April 19, 2013 6:58 pm

Three ENRC founders weigh buy-out offer

Aktobe Ferro Alloys

Melting pot: ferroalloys is ENRC’s largest division, contributing about 67 per cent of underlying earnings

The founding shareholders of Eurasian Natural Resources Corp are weighing a buyout offer for the lossmaking Kazakhstan miner left bloodied by growing investor concerns over its corporate governance.

Alexander Mashkevich – who together with Patokh Chodiev and Alijan Ibragimov own 44 per cent of ENRC’s stock – yesterday said the three were reviewing “the possibility of forming a consortium” with the Kazakh government to make an offer for the company. Mr Mashkevich added that talks were at “a very preliminary stage”.

Shares in ENRC on Friday closed 27 per cent higher at 291p.

The company has shed 58 per cent of its market capitalisation in the past year, amid falling commodity prices and corporate governance issues .

ENRC declined to comment.

Ash Lazenby, an analyst at Liberum, said a bid, if forthcoming, was unlikely to be contested.

“An offer for the company appears opportunistic given ENRC shares have been very weak,” he said in a research note. “The bid is unlikely to be contested (no other likely buyers) thereby buffering an acquisition premium.”

Like its peers the embattled miner has been pummelled by volatile commodity prices and impairment charges. But it is corporate governance problems that have made ENRC, according to one analyst, “un-investible”.

Ever since the company listed in 2007 at 540p there have been concerns over the influence wielded by the founding shareholders, none of whom is ethnically Kazakh. The three won control of huge metals, mining, energy and financial assets in the wake of Kazakhstan’s murky privatisations of the 1990s. Kazakhmys, the FTSE 250 copper miner, owns an additional 26 per cent stake.

But if powerful shareholders are one issue – Vedanta, Kazakhmys and Fresnillo are other miners with big shareholders – death threats are something else.

Alex Gaft, a former senior ENRC corporate investigator, received an email while working at the company warning him to stay away from ENRC’s Kazakhstan businesses.

“You have touched matters where a lot of money is involved and you will be torn into pieces,” it read. “You and all your relatives.” Mr Graft this month lost his job.

Separately, an exploration manager in Mozambique, where ENRC owns coal assets, has been suspended because of allegations of impropriety.

Last week also saw the sudden departure of chief commercial officer Jim Cochrane, who had been part of the management team for a decade.

In addition ENRC’s chairman Mehmet Dalman, who is overseeing an internal probe into the company’s businesses in Kazakhstan and Africa, has threatened to resign over unspecified “issues of principle,” according to one person familiar with the matter.

Dechert, a US law firm hired to lead the internal probe, has been replaced just weeks before it was
due to file a report on ENRC’s African mines to the Serious Fraud Office in the UK.

The SFO has issued Dechert with a demand for ENRC documents in a sign that the agency is considering an official criminal probe.

The shareholders’ announcement comes ahead of a looming deadline. Given ENRC’s falling market capitalisation it could face ejection from the FTSE 100 at the London Stock Exchange’s next quarterly review at the end of June.

When fellow Kazakh miner Kazakhmys was ousted from the top index in March its share price fell by 50 per cent that month, partly due to share selling by index-tracker funds.

Kazakhmys shares on Friday rose 24.4 per cent to 385.7p as the value of its ENRC holding increased.

ENRC has said it was pondering issuing new shares to meet a forthcoming increase in the required minimum of readily tradeable shares at FTSE 100 companies.

The rule change requires a “free float” of at least
25 per cent of the company’s shares as of January 2014. ENRC’s free float stands at 18 per cent.

In its latest annual results ENRC took a $1.2bn impairment charge and, amid lower commodity prices, posted a $550m pre-tax loss for 2012.

Last Wednesday Mr Dalman travelled to Cardiff to watch the city’s football team, where he sits on the board, gain promotion to the English Premier League.

In spite of a dull game – it ended 0-0 – the result must have been a welcome respite from his day job.

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