Constraining factors include inherent commodity price and exchange rate volatility, industry cost pressures, and capital intensity. ENRC also has narrow diversity of operations in our view, including a concentration on steelmaking raw materials, notably ferrochrome and iron ore. These accounted for 50% and 34% of EBITDA, respectively, in the six months to June 30, 2009.

Furthermore, the group’s assets are largely located in Kazakhstan, where country risks--including a very weak banking sector--are a constraint, although in our opinion ENRC manages these risks well.

ENRC’s EBITDA fell sharply by 71% year on year to $628 million in the six months to June 30, 2009, largely reflecting much lower commodity prices. The EBITDA margin reduced to 37% from 63% a year earlier, but we regard this as still healthy, excluding a $210 million foreign exchange gain. Adjusted funds from operations (FFO) were 71% lower year on year at $515 million. After capital expenditures, free operating cash flow (FOCF) was slightly positive. After acquisitions and dividends, the group maintained an adjusted net cash position. Our main debt adjustment is to regard $500 million of cash as being non-surplus.

“In our view, ENRC has financial flexibility at the current rating level. We note the group’s stated growth strategy is to undertake quite significant capital expenditures and potential acquisitions. We anticipate that ENRC’s cash flows will likely remain the principal funding source for capital expenditures, the timing and extent of which we anticipate will reflect market conditions. Furthermore, while we do not factor in large debt-financed acquisitions, we would expect the group to finance such expansion prudently”, the S&P said.

“We do not anticipate upward rating potential in the near term due to our view of the risks of ENRC’s limited diversification, in particular Kazakhstan country risks where the group’s operations are largely located, and volatile commodity prices. However, these risks may be mitigated over time, for example if Kazakhstan country risks were to ease”, the company added.

“Equally, we do not anticipate downward rating pressure in the near term. In our credit scenario, which assumes moderate commodity prices, higher capital spending, and some limited acquisitions, we envisage only moderate leverage and satisfactory credit metrics. We consider FFO to adjusted debt of 50% and adjusted debt to EBITDA of 1.5x to be commensurate with the current rating”, it concluded.