Just how did the Eurasian Natural Resources Company gain a place in the FTSE 100 index of blue chip British companies?
During the latter part of the last decade something strange started to happen to the index. Perfectly good, respectable, British companies disappeared.
Sometimes they were gobbled up by foreign predators. Sometimes they were picked off by carnivores closer to home in the form of consortia of private equity firms which used mountains of debt to take their prey private.
One thing commentators all agreed: the deals were passed through by the big City institutions far too cheaply.
Nature abhors a vacuum, however, and other companies duly came along to fill it. Step forward a bevy of natural resources giants including ENRC and Kazakhmys.
Many of them were brought to London largely through the efforts of one man, Ian Hannam, a former SAS soldier who became JP Morgan Cazenove's top dealmaker. He recently resigned from the company to fight a bid by the Financial Services Authority to fine him £400,000 for alleged market abuse.
There are lots of people who cheer Mr Hannam's efforts. Becoming world's natural resources centre did the City no harm whatsoever.
But there have been consequences. Take tracker funds, for example. I've been a great advocate of these. I own some.
Firstly they are cheap: annual management charges are a fraction of what actively managed funds cost. Over the medium to long term, actively managed funds also struggle to beat them by much (as discussed in this column on 7 February).
The trouble is, the FTSE 100 is not what it was 10 years ago. A large component of it is now made up of natural resources stocks. In the case of most of them their connection to this country is tenuous. It might only involve having a small office here.
Natural resources stocks might not be a bad place to be in investment terms. Over the long term they ought to do quite well, with the world's appetite for metals driven by China's economy (even if it is growing slower than before).
But some natural resources companies present difficulties. Both ENRC and Kazakhmys have big governance concerns.
Some investors greet these with a big yawn. If you don't like the governance just sell the shares, they say. Trouble is if you're in a tracker fund you can't. Depending on how it is set up (some operate with representative samples) your tracker fund may well have some ENRC and some Kazakhmys in it, like it or not.
The other thing about governance is it has a real and demonstrable impact on companies' share prices. Just look at the above graph of ENRC, a company once memorably called "more Soviet than City" by a former director (who had been ousted).
ENRC has assets in a number of countries, but was created in its current form through the privatisation of various mining interests in Kazakhstan. It also has a number of Central African interests acquired in controversial circumstances that look set to be spun off.
In an attempt to arrest the shares' precipitous slide ENRC appointed investment banker Mehmet Dalman as chairman with a mandate to clean things up. At the end of last month it said Richard Burrows, chairman of British American Tobacco, and Mohsen Khalil, head of the climate business group at the World Bank, would join him. Meanwhile Terence Wilkinson, former chief executive of African miner Lonhro, will be senior independent director, replacing Mr Dalman.
If you believe that they can turn it into something approaching a normal company, the shares are cheap. They trade on less than six times next year's earning with a prospective yield of 3.5 per cent – huge for a mining stock. Kazakhmys is even cheaper (less than five times yielding 2.5 per cent).
But the last set of problems were created when ENRC's billionaire founders threw a strop and Standard Life was one institution that ditched its shares in disgust.Then there was the power grab by Kazakhmys, dominated by the Kazakh government, which has a substantial share in ENRC. These stocks are for gamblers only. Or investors in tracker funds who might find they're stuck with them.Reuse content