Well, a higher ENRC bid for Kazakhmys isn’t yet fully off the table, although much will depend on the very preliminary merger talks entered into in July by Kazakhmys and Russia’s largest iron ore miner, Metalloinvest, an unlisted company run by oligarch Alisher Usamanov. Analysts believe any merger between those two has an equally slim chance of succeeding, however, and for now ENRC’s Perry says his company has decided to walk away from Kazakhmys and draw a line in the sand. "We are now looking at other opportunities," he says.
But other acquisition opportunities have clearly been missed. Perry won’t comment on the company’s failure to let London-listed chrome and nickel miner Oriel Resources slip through its fingers, but the loss clearly rankles within the group. Oriel was bought in April for £750 million by Mechel, another mining group with Russian and Kazakh interests.
Acquisitions are needed, if only to placate investors and to keep ENRC’s stock buoyant. Analysts tip ferrochrome prices – crucial to the firm’s stock valuation and earnings – to rise only slightly in the fourth quarter of 2008. And while ENRC has a highly aggressive capital expenditure plan – pumping $7 billion over the next few years into tripling iron ore production while doubling alloy output – much of that raised investment will only pay off from 2011. "ENRC has to make deals," says Kulbayeva. "It is something the market is expecting. They can’t rely on the price of ferrochrome always rising. ENRC should look at any metals with good fundamentals. I would look at them doing something in the gold or uranium sectors, and iron ore is a possibility."