ENRC – CONVICTION BUY CALL @ 334p

We have played ENRC twice now on the following dates and have made good money on boTH occassions, despite being stopped out on the balance positions.

ENRC – Trading Buy @ 316p – 29 Aug 2012. Half position sold @ 354p – 14 Sep 2012. Stopped out of balance @ 330p – 24 Sep 2012. 

Swing Long @ 316p – 1 Oct 2012. Added to position @ 332p – 12 Oct 2012. 50% of position sold – 28 Oct 2012 @ 360p. Stopped on balance @ 333p – 23 Oct 2012

Looking at the chart below, I wonder if another purchasinh opportunity is here again, with a large wedge formation being in the making during the last 2 months and a smaller flag formation during the last 5 days and looking ready to be busted to the upside. An initial break of 337p and then 360/2p (closing) is required in order to confirm the wedge break-out and confirm the new uptrend. Vice versa, a move back below 318p will tell us that a retest of the lows around 296p and possibly 260p is in sight. The wedge height of 75p will target 435p to the upside.

Being exceptionally busy (who isn’t these days?!), sometimes it takes me months to get around to reading the Sunday newspapers in full and it was this last week that  came across an interview in the Sunday Times in the spring with Chairman of ENRC – Mehmet Dalman. The shares were then trading around the 450p level and he was expressing his dismay at the market capitalisation at that time and that much of the corporate governance issues were overblown in his opinion. I wonder what he thinks now at 330?!

ENRC’s Enterprise Value is presently around £5.5bn and an EBITDA figure of £2.2bn was delivered last year (see below). Granted, earnings are likely to be a shade lower this year but still, as we opined in our Dream Mining stock portfolio piece in our October edition (check it out on the Previous Editions page), it remains one of the cheapest stocks in the global mining universe.

We expect that the imminent Chinese political changes that we have covered extensively on this blog (under the China tab) will re-ignite growth in China in 2013, particularly as inflation there is contained and thus allowing a good degree of easing latitude. This will feed through to increased demand for ENRC’s products and so”anal”ysts forecasts for 2013 and 2014 could therefore be upgraded quite substantially in the New Year.

Ivan Glasenberg, CEO Glencore

Kazakhmys remains a 26% shareholder in ENRC and there is periodic speculation as to what it is likely to do with its stake. Glencore’s name has been in the frame on numerous occassions and I wouldn’t put it past Ivan Glasenberg to look to make an opportunistic offer for the stake given the point in the cycle we currently are at (closer to the nadir than the peak!). Remember, Glasenberg is a master trader and didn’t become a billionaire through not understanding that in the commodities sphere, the value creation is nurtured in the buying (the crystallisation being in the selling – and again a point that he proved so succintly in the flotation last year of Glencore).

Other potential acquirers of the stake are likely to be running their slide rule over the valuation metrics in our opinion. Thes share nowtrade at less than 0.5 times tangible book value (ie excluding goodwill) – and so even with a premium for the KAZ stake of 40% to the current price, this would still allow a buyer to purchase exposure to a basket of commodities at a 30% discount to actual replacement cost. Accordingly, we make ENRC a Conviction Buy today.