MAC: Mines and Communities

London Calling on a chill wind blowing from the steppes

Published by MAC on 2007-12-21

London Calling on a chill wind blowing from the steppes

21st December 2007

It slipped into the mainstream almost by stealth: the blandly-titled Eurasian Natural Resources Corporation (ENRC) was listed on the London Stock Exchange earlier this month, and is now valued at £7.7 billion in market capitalisation.

That places it well above Vedanta Resources, although lagging far behind the "Big Four" - BHP Billiton, Rio Tinto, Anglo American and Xstrata.

Currently specialising in ferroalloys, iron ore, aluminium and energy, ENRC has also set its sights on lead, zinc and uranium - not only in its home base of Kazakhstan, but also in Mongolia and Tajikistan. Although the company's biggest single shareholder is the Kazakhstan government, its prime wheeler-dealers are three Kazakh businessmen. Their names, even if pronounceable, are hardly household.

While "mine-watchers" wax either alarmingly or lyrically about the increasing influence of China in determining the nature of the industry and where it will foray for fast-diminishing key reserves, far less attention is paid to recent maneuvers and takeovers within the former Soviet Union.

For instance,- who among the readers of this website are aware that Russia hosts two mining giants which, if combined would give Anglo American a good run for its money? But now such a deal is distinctly on the cards, as Rusal-Sual, the aluminium producer bids for Norilsk Nickel (the country's biggest miner. Anglo's current market capitalisation is just under US$ 80 billion and,while the valuing of Russian assets is a notoriously speculative exercise, a merged Rusal-Norilsk should be worth around US$60 billion.

Getting a grip

The Forbes article below claims that Rusal is the world's largest mining company. That's rubbish:: the conglomerate is not even been the leading global aluminium producer since Rio Tinto bought out Alcan last October. However, if Forbes wanted to raise fears about the growing global influence of Russian "bears" its estimation of Rusal's competitiveness isn't wholly misplaced.

For this company is now firmly in the grasp of that most devious, some would say ruthless, of European leaders - Vladimir Putin.

There's arguably even more of an iron grip (certainly a less subtle one) held by the Kazak ruling elite over that country's resources. As well as its key investment in ENRC , the state also controls the world's third major uranium miner, Kazakatomprom.

Like the Kremlin., from whose domination the Kazaks fought long and hard, the central Asian regime is more than willing for its citizens to make the play in resource acquisition and then bestow its favours upon them (or not) as it suits.

One potential problem surrounding the trio effectively running ENRC is that they're currently the subject of a Belgian criminal investigation into allegedly fraudulent property dealings in the mid-1990s.

But this is hardly likely to worry either the Kazak hierarchy or the UK's Financial Services Authority (FSA) and Britain's own ruling elite.

After all, for some years, they've allowed other former Soviet oligarchs with dubious reputations - such as Beresovky Roman Abramovich - to acquire a haven in London, without let or hindrance.

Kazakh group with global ambitions

by Rebecca Bream, Financial Times

21st December 2007

The listing of Eurasian Natural Resources Corporation, the Kazakhstan-based mining group, on the London Stock Exchange earlier this month was one of the largest floats of the year, but also one of the most low key.

The group raised £1.36bn through the sale of new shares and was valued at about £6.8bn. At this level, ENRC appears to be a shoo-in for inclusion in the FTSE 100 index at the next reshuffle.

Little is known about the company and the listing took place without the usual fanfare that accompanies a large flotation.

However, ENRC has ambitions to become one of the world's major mining companies, meaning that it is unlikely to remain low profile for long.

According to Johannes Sittard, chief executive, ENRC wants to expand its existing four divisions - ferroalloys, iron ore, aluminium and energy - and to buy into new metals such as lead, zinc and uranium.

Mr Sittard hopes that the ambitious expansion will establish the company as central Asia's leading miner.

"We have always tried to establish the company as a regional champion," he says. He says ENRC will focus on buying mining assets in Russia, Mongolia and the central Asian states.

He adds that the company is also looking at zinc and lead projects in Kazakhstan, Mongolia and Tajikistan. "Mongolia is an interesting country. We Kazakhs are neutral, we are not Russia or China, the big neighbours, which gives us advantages."

The company took more than a year to prepare the way for its London listing and had to make several changes before it was ready for the public markets.

ENRC was founded by three businessmen: Patokh Chodiev, Alijan Ibragimov and Alexander Mashkevitch, who own a total of 45 per cent of the company following the float.

The three men are the subject of a long-running Belgian criminal investigation into the source of funds used in some property dealings. The investigation began in 1996 and the three men deny the allegations.

Some investors were unhappy about the founders sitting on the board of ENRC while the court case was still hanging over them, so earlier this year Mr Chodiev, Mr Ibragimov and Mr Mashkevitch stepped down and are now each represented by a director.

Mr Sittard was recruited by the three founders in 2001 after a long career at Ispat International, the steel company owned by Lakshmi Mittal, which is now part of Arcelor Mittal.

The largest shareholder in ENRC is the Kazakh government, with a stake of 20 per cent. Kazakhmys, the London-listed Kazakh copper miner, owns 15 per cent and is thought to harbour ambitions to take over the company.

"I cannot say what is the aim of Kazakhmys," says Mr Sittard, in response to questions about whether the formation of a Kazakh mining giant is likely to be on the agenda.

The fact that ENRC is now public probably means Kazakhmys would have to pay more to buy it, but with the high copper price, Kazakhmys has plenty of cash to spend. People close to the company say that ENRC does not have a particularly close relationship with Kazakhmys and the two companies often find themselves in competition for new mining projects in their domestic market.

Mr Sittard says he believes the Kazakh government would prefer to see Kazakhmys and ENRC remain as separate entities.

"The government wants to see two strong companies in natural resources in Kazakhstan."

He adds that the three founders and the Kazakh government, who did not sell any shares in ENRC's initial public offering, plan to keep their stakes in the company for the foreseeable future.

"We have discussed with the government and founding shareholders and both parties have clearly indicated that they do not want to sell down, they want to participate in growth and value generation," he says.

The proceeds from ENRC's IPO will be spent largely on building the group's first aluminium smelter, a $900m (£450m) project in Pavlodar, in north-east Kazakhstan.

The first section of the smelter opened earlier this month and is due to reach full production of 250,000 tonnes a year by the end of 2010.

ENRC already mines bauxite and refines it into alumina, the main raw material for aluminium, and Mr Sittard says the new smelter will be self-sufficient in both raw materials and electricity, which is generated by the group's own power station.

He says this will give ENRC "a substantial cost advantage", and that this kind of vertical integration is the group's greatest strength. "We believe that if you control your raw materials, you control your costs and you control your markets. This is something I have learnt from Mr Mittal."


* Company is headquartered in London; most of its operations are in Kazakhstan

* Employs more than 62,000 people and generates annual sales of $3bn

* Floated on the London Stock Exchange in December 2007, raising £1.36bn

* Market capitalisation is roughly £7.7bn

* Main shareholders: government of Kazakhstan, 20 per cent; Kazakhmys, 15 per cent. The company's founders - Patokh Chodiev, Alijan Ibragimov and Alexander Mashkevitch - control 15 per cent apiece

* Main products are ferrochrome, manganese, iron ore, alumina and aluminium. It also produces electricity

* Chief executive is Johannes Sittard, hired in 2001 from Ispat International, Lakshmi Mittal's steel company Mr Sittard has worked in the steel industry for more than 25 years and first went to Kazakhstan in 1995, to buy a steel plant for Mr Mittal

* Mr Sittard has a doctorate in metallurgy from the Technical University of Clausthal-Zellerfeld in Germany. He started out as an academic at the University in the 1970s

Copyright The Financial Times Limited 2007

Rusal Poised To Get Norilsk Nickel

by Vidya Ram,

20th December 2007

LONDON - Russia's largest miner, Norilsk Nickel, is poised to slip out of the hands of Russian steel billionaire Vladimir Potanin, and into the clutches of the Kremlin.

Potanin, who ranks 38th on the Forbes list of the world's billionaires, has until Friday to match a $15.7 billion takeover offer from Rusal, a Kremlin-friendly aluminum company, for a 25% plus-one-share stake owned by his former business partner, Mikhail Prokhorov.

Rusal is offering Prokhorov an 11% stake in itself, and $15.7 million in cash. That's a 24% premium on Norilsk Nickel's current market value. Analysts believe Potanin will struggle to gather the necessary funding for a counter offer, leaving the path clear for Rusal to take control of the rest of the company.

Potanin owns at least 26% in Norilsk Nickel, according to Thomson Financial.

Prokhorov's shares would give Rusal a blocking stake in Norilsk Nickel, and the potential to build up towards a full takeover. It would also come under indirect control of the Kremlin, which has been a strong backer of Rusal.

Rusal has already started syndicating a $4.5 billion loan to partially fund the purchase, the Russian news agency Interfax reported Thursday.

Norilsk Nickel closed up $8.50, or 3.3%, at $267.60, in Moscow on Thursday.

Earlier this year, Rusal became the world's largest mining company after buying Russian rival Sual, and the aluminum assets of Swiss metals broker Glencore.

The company is controlled by billionaire Oleg Deripaska, who has openly declared his loyalty to President Vladimir Putin. "Deripaska is closer to the Kremlin than any other Russian oligarch," remarked Cliff Kupchan, director for Europe and Eurasia at Washington-based Eurasia Group.

Deripaska's holding company, Basic Element, owns Rusal, automobile manufacturer GAZ, aircraft manufacturer Aviacor and insurance company Ingosstrakh.

Potanin and Prokhorov took control of Norilsk Nickel in 1995, but at the start of 2007 announced plans to go their separate ways, attributing the split to a difference in personality. Potanin would get Norilsk Nickel, while Prokhorov would get Polyus Gold, Russia's largest gold miner.

Speculation of the Kremlin's interest in Norilsk Nickel began to build over the summer, with Potanin saying the possibility of the government buying back Norilsk shares was not "a personal tragedy, but a change in the business climate." (See: " Kremlin Inc. To Grab Billionaire's Nickel Giant")

"The state is interested in creating a national champion with the sector with very strong mergers and acquisitions capacity abroad," said Kirill Chuiko, an analyst at UralSib Securities in London.

Rusal bought Canada's LionOre earlier this year for 6.8 billion Canadian dollars ($6.9 billion), after a high-profile bidding war with London-based Xstrata

Though one of the remaining oligarchs of the 1990s, Potanin's independent and low-key personality has kept him out of the Kremlin's inner circle, unlike Deripaska, or metal-to-soccer billionaire Roman Abramovich.


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