ENRC board needs to summon its poker skills

May 9, 2013

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

ENRC’s independent directors need to practice their poker skills. They face the task of recommending or rejecting a possible bid for the hapless miner from a consortium of its biggest shareholders. The directors’ hand is weak, but they shouldn’t just fold.

Other things being equal, ENRC’s business is almost certainly worth more than its current share price of 301 pence. The Kazakhstan-focused group is the world’s biggest producer of ferrochrome, a raw material for stainless steel. It also mines iron ore, and has some decent copper assets in the Democratic Republic of Congo. ENRC’s latest production report, published on Thursday, showed output there ramping up.

Analysts’ estimates of fundamental value vary hugely. Strip away the outliers and most bunch around 400 pence per share. Kazakhmys, another miner that owns 26 percent of ENRC, values it at 375 pence per share after a recent writedown.

But ENRC is not like other miners. It has proved a governance basket case since its 2007 listing. The recent departure of chairman Mehmet Dalman has stymied hopes of a clean-out. Factor in a formal UK investigation into alleged corruption, and a governance discount of around 25 percent seems appropriate. So fair value might be around the current share price. The 300 pence mark is also midway between the 60- and 30-day average for ENRC’s battered shares on April 18, just before the bid talk surfaced.

A board ceding control would typically seek at least a 30 percent premium. But the putative bidders – ENRC’s three co-founders and the Kazakh government – already have quasi-control via a 55 percent combined stake. Kazakhmys’s large holding means the free float is only 18 percent. With outside investors already disadvantaged, an acceptable premium for full control might only be only 15 percent.

However, there’s another wrinkle – a possible delisting. If the bidding consortium and Kazakhmys clubbed together to push for such a move, it would leave minorities with an illiquid, unlisted holding. Reputational concerns mean Kazakhstan, which owns 27 percent of Kazakhmys in addition to its 12 percent ENRC stake, probably wouldn’t go along. Still, the risk may be material enough to offset some of the premium.

On that basis, the independent directors should not talk about an offer of less than around 315 pence. Assuming that is below the bidder’s pain barrier, negotiating power, poker skills and a supportive market should extract something higher.

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