S&P lowers ENRC rating to 'B' on governance and liquidity concerns

Business Materials 1 May 2013 13:49 (UTC +04:00)

Azerbaijan, Baku, May 1 / Trend E. Kosolapova/

Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Kazakhstan-based mining group Eurasian Natural Resources Corp. PLC (ENRC) to 'B' from 'BB-'. At the same time, the 'B' long-term and 'B' short-term corporate credit ratings were placed on CreditWatch with negative implications.

The downgrade reflects Standard & Poor's increasing concerns regarding transparency and corporate governance practices within the company following the unexpected departure of the company's chairman Mehmet Dalman, several departures of senior managers, the dismissal of the law firm Dechert, which assisted the company with an internal investigation of fraud, and the launch of a formal serious fraud office investigation.

"Our view that corporate governance uncertainties constrain ENRC's access to funding. We therefore believe that the company may not be able to improve its liquidity by attracting additional committed lines and refinancing large 2014 maturities well in advance as we had previously anticipated," Standard & Poor's said.

According to Standard & Poor's, commodity price and exchange rate volatility, the capital intensity of ENRC's business, and project risks related to its sizable investment plan constrain the group's business risk profile. Furthermore, the group faces high country risks through assets mostly in Kazakhstan, but also recently acquired copper assets in the Democratic Republic of Congo. ENRC's business risk profile is, however, supported by the low cost position of its mining operations, especially in ferrochrome, where we understand ENRC is the world's largest producer by chrome content. Additional supports include the group's healthy and resilient profitability throughout the cycle and substantial growth potential.

The rating reflects the group's stand-alone credit quality. Although the
government owns 11.6 percent of ENRC, Standard & Poor's see a "low" likelihood that the Republic of Kazakhstan would provide timely and sufficient support to ENRC in the event of financial distress.

The CreditWatch placement reflects that Standard & Poor's might lower the rating by up to two notches in the next one to three months, if the company is not able to secure new funding and make progress on refinancing its large 2014 maturities.

Moreover, Standard & Poor's might lower the rating in case of further corporate governance issues, such as departures of additional senior management or independent board members or if the largest shareholders of the company buy out minorities, because such a transaction could lead, to additional debt or a more aggressive financial policy.

Standard & Poor's might affirm the rating if liquidity is strengthened in the near term and if no new corporate governance issues arise.

ENRC is a leading diversified natural resources group, performing integrated mining, processing, energy, logistics and marketing operations. The operations comprise: the mining and processing of chrome, manganese and iron ore; the smelting of ferroalloys; the production of iron ore concentrate and pellet; the mining and processing of bauxite for the extraction of alumina and the production of aluminium; the production of copper and cobalt; coal extraction and electricity generation; and the transportation and sales of the Group's products. The Group's production assets are largely located in the Republic of Kazakhstan; other assets, notably the Other Non-ferrous Division, are mainly located in Africa; the Group also has iron ore assets in Brazil.