Eurasian Natural Resources Corporation (LON:ENRC)

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Hermann S

Eurasian Natural Resources Corporation PLC is the holding company of a diversified natural resources group with integrated mining, processing, energy, logistical and marketing operations. It has six operating divisions: the Ferroalloy Division, which produces and sells ferrochrome and other ferroalloys; the Iron Ore Division, which produces and sells iron ore concentrate and pellets; the Alumina and Aluminium Division, which produces and sells alumina and aluminum; the Energy Division, which is an electricity provider in Kazakhstan; the Logistics Division, which provides transportation and logistical services, and the Other Non-Ferrous Division which was formed from the aquired African assets of CAMEC, Chambishi Metals and Comit Resources. The Ferroalloys and Iron Ore Divisions are accounting for approximately 75% of ENRC's revenue which was 3.8 Billion USD in 2009. ENRC is a public company traded on London Stock Exchange, the Kazakhstan Stock Exchange, the Frankfurt Stock Exchange and the NASDAQ OTC market. Copper miner Kazakhmys is owning a 26% stake of ENRC through its subsidiary Kazakhmys Eurasia BV. ^[1]

Company Overview

The company has six integrated divisions which are supported by a central Sales & Marketing operation and has over 65,000 employees. Annual revenues peaked in 2008 with 6.8 billion USD. ENRC has sizeable proven reserves of chromium, manganese, iron ore, bauxite and coal supplemented by extensive resources.^[2] ENRC is the world's largest producer of ferrochrome on a chrome content basis and the largest iron ore mining and processing enterprise in Kazakhstan and one of the world's significant iron ore exporters by volume. ENRC is a mining company with vertically integrated processing of the ore which includes wholly-owned energy services and logistics.

Business and Financial Metrics

ENRC is reporting according to the IFRS. The companies fiscal year is the calendar year and financial statements are published for the half and full year. Reporting currency is the USD. Production and activity are reported for each quarter.^[4] Impacted by the global financial crisis revenues in 2009 were 3.8 billion USD down 43.9% versus 2008. Due to its low cost structure the company still earned a net profit of 1.0 billion USD down 60.4% versus prior year. Quarterly production reports showed an uptrend which ended with fully loaded production capacities in the last quarter of the year.^[3][5] By end of 2009 the company hold 830 mill. USD in cash and announced in February a further aquisition of assets in Africa.^[6]

Business Segments

Ferroalloys

The Ferroalloys Division’s mining operations comprise Kazchrome’s Donskoy GOK and, manganese miner, Zhairem GOK, and also includes the Aktobe and Aksu ferroalloy plants and a gas-fired power station at Aktobe. In addition, in 2008, ENRC acquired Serov, a Russian ferroalloys producer, and a stake in Tuoli, a ferroalloys producer in China. The Division produces and sells high-, medium- and low-carbon ferrochrome and other alloys, including ferrosilicochrome, ferrosilicomanganese and ferrosilicon, as well as chrome and manganese concentrate. The Division sells its ferroalloys primarily to steel producers and sells the remaining chrome and manganese ore to third party ferroalloy producers and the chemical and refractory industry. The Ferroalloys Division, according to estimates, is the world’s largest ferrochrome producer by chrome content, and is at the bottom of the global industry cost curve. Kazakhstani ferrochrome is differentiated by its higher chromium content, approximately 68%, versus South African charge chrome with a chrome content of approximately 50% and a higher silicon and iron content. 2009 revenue was 1,871 mill. USD for the sale of 1,306 kt of ferrochome, 591 kt of chrome ore, 572 kt of manganese concentrate and 72 kt of ferro-manganese concentrate.^[3][2][7]

Iron Ore

The Iron Ore Division includes primary mining operations that produce iron ore, ancillary mining operations that produce limestone, dolomite and bentonite-clay, an iron ore processing plant and a power plant. The Division mines and processes iron ore into concentrate and pellets for sale primarily to steel producers. The Iron Ore Division sells much of its iron ore to the Russian steel producer, the Magnitogorsk Iron and Steel Works, under a long-term contract. The Iron Ore Division, according to estimates, is one of the region’s significant exporters of iron ore and is in the lowest third of the industry cost curve for iron ore pellet production. 2009 revenue was 1,093 mill. USD for the sale of 8,857 kt iron ore concentrate and 6,203 kt iron ore pellet.^[3][2][7]

Aluminium

The Alumina and Aluminium Division’s assets include two bauxite mining units, a limestone mine, an alumina refinery and a power station. The new aluminium smelter attained its Phase 1 run rate capacity of 125 thousand tonnes per annum in Q2 2008. The Division sells its alumina, which it produces from mined bauxite, primarily to the Russian aluminium producer, United Company RUSAL (‘Rusal’), under a long-term contract, and sells its aluminium under an offtake agreement. The Alumina and Aluminium Division, according to estimates, is the ninth largest supplier of traded alumina by volume in the world and is at the lower end of the global industry cost curve for both alumina and aluminium. 2009 revenue was 563 mill. USD for the sale of 1,359 kt alumina and 125 kt aluminium. The new upgrade of the aluminium smelter to 250 kt per annum run rate capacity is expected to be operational in Q2 2010.^[3][2][7]

Other Non-Ferrous

The Other Non-ferrous Division operates principally in the Democratic Republic of Congo (‘DRC’), where it mines copper and cobalt and processes the ore at Luita, in a joint venture with the State-owned Gécamines as a minority (30%) partner. The Division was formed by the acquisition of CAMEC on 9 November 2009. The copper and cobalt operations include open cast mines, crushing, beneficiation, concentrator plants and an electrowinning facility. 2009 revenue contribution for 2 months was 55 mill. USD for the sale of 2,778 t copper cathode and 1,169 t cobalt concentrate. A cobalt solvent extraction (‘SX/EW’) plant, for the production of cobalt metal, is expected to be commissioned in H2 2010. On 18 February 2010 the Group announced that it had entered into a conditional agreement for the acquisition of Enya Holdings BV (‘Enya’) which holds a 90% interest in Chambishi Metals PLC, a Zambian copper and cobalt producer, together with Comit Resources FZE, a Dubai-based marketing and sales company that historically has handled Chambishi’s copper and cobalt sales. Subject to the completion of the acquisition Chambishi will be integrated into the Other Non-ferrous Division.^[3][7]

Energy

The Energy Division is one of the largest producers of electricity and coal in the Republic of Kazakhstan, accounting for approximately 15% of the country’s recorded electricity production in 2008. The division has a coal-fired power station at Aksu. The division supplies electricity and coal primarily to the Company’s other divisions as well as to third parties. The division also purchases electricity for resale from third parties. In 2009 intercompany revenues of this division were 206 mill. USD and third party revenues were 196 mill. USD.^[3][2][7]

Logistics

The Logistics Division provides transportation and logistical services to the Group’s primary operating divisions and to third parties. The division’s operations include three core businesses: freight forwarding; railway construction and maintenance; and wagon and locomotive repair. In addition, the division operates a transfer and reloading terminal on the Republic of Kazakhstan/China border. In 2009 intercompany revenues of this division were 104 mill. USD and third party revenues were 53 mill. USD.^[3][2][7]

Key Trends and Forces

Growing Demand of the BRIC Countries

Vertical Integration of Mining and Processing

Energy Intensive Production

Kazakhstan's Conditions

Development of the African Continent

Competition

References

1. ↑ ENRC - Homepage
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5} Eurasian Natural Resources - Annual Report and Accounts 2008
3. ↑ ^{3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9} Eurasian Natural Resources Corporation PLC - Announcement of 2009 Preliminary Results
4. ↑ ENRC - Production Reports
5. ↑ ENRC Consolidated Production Data
6. ↑ Acquisition of Chambishi Metals and Comit Resources
7. ↑ ^{7.0 7.1 7.2 7.3 7.4 7.5} Eurasian Natural Resources Corporation PLC - 2010 Spring Roadshow Presentation