Kazakhmys in merger talks with Metalloinvest

The London-listed miner Kazakhmys is in talks to merge with Metalloinvest, run by the Russian oligarch Alisher Usmanov, in a move that could lead to an approach for its rival Kazakh miner Eurasian Natural Resources Corporation (ENRC). The merger has little chance of gaining approval by the Kazakh government, however, according to one analyst.

The FTSE 100 miner, run by Valdimir Kim, said yesterday it was in "very preliminary discussions" about a possible reverse takeover by an unnamed third party. It is understood that the talks are with Metalloinvest, a privately held company half owned by Mr Usmanov, who last year took a stake in Arsenal football club. Metalloinvest produces 21 per cent of Russia's domestic iron ore, and had been in merger talks with Norilsk Nickel and Rusal, which seem to have faltered.

Shares in Kazakhmys leapt 10 per cent after the news, but retreated in the afternoon, closing 6.17 per cent up at 1515p. ENRC finished up 8 per cent at 1228p.

A source close to the talks said the plan to create a company worth about $50bn had "a pretty powerful strategic rationale. It would take the companies to a new level, making a serious player in iron ore and copper".

Mr Kim, who has an estimated fortune of £2.2bn, owns 45 per cent of Kazakhmys, while the government has a 15 per cent stake. The government would also have to approve any approach for Kazakhmys.

Mr Usmanov has been planning a dual initial public offering of 25 per cent of the group in London and Moscow, but is understood to believe that a reverse takeover into a listed company would be an easier way of gaining a listing. The source said that any merger would ease a potential attempt on ENRC, another Kazakh miner, which listed on the London Stock Exchange and bid for Kazakhmys this year. "This deal would be a good starting point for taking over ENRC," the source added.

Charles Cooper, analyst at Evolution Securities, is sceptical about whether the initial deal will succeed. "While we see there are advantages in creating a multi-metal diversified company, the political risks in bringing these two companies together are too great." He added that the Kazakh government is unlikely to allow Kazakhmys to become controlled by a Russian-backed company.

Kazakhmys, which has a market capitalisation of almost £7bn, has also built a 22 per cent stake in its larger rival, which has a market cap of nearly £16bn. News emerged that it had built its holding last month in ENRC following a deal with the Kazakh state. The deal saw the government, which now owns 11.7 per cent of ENRC, take 15 per cent of Kazakhmys. The talk since has been whether the government will look to orchestrate a merger.