Eurasian Resources Group Seeks To Draw A Line Under Scandals

Owner of $1 Billion Cobalt Project Says Rally Is Far From Over

Eurasian Natural Resources Corp. Company has restructured, but is still contending with corruption investigation.

Two years ago, Benedikt Sobotka was given a daunting task: clean up Eurasian Natural Resources Corporation.

When in January 2014, the 35-year-old former consultant was appointed chief executive of Eurasian Resources Group, the successor company to ENRC, Kazakhstan’s largest mining company had just completed an ignominious exit from the London Stock Exchange, dogged by allegations of corruption, including a criminal investigation by the UK Serious Fraud Office.

Now, Mr Sobotka is cautiously declaring victory. “The old ENRC is gone,” he says in an interview with the Financial Times. “It doesn’t exist.”

He has just signed a deal with VTB and Sberbank, two Russian state-controlled lenders, to extend ERG’s repayment deadline on $6bn of debts that had threatened to sink the group. “We’ve reached a point where the company is stable,” Mr Sobotka says. “We can now look into the future.”

But refinancing ERG’s debts has in some ways been a smaller challenge than changing the culture of the company, which is one of the world’s largest producers of ferrochrome, used in stainless steel, and a major iron ore and alumina exporter. It has operations in Kazakhstan, Africa and Brazil.

ENRC’s six years as a listed company between 2007 and 2013 were blighted by a series of scandals, including whistleblower allegations of fraudulent payments in Kazakhstan and a legal dispute in the Democratic Republic of Congo over copper assets with First Quantum Minerals, the Canadian miner. ENRC’s share price tumbled.

There were also boardroom clashes between the company’s oligarch founders — Alexander Mashkevich, Alijan Ibragimov and Patokh Chodiev — and its independent directors. Ken Olisa, a former director, famously described the group as “more Soviet than City”.

The founders sought to draw a line under the problems in 2013 by taking ENRC private in collaboration with the Kazakh government. The company now goes by the name ERG, with the founders owning 60 per cent of the shares.

Mr Sobotka says he has implemented a zero-tolerance policy on corruption and fraud at ERG. He gives an example of one employee who was fired for stealing $2,000 in cash to buy his wife a Christmas present.

“If there was any question about the integrity of an individual we just fired them,” he says. “No matter if he was close to the government or close to the shareholders — there are no holy cows.”

He has purged almost the entire former management of the company. “We’ve fired the CEO, the CFO, the level below that — all the regional heads, every single one,” says Mr Sobotka.

The driver of the shake-up is the Kazakh government, which was deeply embarrassed by the storm of negative publicity around ENRC and now holds a 40 per cent stake in ERG, with Bakhyt Sultanov, finance minister, sitting on the board.

Eduard Utepov, head of the state property commission at the Kazakh finance ministry, said the government “supports all the group’s initiatives to strengthen its compliance and corporate governance policies and procedures”.

The oligarchs who founded the company have taken a step back from the day-to-day running of ERG, says Mr Sobotka. “People … change; people learn,” he adds.

Nonetheless, the group is haunted by the spectre of the SFO investigation, launched in early 2013, into allegations of fraud, bribery and corruption relating to ENRC’s activities in Kazakhstan and Africa.

The SFO has told ERG that it has dropped its investigation into ENRC’s activities in Kazakhstan — the original focus of the probe — and is now only looking at Africa, says Mr Sobotka. The SFO confirmed the investigation into ENRC was ongoing, but declined to comment further.

ENRC became the focus of intense criticism when in 2010 it bought assets in the DRC that the country’s government had seized from First Quantum. ENRC later agreed a $1.3bn settlement with First Quantum.

These DRC assets are now ERG’s great hope for future growth. Last month, it agreed a $700m financing package with China’s ICBC and Eximbank to build a copper and cobalt tailings project in the DRC. It will make ERG the world’s largest producer of cobalt, used to make batteries.

The project should also help ERG reduce its high level of borrowings, which were mainly inherited from ENRC.

Mr Sobotka says the company was fortunate that its annus horribilis in 2013 forced it to restructure ahead of much of the mining industry: “We spent the last two years doing what other people are only starting now,” he adds.

ERG has sold close to $1bn of assets in the past 18 months, including a zinc and manganese mine in Kazakhstan to Glencore for more than $300m, to help reduce its debt load.

For all that, it is ERG’s public image that still concerns Mr Sobotka most. “Every company is vulnerable to scandals,” he says, pointing to the recent Volkswagen scandal. “My plan for the next two to three years is no more noise, no more scandals.”

This article is the subject of a letter of clarification from Mr Sobotka regarding the management changes.

Jack Farchy, The Financial Times