Will shares in Eurasian Natural Resources Corporation (LON:ENRC) help you build a FTSE-beating retirement fund?
The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.
A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.
In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).
Today, I'm going to take a look at Eurasian Natural Resources Corporation (LSE: ENRC) (NASDAQOTH: EURNY), the Kazakhstan-based diversified miner, which has interests in coal, ferroalloys, iron ore, aluminium, copper and power generation.
ENRC vs. FTSE 100
Let's start with a look at how ENRC has performed against the FTSE 100 since it was listed on the London Stock Exchange in 2007:
| Total Returns | 2008 | 2009 | 2010 | 2011 | 2012 | 5 yr trailing avg |
|---|
| ENRC | -47.4% | 182.3% | 15.8% | -37.4% | -53.6% | -15.0% |
| FTSE 100 | -28.3% | 27.3% | 12.6% | -2.2% | 10.0% | 5.1% |
Source: Morningstar
(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)
On the face of it, ENRC has been a dire investment for anyone who bought shares in the company soon after its 2007 listing. It's also struggled to live up to the standards of corporate governance required of London-listed companies, and has faced questions from both the Serious Fraud Office and the Financial Services Authority relating to its business activities and compliance with the listing rules.
What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how ENRC shapes up:
| Item | Value |
|---|
| Year founded | 1994 |
| Market cap | £4.7bn |
| Net debt | £2.2bn |
| Dividend Yield | 1.8% |
| 5 year average financials |
|---|
| Operating margin | 43.1% |
| Interest cover | 59.8x |
| EPS growth | 23.1% |
| Dividend growth | 9.2%* |
| Dividend cover | 6 |
*Over four years. A big cut is expected in 2012's final dividend -- see below.
Here's how I've scored ENRC on each of these criteria:
| Criteria | Comment | Score |
|---|
| Longevity | ENRC emerged out of the chaotic privatisations at the end of the Soviet era. | 2/5 |
| Performance vs. FTSE | Dire, although it has performed well so far in 2013. | 2/5 |
| Financial strength | Fast-rising debt takes the shine off fat margins. | 3/5 |
| EPS growth | Inconsistent. | 3/5 |
| Dividend growth | The payout has only been increased in one year since the company listed. | 1/5 |
| Total: 11/25 |
Given all the controversy it has attracted during its short time as a FTSE member, it's a relief to know that ENRC is digging more and more raw materials out of the ground, and selling it at healthy margins. The company's fourth-quarter production update showed strong gains in iron ore extraction and ferrochrome production, as well as a small increase in coal output -- three key commodities for ENRC. The firm's shares are also up by 30% so far this year, mostly thanks to persistent rumours of a takeover offer from fellow Kazak miner and FTSE 100 member Kazakhmys, which already owns 20% of ENRC.
ENRC is also hoping to make major inroads into the copper market, following its acquisition of African copper miner Camrose, which completed recently. ENRC spent $500m acquiring the final 49.5% of shares in Camrose and is planning to spend $300m next year developing the company's copper and cobalt assets, which they believe offer strong near-term production potential.
Corporate governance issues aside, my biggest short-term concerns with ENRC relate to its debt levels and the strong likelihood of a dividend cut this year. ENRC's net debt has risen from net cash of $42m at the end of 2010, to net debt of $3.9 billion at the end of September 2012. Meanwhile, its final dividend payment for 2012 looks likely to be slashed by as much as 50%, if the company maintains its policy of paying out 18% of earnings, which are expected to have fallen heavily this year. This would leave the company yielding a below-average 1.8%, for an above-average risk.
My Verdict
As you can probably tell, I think ENRC is too speculative to add to a retirement portfolio. It has very little history as a public firm, has question marks over its conduct and is very likely to slash its dividend when it publishes full-year results in March. There's also a growing risk that it might breach its debt covenants and require an equity raise to stabilise its finances.
It's just too much risk and too little solid history -- anyone looking for mining and commodities exposure in a retirement portfolio would do far better to consider companies such as BHP Billiton and Rio Tinto, both of which offer forecast yields of more than 3%, and far less risk.
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> Roland owns shares in Rio Tinto but does not own shares in any of the other companies mentioned in this article.
