Back from hols refreshed and ready to do battle! Starting with a Kaz/ENRC update

6 mins. to read

These last 6 weeks have been absolutely unrelenting with regards to valuation compression in the mining sector and the gold mining sub sector in particular. Indeed, if you have been long and remained long then unless you pay heed of our mantra of leverage moderation, you would have been crushed. Given our call in last months issue that there is serious embedded value amongst numerous of the gold mining stocks (see here page 8 –, then it’s fair to say that either we are entirely wrong or the opportunity is even more compelling today. We believe the latter.

The 2 weeks hol that bith I and Mrs SBM undertook down in the beautiful country of SA provided a little perspective on the current market environment and you will have noticed the muted blogging (inadvisable after sampling the many fantastic Cape wines!!) during this period. Sometimes taking a break from the markets is the best thing you can do – clear the ol brain and relook at things with a fresh view.

Well, suitably rested and refrshed, let’s kick off this weeks blogs in whih I’ll update with my thinking on a variety of stocks and sectors aswell as look to play Apple given their reporting this Tues after hours with the news that broke last Friday afternoon that the 3 oligarch shareholders in ENRC are mooting taking the company private.

Regular readers will know that ENRC was one of our top picks for 2013 (see here page 8 – That trade got off to a cracking start with the stock rising to over 400p a share in pretty short order and then promptly halving over a period of 6 weeks (see chart below)! Talk about volatility…

So clear was the Head & Shoulders formation here that I was personally surprised to see it play out in textbook fashion – that is a very rare occurrence. Just looking at the pure technicals for a momen, and to me it looks like a re-touch of the underside of the old neck-line after the channel break to the upside of 285p looks to be in order. This would target 345p.

Given also that consensus analyst price targets are centred around 400p per share (see below), and having come down from almost 500p at the start of the year and perhaps more importantly, that 26% shareholder Kazakhmys wrote the stock down to just 375p then these should be the levels that the independent directors push the trio towards paying as fair value in our opinion. If Kaz management believe their investment in ENRC to be worth 375p only weeks ago then it will be a difficult sell to their shareholders to accept less than this, certainly given that they made such a strong comment surrounding this to the wider marketplace when questioned as to why they had not completely “marked to market”.

We certainly believed that ENRC was worth north of 400p and considering that the shares were floated at a price of 570p in 2007, and also that the net tangible book value is £5.75bn which equates to 440p per share, we quite frankly don’t see how the trio will get away with paying less than 350p per share should they press ahead with the bid. We also think that they will press ahead with the bid as to otherwise they will be forced to sell equity and dilute themselves arguably right at the bottom of the cycle. You don’t become a billionaire through such strategies…

There is however, in our opinion, a better way to play ENRC and that is through Kazakhmys. The stock has also taken a massive drubbing in the last 3 months (see chart below).

Again, from a pure technical perspective, the stock’s sharp move higher Friday on over twice the daily volume, and indeed the heaviest volume this year, is a strong bullish signal. Throw in confirmatory RSI and MACD signals, a clear downtrend channel break, very negative sentiment towards the stock and a consequent pick up in short interest in recent weeks, and all the classic ingredients are there for a sharp squeeze higher. Considering that at the start of the massive value decimation during the last 3 months that the stock was trading at 830p per share, then a typical one third retracement would take the stock back to around 470p per share – usefully right at the 38 day ema (or 50 day sma) and the upper side of the bollinger band.

Let’s put the technicals aside for a moment however and look back at the fundamentals of KAZ that we have covered on this blog in recent weeks. At the current price, the stock is valued at a little over £2bn. With a 26% stake in ENRC that at the present share price is worth around £1bn then the value of the remaining KAZ assets is deemed to be worth just £1.2bn (including debt of $700m). Those assets include Ekibastuz the JV power the largest power station in Kazakhstan, some of the worlds largest copper assets and zinc, silver and gold mining assets.

Given that ENRC’s major owners saw an opportunity to take back the value that the “market” was depriving them of in valuing ENRC at around the 250p level this last few weeks, it is highly unlikely that the “market” will knock ENRC back below this level in the near future, corporate governance worries notwithstanding. With the very real catalyst potential of the sale of the 50% JV power operations – Ekibastuz by KAZ to its partner, and where the sale price has been mooted at between $2-2.5bn by most industry analysts and relative to peer operations values, then even at an ENRC stock price of 250p and being ultra conservative in discounting the Power division even further to $1.5bn, accounts for almost three quarters of the enterprise value (that includes the current debt of $700m) of KAZ.

Should Ekibastuz realise $2.5bn and ENRC go for the likely required 350p per share, then these two assets lone are worth a combined £2.83bn. Knock off current debt of $700m and you get a stock price of 435p. Remember, we have not ascribed any value whatsover to the remaining assets yet, assets that are in the books at in excess of 300p per share!The market is presently ascribing no value to all its other mining assets.

You will begin to see why we think KAZ as being exceptionally cheap. No bid for ENRC and the stock is still worth likely 60% more than the current stock price. A cash exit for ENRC and any fears over the rising debt profile over the next few years and flat earnings will dissipate almost completely. There could even be a special dividend paid out – something Valdimir Kim, Chairman would no doubt welcome and push through given his shares “pledging” issue. 

We will be adding to our position this week should the market knock the stock back towards the 350p level and would not be surprised to see us trade towards 430-450p before the week is out.

Going forward we will be paring back this type of analysis on the site and focusing upon the running of our Titan funds that will launch officially in the next few weeks. The shakedowns in the mining and oil explorer sectors in recent months have, based on our analysis, presented us with a valuation nadir opportunity to invest in these sectors. We prefer to buy at cheap levels and sell high as opposed to buy higher and hope to sell higher. Our bias is to the value side of investing as opposed to growth too and our belief n the opportunity now present is such that we put our own money into each of the funds. If you want more details and would like to invest alongside us, then click the image below for a registration pack.

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