Kazakhstan Chamber of Commerce in the USA

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ENRC announces new deal amid governance storm

Posted on October 13, 2011 by Alex

Eurasian National Resources Corporation (ENRC), a Kazakhstan-focused miner, plans to buy a 75% stake in Kazakh coal producer Shubarkol Komir  from ENRC’s founders for up to $650 million, the company said on Tuesday.  The acquisition would give ENRC access to low-cost coal for its existing operations and expansion plans, it said.

ENRC already owns about 25% of shares in Shubarkol, and would exercise an option to purchase the remaining shares for about $600 million plus the assumption of  the company’s  $50-million debt.

The deal would value the coal producer at about $850 million.  The purchase is expected to be  broadly  earnings-neutral  in the first financial year after closing and would  increase profitability thereafter, the company said.

ENRC currently uses about 1.0 million tonnes of Shubarkol’s high calorific coal to produce aluminum, iron ore, and ferrochrome.

Another 3-3.5 million tonnes are sold to customers in Kazakhstan, while  the remainder is exported.  Shubarkol produced 6 million tonnes of coal in 2010.

While the acquisition makes strategic sense for the company, the announcement comes less than two weeks after the company concluded a review of its  corporate  governance, which  focused primarily on the role of ENRC’s three founders in the company’s operations.  ENRC trades at a discount to its mining peers on the London  Stock  Exchange, which  analysts  attribute  primarily to concerns over corporate governance at the company.

“On face value, it looks like a reasonably good deal for ENRC but people will always be suspicious of related-party transactions and quite rightly so, because you can’t be sure why the deal is being done, so it’s difficult to read if it’s a good deal for shareholders or not,” Cailey Barker, an analyst at Numis Securities, said on Tuesday.

The transaction requires approval from independent ENRC shareholders at a meeting due to be held on November 7, and, if approved, could be completed by the end of next month.

SOURCE: SRI, Kazakhstan Daily News Brief, Issue dated October 12, 2011

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