Is Eurasian Natural Resources a Buy?


LONDON -- A confluence of factors has pressured Eurasian Natural Resources Corporation in recent times: rising operational costs, depressed ferrochrome prices, and escalating debt levels have all put the giant ferrochrome-producer under the cosh.

Although a dodgy balance sheet could present more problems further down the line, I sense that rocketing production in coming years could propel the share price skyward.

Copper-bottomed strategy
ENRC -- whose primary assets are located in the mining hotbed of Kazakhstan -- boasts extensive operations across a multitude of areas, encompassing ferroalloys, iron ore, alumina and aluminum, energy, and logistics. ENRC announced earlier this month that its total annual production of saleable ferroalloys, electricity, and coal had hit its highest levels since the group's 2007 flotation.

In a bid to increase its exposure to the copper market, the company completed the acquisition of the remaining 49.5% stake in Camrose -- which owns various red-metal projects in the Democratic Republic of Congo -- for $500 million at the end of December. Eurasian has earmarked capital expenditure of $300 million to develop these African assets this year.

Credit Suisse expects production volumes across the group to step up significantly in coming years and drive earnings growth. Ferrochrome output is projected to rise almost 1% in 2013 to 1.5 million tonnes before shooting to 1.6 million tonnes in 2014 -- a 6.6% annual increase. Copper production, meanwhile, is forecast to rise 57.1% to 55,000 tonnes this year and then 127% in 2014 to 125,000 tonnes.

Balance-sheet blues
Expectations of a small equity-raising continue to rumble due to ENRC's suffocating debt levels and fears of a possible debt-covenant breach by the end of the year.

The company recently announced that it expects net debt to come in at $5 billion for the end of 2012. (As an aside, ENRC was in a net cash position in 2010 prior to embarking on its acquisition spree.) I must admit the borrowing situation remains precarious, although the possibility of asset divestment could help allay fears.

Further, takeover speculation has heated up in recent weeks, as the likes of Kazakhmys are said to be considering a swoop.

Earnings ready to ignite
Analysts expect ENRC's earnings per share to have collapsed almost 70% in 2012 to 30 pence before bouncing 10% back to 34.4 pence the following year. A 44% jump is then anticipated in 2014 to 49.5 pence as production volumes balloon and commodity prices improve.

The level of risk attached to ENRC is reflected by a P/E ratio of 11 for 2013, down from 12.1 the previous year and set to fall to a lowly 7.6 for 2014, according to the current City broker consensus. Provided management can successfully hurdle recent problems, I reckon ENRC could pay off handsomely for the more risk-tolerant punter.

Canary in the mine
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