Rival miners in talks to create Kazakhstan 'national champion'

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The Independent Online

ENRC, the miner that will enter the FTSE 100 this month, is in talks to buy its domestic rival Kazakhmys in a deal that would bring together Kazakhstan's two largest companies and create a central Asia mining giant.

Eurasian Natural Resources, as the company is also known, was forced by the Takeover Panel to issue a statement yesterday saying that it has held "informal dialogue" with Kazakhmys, one of the world's largest copper producers. It added that "no formal proposal has been made by ENRC and there can be no certainty that a formal proposal would be made".

The announcement sent Kazakhmys shares to an all-time high, ending the day up 16 per cent at 1,780p, valuing it at £8.1bn.

The news brought out into the open a combination that has been a favourite topic of traders and is likely to be determined by hard-nosed negotiations between the handful of men that control the two companies. Nearly half of ENRC is owned by three billionaire oligarchs,Alexander Mashkevich, Alizhan Ibrahimov and Patokh Chodiyev, who each own a 14.6 per cent stake. Vladimir Kim, the billionaire chairman of Kazakhmys, owns just under 50 per cent of that company.

Adding a further wrinkle is the role that the Kazakh government would play in the talks. It owns 20 per cent of ENRC and it is thought to be keen amid the global mining consolidation frenzy to see the creation of a national champion that could roll up other companies throughout central Asia. "The idea that there would be two listed Kazakh miners in London in five years always looked like it would be one company too many," said an analyst. "It looks like it's going to happen much quicker than that, but there is certainly going to be an element of politics involved."

If ENRC makes a move for Kazakhmys, it would be a dramatic turning of the tables. Not many months back, the speculation was that Kazakhmys would be the one doing the buying.

Speculation has simmered since Mr Kim took a 14.6 per cent stake in ENRC in 2006. But since its December stock market float, ENRC shares have skyrocketed. When Mr Kim bought his ENRC stake, which he later transferred to Kazakhmys, it was worth $800m (£395m). Today, it is worth $4.4bn, more than five times as much. This is due in large part to major expected price rises for the price of chromium, which ENRC mines and is used to produce stainless steel.

Power shortages in South Africa, home to the world's largest reserves of the metal, mean that prices, set quarterly, are expected to jump by as much as 50 per cent.

Analysts think a deal could still be long way off. "There are good reasons for them to get together, but we think this is less likely in the short term," said Charles Cooper, an analyst at Evolution Securities. Kazakhmys is cheap relative to sector rivals, he added, which would make price a sticky issue, and the outcome is likely to be heavily dependent on the personalities involved.

Mr Kim, who has built Kazakhmys through a series of acquisitions over the last decade, is likely to want to continue in a lead role at any combined entity.

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