Kazakhstan’s miners come of age

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“The Kazakhs” is a term mining investors use to denote Kazakhmys and Eurasian Natural Resources Corporation, the two Kazakh mining groups whose flotations in London epitomised the pre-crisis enthusiasm for emerging-market resources companies.

But at least in the case of ENRC, the Kazakh tag no longer tells the whole story. The company is quickly expanding into Africa.

ENRC’s purchase last month of a 12 per cent stake in Northam Platinum, a South African platinum company, followed the acquisition of Camec – the copper and cobalt producer in the Democratic Republic of Congo – as well as a copper smelter in Zambia.

ENRC’s African expansion is the latest “coming of age” sign among the resources groups that floated in London starting in about 2005. Companies such as ENRC, Kazakhmys, Vedanta, and Fresnillo are becoming more international – either through their geographic footprint or corporate governance.

They are moving beyond the stage of bringing legacy operations – such as Kazakhmys’s Zhezkazgan complex, an enormous copper site prized under the Soviet Union – up to international standards. In some cases, a new confidence on the world stage is propelling these companies into other emerging markets far from their home base.

“We did not spend the downturn wondering how we were going to survive,” says Jim Cochrane, ENRC’s head of sales and marketing. “We spent it wondering how to use our balance sheet.”

ENRC was well positioned during the downturn, ending 2008 with $2.5bn in cash derived in part from its highly profitable ferrochrome division. The miner spent $5.3bn over the next four years upgrading its operations in Kazakhstan, where it makes iron ore, aluminium and ferrochrome, its chief executive said last month.

But the Africa strategy is getting more attention.

“There’s no doubt ENRC is after Northam Platinum for more than a 12 per cent stake,” says Rob Edwards, head of mining and metals research at Renaissance Capital. “They are going for consolidation at some point.” The R2.2bn ($288m) purchase in effect gives ENRC a blocking stake.

ENRC’s move has made waves in the platinum industry in South Africa, where three-quarters of the world’s platinum reserves are located. The stake in Northam gives ENRC a rare entry point into the highly consolidated industry.

But getting a bigger share in Northam depends on South Africa’s Mvelaphanda Resources, the seller, which is in the middle of a messy unbundling involving all the complexities of “black economic empowerment” policy. That carries a risk for any ENRC stake-building strategy.

“We have an appetite for risk,” Mr Cochrane says. “Many others don’t have the convictions we have about the future of these countries in Africa.”

The purchase of Camec also gave ENRC assets in Zimbabwe and Mozambique. “If you want to invest there, you really need to have a conviction that Africa is going to be a different place in 20 years,” Mr Cochrane says.

As ENRC has pushed outward, some analysts have drawn unfavourable comparisons to Kazakhmys, which has neither ENRC’s balance sheet nor its commodity spread. Indeed, one of Kazakhmys’ most valuable assets is its 26 per cent shareholding in ENRC.

Their strategic divergence since their mid-decade flotations has now become stark. Mr Edwards of Renaissance Capital says they are too different to compare directly. “Kazakhmys is positioned as the home boys. They are the ones who will be Samruk’s partner on the home turf,” he says, referring to Kazakhstan’s powerful state investment agency.

Recent financing deals with the China Development Bank and Jinchuan, the Chinese mining company, will allow Kazakhmys to accelerate expansion projects in copper, its key commodity.

One banker familiar with both companies, however, says investors cautious about transparency may gravitate toward Kazakhmys over ENRC. That, the banker says, is related to the undefined links between the founding ENRC shareholders’ global businesses, especially their private vehicle called International Mineral Resources.

More than 40 per cent of ENRC shares are split between its three Russian founders: Alexander Machkevitch, Patokh Chodiev and Alijan Ibragimov.

They control IMR, and ENRC’s push into Africa has brought IMR out of the shadows. Long before ENRC’s 2007 flotation IMR had investments across Africa. They included the Chambishi copper smelter in Zambia, which IMR sold to ENRC in February for $300m. The deal was deemed a “smaller related party transaction”.

IMR’s other assets include Samancor, the South African ferrochrome producer. “We have bought a number of assets from IMR but we would not say IMR is an incubator for ENRC acquisitions,” Mr Cochrane says.

He adds: “Clearly the founding shareholders have relationships and that helps us, whether in Africa or Kazakhstan.”

The doors that IMR opens makes ENRC’s Africa strategy – as well as its entire international expansion – less spontaneous than at first glance.

The strategy, however, still raises the question of whether miners based in developing countries – such as Brazil’s Vale or China’s Chinalco – have an inherent affinity for emerging markets that makes them more competitive in other emerging markets.

In January, Johannes Sittard, ENRC’s chairman, told the Financial Times the company brought its emerging markets experience to bear when evaluating whether to buy Camec.

“In the 1990s if you asked the question: ‘Should I invest in Kazakhstan?’, there would be people who would say you were crazy. Here we are,” he said.

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