August 15, 2012 10:25 am

ENRC cuts investment after profits fall

Eurasian Natural Resources Corp is cutting investment this year and reviewing its spending plans beyond, as a drop in first-half profit and rising debt levels prompted the London-listed miner’s shares to tumble.

ENRC shares fell 8.5 per cent to 379.4p after it said that falling commodities prices and rising costs had resulted in a 59 per cent drop in pre-tax profit to $667m.

However, analysts also pointed to the higher than expected rise in the miner’s net debt, up from a net cash position a year ago to $3.4bn, as unsettling the market.

“At the moment the cash flow does not cover their dividend and [capital expenditure] and their net debt will increase again by the end of the year,” said Robert Clifford, analyst at Deutsche Bank. “But, from what the company has said in the past, it was a foregone conclusion that it was gearing up for growth, so should not be a surprise.”

ENRC spent just over $1bn in capital expenditure in the first half of the year, the bulk of which was on expansion rather than maintenance. Its operations generated $724m in cash over the same period, down 39 per cent on last year.

The miner maintained its payout ratio, announcing an interim dividend of 6.5 cents, down 59 per cent.

But ENRC followed peers, such as Xstrata and Anglo American, in reducing its spending plans, saying it now expected to invest $2.4bn this year, down from $2.7bn.

ENRC added that it was placing $8.8bn of projects under review but would prioritise certain developments such as the controversial Frontier and Kolwezi mines in DRC, which earlier this year it secured after agreeing a $1.25bn settlement with First Quantum.

Zaure Zaurbekova, chief financial officer, said the miner’s net debt would rise to almost $5bn by year’s end and that it would consider asset disposals and other funding options for its expansion plans.

Miners are pruning their ambitious expansion plans as the ailing global economy and uncertainty about Chinese demand for key commodities such as copper and iron ore weigh on the outlook for prices.

ENRC, which is trying to put last year’s damaging corporate governance storm behind it, did not give an update on its eagerly awaited strategic review, only noting that “the board continues to assess options to best unlock value for shareholders, including a demerger of the international operations”.

ENRC’s first-half revenues fell 19 per cent to $3.2bn, as falling prices were compounded by disruptions to production from unscheduled maintenance. Earnings per share fell about 60 per cent to 36 cents.

FT Comment

ENRC’s corporate history reads like the over-punctuated missives of a teenager, bursting with exclamation points and question marks. In the past two years, the miner shocked the market with an embarrassing boardroom spat and an arguably ill-advised deal to buy Democratic Republic of Congo assets recently confiscated from a rival. Questions marks have continued to mount. There is the strategic review, which could mean a demerger of the international business; the ongoing corruption audit, after whistleblowers raised concerns; and now a pledge to cut spending plans. The industry backdrop adds further complexity, with prices falling and costs still rising. But slightly weaker production was pre-announced and the miner expects to return to full capacity in the second half. Costs rose only 4 per cent and ENRC’s core businesses still generates good margins. The rise in net debt from zero to $3.4bn adds another query. Trading at about eight times 2013 earnings, only a slight discount to other diversified miners, and with little catalyst for a recovery in prices, there may be tougher questions to come.

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