ENRC could sell precious DRC mines to repay costly debt

LONDON/SYDNEY Mon Feb 3, 2014 3:25am EST

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LONDON/SYDNEY (Reuters) - Kazakh miner ENRC ENRC.L is considering selling all its international assets, including its coveted copper operations in Congo, as its founders come under increasing pressure to repay a big loan they took on to privatize the company, industry and banking sources said.

Among the most likely buyers of the copper mines in the Democratic Republic of Congo (DRC)- ENRC's jewel outside Kazakhstan - are commodities trader and miner Glencore Xstrata (GLEN.L) and its rival Trafigura TRAFGF.UL, the sources said.

ENRC's three founders and the Kazakh government took the company private last year in a $4.5 billion buyout that ended six turbulent years as a listed company, troubled by boardroom battles, weaker commodity prices and corruption allegations.

To finance their share of the deal, the trio of founders had to take on a $1.7 billion loan from Russian banks VTB and Sberbank at an interest rate of about 7-9 percent, a source with knowledge of the situation said.

That comes on top of ENRC's own debt of about $6 billion, most of which was used to finance acquisitions around the world in previous years.

To keep a lid on the debt, the founders said in August they would focus on Kazakhstan, while ENRC could divest some of its international assets.

It was thought at the time that the company would keep the most valuable of those: the copper assets in the DRC.

But, as the debt grew and they realized the sale of other, less developed assets might prove complicated, the founders decided to consider sales in Congo too, the sources said.

"They are selling all assets that are not in Kazakhstan," said one of the sources. "They are not going out appointing advisors yet, but there is a strong push internally to sell. It's most likely that they will go in this direction."

ENRC said it could not comment on the potential sale of any assets. Trafigura and Glencore declined to comment, while VTB and Sberbank did not return emails seeking comment.

ASSETS WITH BAGGAGE

Outside its core Kazakh ferrochrome, aluminum and iron ore operations, the company has assets in Africa and Brazil.

Industry players said they might struggle to sell most of them given the weak outlook for metals prices, but the DRC copper operations, which include the large Frontier mine in Katanga Province, already have suitors.

Frontier alone, which recently started production and can produce about 90,000 tonnes a year of copper concentrate, could fetch well in excess of $1 billion, industry sources estimate.

But the history of those assets may deter some.

ENRC acquired Frontier, the Lonshi mines and the Kolwezi tailings project in a disputed 2010 deal after they were confiscated from rival miner First Quantum.

Disagreements between the two companies over the assets were only settled two years later with a $1.25 billion payment to First Quantum, but the acquisition by ENRC came under scrutiny by British authorities.

"Frontier and the other Congo assets are the most sellable, but they have a slight problem: their history with First Quantum and the fact that they are in Congo," another source with knowledge of the assets said.

"People are not that keen on Congo because it is politically unstable. The problem of buying assets there is that you might not own them next year."

Knowledge of the country and connections could certainly help. On this basis, Glencore Xstrata, which has been operating in Congo for years, may have an advantage.

ENRC's iron ore project in Brazil and coal project in Mozambique will be tougher to sell, the sources said.

The Brazilian assets, which it bought from iron ore developer Zamin in a $1 billion deal, lacks a key port license.

The greenfield coal project in Mozambique - close to Rio Tinto's (RIO.L) problematic Riversdale asset that triggered a writedown of almost $3 billion last year - is competing with other, bigger assets for sale in the same area.

Brazilian miner Vale (VALE5.SA) also plans to sell a 15 to 25 percent stake in its coal operations, which include its projects in Mozambique.

Should ENRC decide the urgency is such that even a sale of its Kazakh assets is plausible, then Glencore, once again, would be the most likely buyer, the sources said.

"Glencore would love the Kazakhstan assets if they became available. It is the natural buyer," a sector banker said.

(Writing by Silvia Antonioli; editing by Tom Pfeiffer)

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