Acquisitions and increased capex may weaken ENRC's credit profile - analysts
ALMATY. June 14 (Interfax) - The financial and MA policies of Eurasian Natural Resources Corporation Plc (ENRC) are likely to adversely affect its creditworthiness, while placing international assets into a separate structure could have a positive impact on its financial risk profile, analysts say.
Moody's Investors Service said ENRC's aggressive financial and MA policies could have a negative impact on its credit profile in the next two to three years.
"We expect ENRC's credit profile to weaken based on the group's recent acquisitions and its raising of additional debt to fund its sizeable capex programme of approximately $6 billion over the next two years," says Andrew Metcalf, an Analyst in Moody's Corporate Finance Group, is cited as saying in a Moody's report.
Moody's expects a weakening of ENRC's credit profile despite a strong financial performance in 2011.
Moody's noted that the step-up in capex will lead to a deteriorating liquidity profile at ENRC -- especially given the group used excess cash in the first quarter of 2012 to complete the $600 million acquisition of Shubarkol, as well as pay out $750 million to First Quantum Minerals for assets in Congo.
The group's recent acquisitions and significantly increased capex plans mark a fundamental shift in its debt and liquidity policies. Over the next three years, Moody's expects the group to transition from the conservative balance-sheet structure that has prevailed since 2007 (minimal net debt and high cash balances), to a more aggressive structure.
Moody's notes that corporate governance remains a key issue for ENRC. This is a result of the high concentration of ownership among five key shareholders; the large number of related-party transactions.
Analysts at Standard & Poor's say placing international assets into a separate structure could have a positive impact on the ENRC financial risk profile.
S&P suggest that the possible spinning out of an international subdivision will reduce the level of diversification of operations and increase its concentration in Kazakhtan. This could have a positive effect on its financial risk profile because an international subdivision will require major investment over the next few years, which is currently the main factor that is having a negative impact on the company's rating, S&P said in a report.
If the company does decide to spin out its international operations to obtain a separate listing, S&P would review ENRC creditworthiness because this would significantly change the business risk profile and the financial risk profile.
For now this will not have an immediate impact on the rating (BB-/negative/B), because the decision has not been confirmed by the board of directors or shareholders.
ENRC continues to look at different ways to increase share value, including acquisitions, a partnership and a possible spin-off.
Analysts at Troika Dialog say that if ENRC choose to spin off their foreign assets into a separate company with a large share of founding shareholder representation it could provide for a soft exit from business in Kazakhstan.
"ENRC seems to be carefully studying all possible options for the foreign assets in its gigantic portfolio. The portfolio was created as a result of an incessant pull towards mergers and acquisitions and we believe that this will significantly expand company value," Troika said.
ENRC is working on a development strategy, especially with regard foreign assets, which are undergoing another round of due diligence. Preference is given to developing iron ore and copper deposits, while the platinum business (Northam Platinum), coal companies in Mozambique and manganese deposits in South Africa are likely to be classed as non-core assets and may be sold. "According to Mekhmet Dalman [ENRC Board Chairman], ENRC could earn $2.5 billion to $3 billion from the sale of non-core assets, but in the current market this seems doubtful to us," Troika Dialog said.
Many options are being considered, including the establishment of a joint venture (for example with China in Brazil thorugh the sale of 40%-50% in iron ore projects), Troika says. "Spinning off or dividing foreign assets as a way of expanding value with the possibility of using new company capital in the future to fund projects is being seriously discussed."
"The government does not seem to be showing interest in investments in foreign assets and may not participate in asset exchange. We propose that Kazakhmys may adopt the same position. So it would be logical for founding sharheolders to obtain a bigger share in ENRC International than in ENRC, which would lead to a proportional increase in the government and Kazakhmys stake in ENRC. This would be a soft exit from Kazakhstan of the Eurasian trio. In the case of asset sales, ENRC shareholders may obtain special dividends," Troika said.
The "Eurasian trio" are ENRC shareholders Alexander Mashkevich, Patokh Shodiev and Alidzhan Ibragimov (each owning 14.59%). Kazakhstan owns 11.65% through the Finance Ministry State Property and Privatization Committee and Kazakhmys PLC - 26%.
Troika considers ENRC to be one of the best assets in the CIS by quality and the level of operational management. "We also believe the foreign asset portfolio has substantial value, which the market, for the most part, does not take into account. MA deals were largely a way out in money for the Eurasian trio but the value of these deals has already amortized. The potential deal with Glencore and/or optimization of offshore assets should be good catalysts for shares," the investment company said.
ENRC is a diversified natural resources group focused on mining and processing of mineral resources. Production assets are mainly located in Kazakhstan.
Outside Kazakhstan, ENRC has assets in Brazil, Zambia, Zimbabwe, South Africa, Mali, Mozambique and Congo.
The company held an IPO on the London Stock Exchange in 2007.