ENRC’s minority shareholders may hope for a bonanza, but they’re more likely to get shafted

To delist or not to delist…
To delist or not to delist…
Image: AP Photo/Alastair Grant
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If you were looking to invest in an exotic, booming commodities company in recent years, almost nothing could beat Eurasian Natural Resources Corporation (ENRC). The Kazakhstan mining firm has assets in the Democratic Republic of Congo and other African countries, as well as Brazil, Russia, China, and Kazakhstan itself. But after a good run since its 2007 IPO, ENRC appears to be unraveling. In the past two weeks several of its senior managers and directors have quit or been forced out, the company has been awash in allegations, and yesterday the UK’s Serious Fraud Office launched a criminal investigation into it for fraud, bribery and corruption.

Worst of all if you’re an investor, you’re getting diametrically opposed opinions about what to do with your shares. On April 24, Macquarie Group advised any clients (paywall) holding ENRC shares to “jump ship while you still can.” But UBS told its own clients the opposite—to hang on for a blockbuster transaction that could send ENRC shares soaring.

The general trend has been down. ENRC’s shares have plunged by 48% in the last year, bottoming out on April 3 in London at 201.9 pence. But then the price began to soar when, on April 19, Alexander Mashkevitch, one of ENRC’s three founding partners, said that the trio plus the Kazakh government might buy out public shares at a premium and take the company private again. Those buying on that news have since seen the value of their shares rise by about 22%. Shares rose again yesterday.

That volatility—and the opposite views of Macquarie and UBS—stems from ENRC’s highly unusual profile: This is a company with news that one does not ordinarily see on a major exchange, or perhaps any exchange.

The three amigos

The first thing to know is that ENRC’s trio of founders—Mashkevitch, in addition to Patokh Chodiev and Alijan Ibragimov—have been the subject of controversy for almost two decades. One mystery is how they obtained their privileged iron-ore position in Kazakhstan, the republic with the second-richest metals and minerals reserves in the former Soviet Union—which, when it was whole, had the most resources of any country on the planet.

Generally speaking, the Kazakh president’s family controls the republic’s oil and gas, while parceling out metals and minerals to loyal associates who serve purposes such as funding pet presidential projects and trips abroad. The founding trio owns about 44% of ENRC; the Kazakh government owns 12%, and Kazakhmys, Kazakhstan’s biggest copper producer, owns 26%.

In 2007, when the trio decided to go public in London with a tiny 18% stake of the company (too low under FTSE rules, but permitted in an exception by British regulators), PriceWaterhouseCoopers advised them (paywall) to quit the board. A long-running Belgian investigation of the three on suspicions of money-laundering might, said PwC, pose a bit of a problem.

They did step down, but the prospectus cautioned investors that they were likely to do their best to exert a heavy hand from the outside. And so they appear to have done. In 2011, the trio pushed four directors off the board, one of whom responded with the obvious jibe—that the company’s behavior is “more Soviet than City [of London].” In March 2012, it was disclosed that the ENRC employees fund may have been used to pay for the son of a police official in Kostanai, a northern Kazakh region where the company operates, to go to college in America.

That disclosure came in an internal investigation by Dechert, a law firm, which questioned about $100 million in spending at the Kostanai operation. This triggered an investigation by the Serious Fraud Office (SFO) that has since expanded to include allegations elsewhere, including in the Democratic Republic of Congo. In June 2012, Global Witness, a London-based transparency advocacy group, released a document linking ENRC to possibly shady mining transactions involving hundreds of millions of dollars in Congo.

This month is when things really started coming apart. On April 10, ENRC dismissed Dechert. ENRC’s chief commercial officer, company secretary, human resources chief and two other executives subsequently quit or took leaves of absence. On April 15, ENRC dismissed Alex Gaft, a senior corporate investigator who had received a February 2013 email urging him (paywall) to lay off of the subject of Kostanai or else. “You have touched matters where a lot of money is involved and you will be torn into pieces,” the email said. Around this time, the SFO demanded Dechert’s documents.

Finally, on April 23, chairman Mehmet Dalman resigned. Two more board members—Paul Judge and Dieter Ameling—have said they will not stand for re-election in the annual general meeting June 5. And yesterday the SFO formally launched a criminal probe. ENRC, citing the ongoing investigation, refused to comment.

Buy? Sell?

So why are Macquarie and UBS giving investors opposing advice? Macquarie’s sell recommendation is based on a simple calculus: ENRC’s Kazakh shareholders—the three amigos plus the government and Kazakhmys—could simply delist the company from London, and thus halt the forced transparency in its tracks. UBS, by contrast, thinks minority shareholders might get a big payout if the Kazakhs, instead of delisting, buy out the 18% free float.

But UBS’s “if” is a big if, and on the face of it, at least, Macquarie’s recommendation makes more sense. The Kazakhs would need a 75% majority shareholder vote to delist—but as they collectively own 82%, that would be easy. A buyout, on the other hand, would require 7% support of minority shareholders, and Macquarie argues that delisting would simply be easier. “Relying on disgruntled shareholders… may be too risky, so we believe the likelihood of the delisting option being pursued is high and could leave minority shareholders holding illiquid stock in an unlisted business,” Macquarie said.