Kazakh Mining Group Slashes Its Capital Spending

on Aug 21, 2012

Eurasian Natural Resources Corporation (ENRC:LSE), a Kazakhstan-based mining company, has been forced to cut its dividend and investment, as lower production volumes and price weakness in steelmaking commodities dragged its first-half profit down. The mining group announced that it has cut its interim dividend payout by 60 per cent, to 6.5 cents per share from 16 cents last year. Wider spending plans for 2012 have also been cut by $300 million (£190 million) to $2.4 billion (£1.5 billion) and a longer-term investment target is now under review.

“We have implemented a review of our capex (spending on) projects and are revising the development plan for our copper assets in the DRC (Democratic Republic of Congo) so as to improve the capital efficiency of our investment programme and returns to shareholders,” said Felix Vulis, ENRC’s chief executive. The company further announced that most of the planned cuts are likely to be in Brazil, where licensing delays have pushed back first production to 2016.

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!m[](/uploads/story/297/thumbs/pic1_inline.png)While still trying to put last year’s storm over corporate governance behind it, ENRC has been badly hit by the global economic slowdown that has sent commodity prices spinning downwards. Like larger peers Rio Tinto (RIO:LSE) and BHP Billiton (BLT:LSE), the Kazakh miner has been facing rising costs and lower prices as growth slows in China, the world’s biggest commodities consumer. The price of iron ore, ENRC’s biggest earner last year, averaged about $141 (£89.4) a ton in the first half, down 21 per cent on a year earlier. This sent pre-tax profits down by 59.1 per cent to $667 million (£423 million). At the same time, net debt rose to $3.41 billion (£2.1 billion) from $972 million (£616 million) at the start of the year, ENRC stated. The Kazakh mining group spent just over $1 billion (£634 million) in capital expenditure in the first six months of the year, the bulk of which was on expansion rather than maintenance.

ENRC said that the difficult global economy and market situation have forced it to reconsider its $8.8 billion (£5.5 billion) capital spending plan. The Kazakhstan-based company also said that it sees no significant recovery in commodity prices this year. The miner expects “volatile market environment and pricing uncertainty” to persist, putting further pressure on ENRC to come up quickly with a comprehensive restructuring process.

“ENRC has shown a resilient performance in the first half of 2012, a period characterised by deepening economic uncertainty and declining prices for our key products,” CEO Vulis said. ENRC is in the “advanced stages of reviewing all capital expenditure projects that are not currently in execution,” he added. Even though a recovery is unlikely in the second half of the year, the company’s Chief Commercial Officer Jim Cochrane said that further declines in the commodity prices will also be “limited”.


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