By Stuart Burns
Not all miners are the same, obviously, but not all miners should be viewed as equivalent even when weighted for size.
Take Vedanta Resources (VDNRF) — London-listed, but almost 60-percent owned by its founder, Anil Agarwal.
Agarwal’s avowed aim is for Vedanta to be viewed like Rio Tinto (RIO), BHP Billiton (BHP) or Vale (VALE). On the face of it, the firm is well on the way, ranking 7th in the world among mining giants according to theTelegraph and with operations in aluminum, copper, coal, zinc, gold, iron ore and oil spread across four continents.
So why are its shares trading at only three times earnings and the firm’s status as a top FTSE 100 listing said to be under review by the UK Financial Services Authority?
In large part, the firm is a victim of its own opaque structure — some would say a legacy of its growth strategy in a state-dominated business environment, others would suggest it has more to do with deliberately obfuscating the extent of real ownership in its declared assets.
Wacky Structure, Controlling Shares
Firstly the structure: Vedanta has some 99 principal subsidiaries, but doesn’t own any of them outright. Indeed, last year only some 5 percent of profits were attributable solely to Vedanta, 95 percent are said to be attributable to other parties.
Likewise a £60 million ($96 million) dividend was paid to parent company holders, but £144 million ($230 million) was paid to other parties. Agarwal’s near 60-percent shareholding is in turn held in Bermuda, an offshore tax haven, under the name of Volcan Investments.
The most worrying aspect is probably that Vedanta does not hold a controlling share in many of these subsidiary companies. Last year, Vedanta said its “non-controlling interests,” or the proportion of the company’s assets that are in fact owned by someone else, amounted to 59 percent of the company. In the latest report and accounts, filed in March, non-controlling interests soared to 75 percent of the company.
So as the Telegraph explains, although Vedanta claims to have assets of $18.4 billion, shareholders in the parent company own just $4.7 billion.
You may reasonably ask how such a position could come about. Well, one explanation is Vedanta has acquired many of its domestic assets from partial privatizations made by the Indian state; companies such as Hindustan Zinc and Bharat Aluminum are still partially state-owned.
Others like Sesa Goa, the iron ore producer, are stock-market-listed and Vedanta controls some 57 percent of the shares. Vedanta is in effect more of a holding company for Agarwal’s personal investments, admittedly with considerable management control over its investments, than it is a miner in the sense that Vale or BHP are.
Moves to consolidate the structure are said by the firm to be hampered by the need for Indian government approval, but critics say this has been a problem for years and only in recent months has the firm taken any action.
In the meantime, Vedanta will continue to be viewed (particularly in a risk-off environment when scrutiny and caution are greater) as more like London-listed Kazakhstan miner ENRC and Indonesian Bumi Resources, and its share price will reflect the lower level of investor confidence in its structure and hence governance.
Image source: rediff.com