CORPORATION KAZAKHMYS BOUGHT 10% BLOCK OF ITS OWN SHARES

/IRBIS based on PANORAMA, Nov 23, 01/ - The president of Corporation Kazakhmys, Vladimir Kim, commented on the changes in constitution of the shareholders that take place recently and their influence on the future of the company. Speaking of the motives of the Samsung that wished to reduce its participation in the corporation's capital, Mr. Kim related them to "the difficulties that the Korean economy is facing with now", and the requirements of IMF and the World bank on the sizes of shareholders' equity of the Korean companies and their investments abroad. One of the major positions between the IMF and the Korean government was the recommendation to reduce the "outside" investments and bring them bank into normal limits. Therefore, many companies had to cut their foreign assets, and Samsung, particularly, had sold many its buildings, Daewoo had sold plants, and many other companies had done the same. The Samsung's decision to sell part of its assets in Kazakhmys however was not a news for the copper business. Mr. Kim states that it was a settled matter "for the last one year period", and the question was that a new investor has to be suitable for Kazakhmys and the offered price of the block be high. Samsung, however, always wanted to stay in Kazakhstan and "did not go anywhere", since even after the sales it remained as the major shareholder of the corporation, with more than 27%. Samsung offered its shares to Ernon, a major American energy company and the trader, as well as to other potential buyers. As a result, the block was purchased by the consortium of banks, led by UBS Bransvik, an investment subdivision of UBS group which unites banks and private investors of Europe. The deal took place in London and based on revealed information (please, Panorama, #41, 42) one percent of shares was worth $6.315m. Thus, when the deal was stricken the capitalization of Kazakhmys was estimated at $630m, while one ton of copper was at $1,300. At that, as Vladimir Kim says, the last audit conducted by Credit Swiss and First Boston in compliance with international standards showed that maximum value of Kazakhmys may reach $1-1.3bn, which will be based on the copper price of $2,000 and a country rating at 2A (like France or Great Britain). Taking into account that the rating of Kazakhstan is BB, the "discount" is 30%, and the major factor is also the size of the block being sold. In case if it is a controlling block, the value of one percent jumps to $10m. For an "ordinary" block the sales conducted by Samsung is not quite bad, and the state which sold its shares at an approximately parity price, made a quite expensive deal. Speaking of the interests of new shareholders that came after the sales, the president of the corporation, quoting their words, noted that their major goal was to make Kazakhmys to enter the stock market in 2-3 years, and then the capitalization may be "somewhat different", but a serious work should be preceding this. The necessary conditions for doing this, in the opinion of Mr. Kim, is the registration of at least one "brand" at London Metals Exchange (which has been done with copper from Jezkazgan) and making sales procedures more transparent, on which the agreement has been made already with the shareholders. Probably, an international audit of the copper reserves and a credit rating may be required, which can not exceed the country's rating. If all these are materialized, in the opinion of Mr. Kim, there is a great chance of going into the stock market in 2-3 years. And the assumption is that "focusing" may take place at Canadian stock market in Toronto, where major copper companies are quoted. Speaking of the influence of almost simultaneous sales of Samsung block and state block, Mr. Kim noted that "from the perspective of the managers", the company would be better off having many shareholders with no major ones. Until now Kazakhmys was not "as such" and therefore, the management was making their best to help Samsung to make this deal, but simultaneously there were talks with the government on the existence of some "parity". As a result, Kazakhmys bought 10% block through its dealer at a high price. In the opinion of the company's president, "frankly speaking", it means that the positions of the shareholders were "leveled out". The changes will lead to more transparency and internal stability of the company. The president of the company is quite optimistic about the ability of the management in cooperating with the shareholders regarding dividends, investment and employee policies. Speaking of 10% shares, which are now held by the corporation itself, Mr. Kim noted that in the future they can also be on western stock market along with the shares owned by the banking consortium. And the corporation will try to make some money by doing so. At the trades held on November 19, apart from Kazakhmys, there was another potential buyer, though its representative did not identify itself, and as a result, based on the trade procedures it was removed from the list. Explaining this, Mr. Kim noted that a very high price and 10% of shares, which do not give a serious control within Kazakhmys, probably did not attract solvent competitors. The president of the corporation also considers it correct that the positions of the government did not become weak as a result of the deal, since it has "many other levers to influence the company" in good sense of it. Kazakhmys respects the government, as a remaining major shareholder too. Arguing with the opponents speaking about the impossibility of selling "highly profitable assets", he suggested to recall the year 1995, when the company was actually bankrupt and its debt was equal to its production volume. Especially it was bad hit the Balkhash combine, Jezkent GOK and VKMHK, which are now within Kazakhmys, and the wearout was almost 100%. And if after 6 years they are talking about high profitability, then it demonstrates the merits of the privatization schemes used by the government. The government gave the enterprises to external investors, received all budgetary debts and the enterprises themselves received working capital and got access to financing sources. Only Kazakhmys itself repaid budgetary debt of $150m. The enterprises began to pay a very high taxes, retained their workers and were able to expand the production, go into external markets. Besides, quality also increased due to the transparency, switching to western accounting standards and cleanup of the accounts. It is not only correct with regard to Kazakhmys, but to all "blue chips" that passed the privatization procedure. Also, Vladimir Kim suggests the critics not to forget about "opposite side of the coin". Along with that there was a privatization and all objects were bought out from the government for a quite high prices. For the first time the president of the corporation made the amounts of purchases public. For all enterprises bought by the corporation during its expansion period, except for Jezkazgantsvetmet, the budget received about $200m. Along with that the government always had 35% stake in the company, and the value of the state block was increasing. As a result, the benefit gained by the government, against all skepticism of the privatization, as Mr. Kim says, doubled or even tripled. It was able to sell bankrupt enterprises, liven up production, attract big investors and receive big budgetary bonuses and increase the value of the state block, as it becomes apparent. The reaching the company's capitalization $630m actually means the achievement of international value of the assets. Opponents, who have "short memory", do not want to recall the enterprises that stopped 6 years ago, the absence of electricity, hot and cold water in cities. Speaking of the prices on the value of the company's assets, Mr. Kim mentioned that today it is quite apparent that there is a crisis in copper industry, since the reserves are great (up to millions of tons, actually returning to the situation of 1998), production grows and consumption falls. These are the major factors of price policy, therefore, it is not likely to expect something outstanding (prices of about $2.500-3.000 per ton of few years ago), and these prices should be forgotten. Therefore, Mr. Kim believes that there is no sense of waiting for the year 2002 or much higher prices. Speaking of the value of the assets, the corporation's president an example of the major Poland copper producer, whose capitalization equaled $498m, while its copper production was much greater than that of Kazakhmys (450 th. tons against 420 th. tons of our producer). Opponents say that Kazakhmys is more vertically integrated, and it has its own stations and coal mines, but the fact is fact, the production of Poland company is greater, though it worth about $500m, whereas Kazakhmys worth $630m at current copper prices. The company, as its head believes, may worth "more", but about 25% of its value is lost due to incompliance of the enterprises with international environmental criteria, especially regarding Balkhash combine. The president of the corporation thinks that it would require another 2 years for the environmental program at Balkhash combine to be completed. At the same time, Vladimir Kim believes that it is wrong to blame the company for all bad environmental condition, because the situation was not good both in 80's and 90's. Despite the existing difficulties, the corporation continues to build a unique environmental facility - neutralization of technological gases from Balkhash copper smelter. This method has no analogs in the world. It allows to utilize the gases containing sulfur dioxides up to 7%. With the introduction of this facility the air pollution will decrease 6.1 times against current conditions. The fact that Samsung is cutting its participation, in the opinion of the president, can not have any impact on the sales markets which will remain the same. The company does not intend to leave the markets, but other shareholders will be affecting the price policy. The management's task for upcoming 2-3 years - make the company as solid structure complying with international standards, which will require a lot of efforts, as Mr. Kim says. The president informs that Samsung moved its office from Frankfurt to London and the corporation also intends to focus its external contacts, mainly in financing, on financial institutions, and sales with London Metals Exchange, which means the change in locations. Speaking of the perspectives of internet trading of metals, Vladimir Kim mentioned that in this year the Exchange is feeling the changes with the increase in possibilities of the Internet. But big companies were always conservative, therefore the company's task is to closely monitor the happenings, moreover, not all transactions (especially big purchase-sales, hedging, pre-export financing) can be made through Internet. However, as far as the spot contracts and volumes of 1-2 th. tons concerned, the Internet is obviously advantageous. Mr. Kim believes that it is "practically impossible" to create a "copper" pull like the OPEC "because of just one reason" - high overheads of the company. At the price of $1.300 the companies from Chile, Australia and America close. But Kazakhmys survives mostly thanks to conceptually correct approaches of the authorities that allow the creation of a vertically integrated holding, though it is quite difficult to maintain it. At the price of $1.300 or a little higher the company has loses of $50-60m. It is the fact. With the appearance of new shareholders the budget renovation is reviewed again. In order to achieve a positive balance shifts were made in top management which will probably have a significant impact. In general, the corporation does not have doubts about competitiveness with the respect to the cost, and the difficulties are related to the need of paying $63m to the government due to the purchase of 10% block and mainly due to the initiation of a big investment program in last year. Planned extraordinary $162m investments were related to the forecasts made by all analysts, including the World bank, regarding high prices on raw material, including copper. The situation actually was quite contrary, but the corporation can not cancel its orders for equipment supplies, particularly, a new zinc plant. As it is expected, the plant can be put into service in late 2002. The project is absolutely unique, while the Canadian project can be similar which was used as a basis for this one. One of the major advantages of the project is its environmental cleanliness, and neither new pipes nor smokes will exist in Balkhash. Planned production volume will be 100-120 th. tons of metal zinc, which will require $100m investments. The halt of the production would lead to significant fines. Despite of this, the situation is "under control". The president of the corporation, particularly, strictly refused the possibility of cutting the production at the enterprises with high costs, the corporation has a consolidated balance sheet, all enterprises are working on the verge of "profitability and insolvency", but still the corporation is able to control the situation, though America and other producers have already declared their intentions to cut the copper production. As far as the raw materials base concerned, the question on providing the company with the raw materials for upcoming 70-100 year is urgent, and it is solved in different ways: development of new fields in different regions of Kazakhstan, including the rich Jaman-Aibat field with estimated reserves of about 3m tons of copper and its activities in Russian Ural and Siberia regions, where the talks are conducted on purchasing or participation in some projects. Commenting on the situation with the dividends policy and minority shareholders, the president of the corporation noted that high dividends are paid. In 2000 the corporation has paid "not quite small part of " all dividends to state blocks of shares. On average dividends were about $30m a year, and the company is studying the draft law on joint stock companies, which gives more rights to regular shareholders. The task of any joint stock company or the shareholders is to always find optimal solutions which will help to improve the condition of the joint stock company. If there is no solution, then shareholders either "get profit" in terms of dividends or other ways and as a result the enterprise is hurt. Or the Board decides that it can do much and it does not care about the shareholders, but in that case the managers are the "real owners" and their fight with the shareholders lead to a legal incorrectness, and for the company - financial loses and loss of image. The main task of the company's management and that of the president, as Mr. Kim says is the building a company on international standards. Despite of this, until the last deal the company was like that. However, based on Kazakhstani laws, the company was an open joint stock company, and in the west it was not regarded as such, falling under the definition of "limited" company - limited liability partnership. The task may be the achievement of the "Inc" standards, which implies the presence of many shareholders. The existence in "limited" position may put many restrictions, first of all, concerning the ability of raising funds through issues. With the previous structure of shareholders, as Mr. Kim believes, it would be impossible to talk about any foreign investors and going into western markets. Now the ongoing movement is apparent. International financial markets makes it possible to assess the real value of the assets and get the access to significant sources of financing. In the opinion of the company's president, the shares "may worth more" after going into stock markets, "and how much more" will depend on raw materials market condition and the situation on the world economy. At the next shareholders meeting, which will be held in December, new shareholders will be introduced, and some changes will be made into the charter, based on new law on joint stock companies, as well as the approval of a few big scale deals related to the sale of copper. The comments of the corporation's president makes an impression that such a big Kazakhstani company is making diversification of its shareholders intentionally for the first time, which is developed in great detail and aimed at moving into western stock markets. The only correct similarity if the example of Norilsk nickel, which also made active steps into going "beyond the country boundaries" and achieving certain transparency in this fall.