Life is never dull at Kazakhstan mining giant Eurasian Natural Resources Corporation

Sep 29. Proactive Investors

Life is never dull at Kazakhstan mining giant Eurasian Natural Resources CorporationLife is never dull at Kazakhstan mining giant Eurasian Natural Resources Corporation (LSE, ENRC).  Having recently sidestepped the threat to earnings posed by potential export duties on metal exports from Kazakhstan, ENRC is now being sued by Canadian mining company First Quantum Minerals over its US$175 million purchase of a majority stake in Camrose Resources, a privately held mining focussed investment vehicle which boasts five copper and cobalt mining permits in the Democratic Republic of Congo (DRC).

On the surface, ENRC’s play for Camrose looks like a shrewd piece of business. With the price of copper holding up well as growth the East overpowers the weakness in the West, Camrose’s assets look highly earnings accretive over the long term.

The problem however lies with the Kolwezi tailings licenses. In August 2009, the Congolese government seized the licenses held by First Quantum, citing contract irregularities and delays. First Quantum invested a significant sum in developing the project, including a US$700 million plant facility, and unsurprisingly has been locked in a legal wrangle with the DRC ever since.

Having witnessed ENRC purchase assets at the centre of an international arbitration case has caused uproar at First Quantum and as such the company has launched legal proceedings. In response, ENRC have promised to “vigorously defend” their position and reminded First Quantum that after the licence was withdrawn, a court of appeal confirmed that the withdrawal was lawful. The group’s legal team has conducted thorough due diligence and are confident that First Quantum efforts are in vein.

Offering stark contrast to the Camrose situation, ENRC’s purchase of the outstanding 50% interest in Bahia Minerals is relatively straightforward. The company have effectively bought out Zamin Resources for US$670 million, and will assume full control of the prospective iron ore mine in Bahia, Brazil which is due to start production in 2013.

Much like Camrose, the benefits of the purchase are clear to see. The project has a resource base of 1.8 billion tonnes at 32% Fe content and what’s more ENRC has also obtained an option to acquire the nearby Greystone project from Zamin for US$150 million. Greystone’s iron ore resource base is 147 million tonnes at 31.8% Fe, and an additional potential resource of 188 million tonnes.

Iron Ore is a major contributor to ENRC’s bottom line and the Brazilian expansion will see ENRC cash in further on robust demand from Latin America. The company is already in talks with European, Indian and Chinese steelmakers with a view to financing the US$2.1 billion estimated cost of building a mine.

Despite the recent spending spree, ENRC’s cash outflows are set continue. The group has outlined a US$5.9 billion capital expenditure programme to both expand operations and enhance productivity and efficiency with the key focus on enhancing its position in Kazakhstan.

Management have also stated that the group’s pursuit of earnings accretive acquisitions will continue. The group stands on extremely sound financial footing with gearing (debt/equity) extremely comfortable, interest cover very high and a cash pile of over US$700 million as at the halfway point of this year.