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ENRC: the miner that dug itself into a hole ENRC: the miner that dug itself into a hole
(5 months later)
Over two days in June 2007, 13 obscure business men and women delighted in the luxury of Horsham's five star South Lodge hotel as they attended a corporate awayday.Over two days in June 2007, 13 obscure business men and women delighted in the luxury of Horsham's five star South Lodge hotel as they attended a corporate awayday.
The theme of the meeting was "what it means to run a public listed company" and a team of bankers, accountants and lawyers from Deutsche Bank, PricewaterhouseCoopers and Herbert Smith gave talks on topics such as "overview of the UK anti-corruption legislation and how UK companies could be liable for corrupt acts overseas".The theme of the meeting was "what it means to run a public listed company" and a team of bankers, accountants and lawyers from Deutsche Bank, PricewaterhouseCoopers and Herbert Smith gave talks on topics such as "overview of the UK anti-corruption legislation and how UK companies could be liable for corrupt acts overseas".
The audience was, of course, the senior management of the soon to be floated mining group Eurasian Natural Resources Corporation (ENRC), a company that was to be catapulted straight into the FTSE 100 index when it floated on the London Stock Exchange in December of that year.The audience was, of course, the senior management of the soon to be floated mining group Eurasian Natural Resources Corporation (ENRC), a company that was to be catapulted straight into the FTSE 100 index when it floated on the London Stock Exchange in December of that year.
Six years later, ENRC and its directors are no longer obscure: but for all the wrong reasons. Investors, who initially saw their ENRC shares soar, have watched as they have slumped by 80% from their peak, wrecked by a string of damaging corporate governance rows and corruption allegations that have eroded the miner's image.Six years later, ENRC and its directors are no longer obscure: but for all the wrong reasons. Investors, who initially saw their ENRC shares soar, have watched as they have slumped by 80% from their peak, wrecked by a string of damaging corporate governance rows and corruption allegations that have eroded the miner's image.
ENRC was founded by three oligarchs – Alexander Machkevitch, Alijan Ibragimov and Patokh Chodiev – who held on to 44% of the company after the flotation. Kazakhmys, then another FTSE 100 company, owned 26% and the Kazakhstan government 12%, which, unusually, left a free float for other investors of less than 20%. But what all the shareholders own is a company with more than 70,000 employees – 65,000 of whom are located in Kazakhstan – who mine chromium, manganese, iron ore, bauxite and coal.ENRC was founded by three oligarchs – Alexander Machkevitch, Alijan Ibragimov and Patokh Chodiev – who held on to 44% of the company after the flotation. Kazakhmys, then another FTSE 100 company, owned 26% and the Kazakhstan government 12%, which, unusually, left a free float for other investors of less than 20%. But what all the shareholders own is a company with more than 70,000 employees – 65,000 of whom are located in Kazakhstan – who mine chromium, manganese, iron ore, bauxite and coal.
The significance of the control the central Asian shareholders wielded was soon to be illustrated. The first crisis erupted in June 2011, as a bitter boardroom battle boiled over and independent directors Sir Richard Sykes and Ken Olisa were ousted from the board.The significance of the control the central Asian shareholders wielded was soon to be illustrated. The first crisis erupted in June 2011, as a bitter boardroom battle boiled over and independent directors Sir Richard Sykes and Ken Olisa were ousted from the board.
Olisa memorably described the company as "more Soviet than City" and by the end of that year it was clear that corporate governance was not going to be the only concern. It emerged that the Serious Fraud Office was gathering intelligence on allegations of fraud and the company was conducting an ongoing internal investigation into claims that tens of millions of pounds had gone missing from SSGPO, a subsidiary in Kazakhstan.Olisa memorably described the company as "more Soviet than City" and by the end of that year it was clear that corporate governance was not going to be the only concern. It emerged that the Serious Fraud Office was gathering intelligence on allegations of fraud and the company was conducting an ongoing internal investigation into claims that tens of millions of pounds had gone missing from SSGPO, a subsidiary in Kazakhstan.
By February 2012, independent director Mehmet Dalman was promoted to become chairman and immediately staked his reputation on cleaning up the company, even though he had sat on the board since the 2007 float and had previously invested money on behalf of Ibragimov. However, despite the public proclamations of how he was going to solve the various crises, it did not quite work out like that. Dalman walked away last week after stating: "I have achieved all that I can as chairman of ENRC."By February 2012, independent director Mehmet Dalman was promoted to become chairman and immediately staked his reputation on cleaning up the company, even though he had sat on the board since the 2007 float and had previously invested money on behalf of Ibragimov. However, despite the public proclamations of how he was going to solve the various crises, it did not quite work out like that. Dalman walked away last week after stating: "I have achieved all that I can as chairman of ENRC."
Two days later, the SFO announced it was launching a criminal investigation into allegations of "fraud, bribery and corruption relating to the activities of the company or its subsidiaries in Kazakhstan and Africa". ENRC says it is "assisting and cooperating fully with the SFO" while being "committed to a full and transparent investigation of its procedures and conduct".Two days later, the SFO announced it was launching a criminal investigation into allegations of "fraud, bribery and corruption relating to the activities of the company or its subsidiaries in Kazakhstan and Africa". ENRC says it is "assisting and cooperating fully with the SFO" while being "committed to a full and transparent investigation of its procedures and conduct".
So what are the accusations? The ones that are known about are wide and varied. For example, a presentation given to the SFO last year by the ENRC's then law firm, Dechert, and seen by the Guardian, alleges that there had been more than "$100m in fraudulent payments" over four years.So what are the accusations? The ones that are known about are wide and varied. For example, a presentation given to the SFO last year by the ENRC's then law firm, Dechert, and seen by the Guardian, alleges that there had been more than "$100m in fraudulent payments" over four years.
Specifically, the document outlines allegations including the purchase of a farm in Kazakhstan by a director of SSGPO, where it states that the acquisition and running costs of the farm were "paid from SSGPO funds" and that the farm was owned via a "nominee shareholding on behalf of SSGPO president and major shareholder, Alijan Ibragimov". Representatives of Ibragimov have declined invitations to comment on these findings and it is not yet clear what, if any, action the SFO may take.Specifically, the document outlines allegations including the purchase of a farm in Kazakhstan by a director of SSGPO, where it states that the acquisition and running costs of the farm were "paid from SSGPO funds" and that the farm was owned via a "nominee shareholding on behalf of SSGPO president and major shareholder, Alijan Ibragimov". Representatives of Ibragimov have declined invitations to comment on these findings and it is not yet clear what, if any, action the SFO may take.
Furthermore, when the company floated in 2007, its prospectus outlined areas of potential concern for future investors, including the existence of a complex structure called the Russian trading system (RTS) that involved sales made by ENRC to third parties and resulted in cash payments to ENRC's founders. The founders did not comment on RTS.Furthermore, when the company floated in 2007, its prospectus outlined areas of potential concern for future investors, including the existence of a complex structure called the Russian trading system (RTS) that involved sales made by ENRC to third parties and resulted in cash payments to ENRC's founders. The founders did not comment on RTS.
Meanwhile, campaigners focus on the group's business in the Democratic Republic of Congo (DRC), where ENRC acquired stakes in mining concessions from an Israeli tycoon, Dan Gertler, who appears to have a close relationship with DRC president Joseph Kabila. The deals were done at prices that seemed to deliver Gertler's offshore companies handsome – and speedy – profits, while campaigners also argue that ENRC's purchases were at levels significantly less than the true market value, meaning the company and its partner might have profited at the expense of one of the poorest populations on Earth. Both Gertler and ENRC have consistently denied any wrongdoing.Meanwhile, campaigners focus on the group's business in the Democratic Republic of Congo (DRC), where ENRC acquired stakes in mining concessions from an Israeli tycoon, Dan Gertler, who appears to have a close relationship with DRC president Joseph Kabila. The deals were done at prices that seemed to deliver Gertler's offshore companies handsome – and speedy – profits, while campaigners also argue that ENRC's purchases were at levels significantly less than the true market value, meaning the company and its partner might have profited at the expense of one of the poorest populations on Earth. Both Gertler and ENRC have consistently denied any wrongdoing.
While much of this has proved to be quite entertaining viewing for mining wonks who do not hold ENRC shares, the company is still largely held by the founders and the Kazakh government: so does it really matter to the City?While much of this has proved to be quite entertaining viewing for mining wonks who do not hold ENRC shares, the company is still largely held by the founders and the Kazakh government: so does it really matter to the City?
Many feel it matters hugely. The reputation of London as a financial centre providing investors with world class standards of corporate governance has clearly been knocked. Meanwhile, investors in tracker funds – reckoned to own about 8% of the market – have suffered. Many of them are pension funds.Many feel it matters hugely. The reputation of London as a financial centre providing investors with world class standards of corporate governance has clearly been knocked. Meanwhile, investors in tracker funds – reckoned to own about 8% of the market – have suffered. Many of them are pension funds.
That, to borrow the phrase from the 2007 Sussex meeting, is what it actually means to run a public company.That, to borrow the phrase from the 2007 Sussex meeting, is what it actually means to run a public company.
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