Bulat Utemuratov and Glencore Report: The truth about Glencore's business in Kazakhstan

Page 1

For the exclusive use of xxxxxxxxxxxx at xxxxxxxxxxxxxxxxxxxxxxxx. See Appendix for important disclosures and analyst certifications.


European Metals & Mining

Glencore: Bribery and Corruption Allegations Much Worse Than Thought. Ticker






Price as at Dec 7, Target Price 2018 279.4 228

Market Cap £38.5bn

Highlights: Glencore is under investigation by the US Department of Justice in relation to potential violations of bribery and corruption laws. The allegations relate primarily to Glencore’s operations in the Democratic Republic of Congo (DRC). Glencore’s shares have significantly underperformed its peer group in 2018 due to market concerns about alleged corruption and governance. However, it appears that the DRC allegations are only the tip of the iceberg. The evidence presented in this report suggests that Glencore’s dealings in Kazakhstan are even more troubling than in the DRC and could expose the company to potentially enormous liabilities. •

Glencore’s local partner in Kazakhstan is Bulat Utemuratov, a billionaire who has held numerous government roles including adviser to the President and head of the President’s private office. It has been stated publicly, including in US Diplomatic cables, that a corrupt relationship exists between Utemuratov and Kazakhstan’s President Nazarbayev. Utemuratov has been described as “consigliere” and “personal financial manager” to the President.

The parallels between Glencore’s relationship with Dan Gertler in the DRC and Bulat Utemuratov in Kazakhstan are striking. This report suggests that shareholders should have serious concerns about the legitimacy and legality of Glencore’s partnership with Utemuratov.

Potential Fraud and Corruption


Glencore and Utemuratov, via his investment vehicle Verny Capital, have done a series of deals that have transferred vast wealth to the Kazakh oligarch at the expense of shareholders. In 2008, Glencore’s Kazzinc subsidiary acquired 40% of the Vasilkovskoye gold mine from Verny Capital for $300 million. Glencore also appears to have secretly given Verny nearly one-third of Kazzinc’s shares at a time when Utemuratov was chief of staff to the Kazakh President. This unreported transaction was worth hundreds of millions of dollars to Utemuratov.

In 2010, Glencore bought the remaining 60% of Vasilkovskoye from Verny in a deal that valued Kazzinc at $5.1 billion – a 10x increase in value over 5 years. In 2011, Glencore launched its initial public offering in London with a market capitalization of $60 billion. As part of the IPO, Glencore agreed to buy back shares in Kazzinc from Verny in a deal that valued Kazzinc at $7.6 billion, or 12.5% of Glencore’s IPO market cap. The deal was finally completed in 2012 at a slightly lower valuation.

Through this series of share swaps between related parties, we can see that Glencore was able to significantly increase the valuation of its Kazakh assets:




2005 2008 2010 2011 2012

$500m $1bn $5.1bn $7.6bn $7.2bn

$54m $750m $1.9bn n/a n/a

The valuation increases attributed to Glencore’s assets in Kazakhstan are not supported by logic. Between 2005 and 2012, Kazzinc’s valuation rose more than 1,300% from $500 million to $7.3 billion while operating income rose 50% to $2.9 billion between 2007 and 2012. Gross profit fell by 23% to $800 million and net profits were down 50% to $329 million in the same period. There was, therefore, no significant change in earnings that could justify Kazzinc’s meteoric increase in valuation. Instead, the increase appears to have been achieved by flipping assets between related parties. The extent of the overvaluation was demonstrated just four months after the 2012 transaction when Verny sold its remaining stake in Kazzinc to the Kazakh sovereign wealth fund. That deal valued Kazzinc at $5.6 billion, a drop of 22% compared to what Glencore paid just a few months before.

The Vasilkovskoye transaction raises serious questions about whether Glencore fraudulently inflated the value of its assets in the run up to its IPO. The deal also transferred a vast amount of money to Utemuratov at a time when he was an advisor to President Nazarbayev and managing the President’s affairs. We estimate that Utemuratov and Verny made about $3.5 billion from Vasilkovskoye - an asset that is currently valued at roughly half that amount.


Utemuratov (via Verny Capital) and Glencore acquired another asset called Orion Minerals in 2013 for $200 million. The following year, Glencore bought Verny’s 10.5% stake in Orion for $36.5 million in cash and gave Verny one of Orion’s gold mines, which represented roughly 42% of Orion’s assets. As a result of this asset swap, Glencore paid a total consideration of $239 million for a gold mine that it sold three years later for $100 million. Meanwhile, Utemuratov made a cash profit of $16 million and received an asset that is now worth approximately $300 million.

The Orion asset swap was not disclosed to Glencore shareholders. The deal is such poor value for Glencore shareholders it raises questions about whether the company was secretly transferring wealth to its politically-connected sponsor in Kazakhstan in order to keep doing business in the country.

The questionable deals between Glencore and Utemuratov continue to this day. Glencore has provided $250 million of financing to Utemuratov for the construction of a commercial real estate project in Astana called Talan Towers. The loan’s interest rate is 4%, which is substantially below market rates. Our calculations suggest that the interest rate given to Utemuratov is now less than Glencore’s own cost of financing, implying that shareholders have been subsidizing a Kazakh billionaire in a non-core, high-risk real estate project.

During the period of the Talan Towers loan (2014-), Glencore has been under significant pressure to reduce its debt levels. Concern over leverage led to the company pledging to reduce debt by $10 billion by issuing new shares, cutting its dividend, mothballing mines, cutting capital expenditure and selling assets. While Glencore was undertaking these crisis measures, the company was also loaning money to a commercial property development at a huge discount to market rates. We conclude that this undisclosed and related-party transaction was driven by motives beyond shareholder returns. Our suspicion is that it was done to enrich Utemuratov and gain favor with President Nazarbayev.

Glencore has spent $23 million of shareholder funds to buy a private school in Astana, Kazakhstan. The company immediately wrote off this investment and subsequently transferred its shares in the school to Bulat Utemuratov’s charity for no consideration. This deal cannot be considered a charitable venture given that the school caters to the children of Kazakhstan’s elite and charges fees of up to $20,000 a year (Kazakhstan’s average GDP per capita is $10,800). It is difficult to draw any other conclusion from this transaction than Glencore was buying influence and favors in Kazakhstan, particularly given that the other major shareholder in Haileybury Astana was President Nazarbayev’s personal charity.

The deals between Glencore and Utemuratov are non-sensical, value destructive for investors and raise the possibility that Glencore has been secretly transferring wealth to its local fixer in order to buy favors and influence in Kazakhstan. The US Foreign Corrupt Practices Act (FCPA) states that payments (deemed to be anything of value) intended to induce or influence a foreign


official is a violation of the law. The UK Bribery Act is broader in scope and includes all bribery, including to private citizens.

Investment Conclusion: Glencore (GLEN.L) Overstatement of Assets: -3.5% The acquisition of the Vasilkovskoye mine and the associated asset swaps between Utemuratov’s Verny Capital and Glencore resulted in a meteoric increase in Kazzinc’s valuation over a short period of time. Some of this increase was justified in the accounts by attributing mining rights to Vasilkovskoye worth more than $2 billion. This was 10,000% more than the value ($18.9 million) put on the same mining rights by Vasilkovskoye just one year before. Kazzinc still carries this phantom $2 billion as an intangible asset on its books while Glencore has accounted for it as a tangible asset under “plant, property and equipment”. Regardless of the contradictory accounting treatments, we do not believe that the $2 billion is a legitimate asset but rather the legacy of a scheme to artificially inflate the value of Kazzinc. The asset has no substance and should be deducted from the value of Kazzinc, thereby reducing Glencore’s shareholder equity in the subsidiary. Glencore attributed $3.3 billion of equity value to Kazzinc in 2017, which we argue should be cut to $1.8 billion. If we apply this to Glencore’s market capitalization, we find that the actual trading value of Glencore is at least 3.5% lower. We therefore apply a 3.5% discount to Glencore’s share price for this one asset, not including other similar accounting irregularities that may exist in other assets. ESG: -10% We think it is inevitable that governance issues will dominate Glencore’s share price performance for some time to come given the emerging scandals in the DRC, Kazakhstan and other countries. As further regulatory action is announced, demand for Glencore’s stock from institutional shareholders will likely fall. ESG requirements and mandates are now an important consideration for most funds and it is clear from our feedback from the market that many institutions already view Glencore’s stock as toxic. Given the mounting allegations against the company, we are concerned that its stock could become untouchable for many funds, driving down the price further. Good ESG credentials are generally understood to have a statistically significant positive impact of 10-15% on share performance1. Glencore is currently ranked in the 32nd percentile for ESG rating but we think that the evidence in this report as well as continued coverage of the DRC allegations will significantly impair the company’s governance rating. We therefore attribute a -10% impact from ESG concerns. Regulatory Action: -2% to -12% If the Department of Justice, SEC and UK Serious Fraud Office were to pursue Glencore over corruption in Kazakhstan, the company could theoretically be required to disgorge all profits from its operations in that country. Since 2007, Kazzinc has accumulated pre-tax profits of $6 billion – more than Glencore’s entire 1



net shareholder income in 2017. The elimination of $6 billion of free cash flow would theoretically cut Glencore’s share price by about 12%. Even if Glencore were to be fined $1 billion, roughly equivalent to the penalty imposed on Telia AB by the DoJ, this would still have at least a 2% price impact. Board/Management Changes: As a result of the growing controversies around Glencore, it is possible that the DoJ and/or investors will seek the removal of senior executives and board directors of the company. The head of copper, Aristotelis Mistakidis, has already “retired” following a Canadian investigation into misreporting by one of Glencore’s DRC subsidiaries. It is impossible to quantify the impact of senior departures but given that the culture of Glencore has been set by a small group of executives who have worked at the company for decades (and hold billions of dollars in stock), the impact could be very significant if they were required to leave.

Summary: Combining the above estimates, we calculate a downside risk of between -15.5% to -25.5% for GLEN.L stock. Based on current prices this gives a target price of 208p to 236p per share.


1. Glencore’s Modus Operandi

Background Glencore was founded by Marc Rich, a commodities trader who made much of his fortune from dealing with pariah regimes and sanctions busting. Rich fled the United States in 1983 after he was charged with racketeering, trading with the enemy (Iran) and tax evasion. He was controversially pardoned by President Clinton in 2000. A subsequent Congressional2 investigation described Rich’s business as “based largely on systematic bribes and kickbacks to corrupt local officials.” Marc Rich & Co. became Glencore in the mid 1990s and a new management team, most of them hired and mentored by Rich, took over. Many of the company’s current senior executives, including CEO Ivan Glasenberg, hail from this time. Despite the new management team at Glencore, NGOs and the media have alleged that the company has continued to engage in questionable and illegal activities. For example, a US-led mission in Iraq claimed that Glencore had paid more than $3 million in “illegal surcharges”, or kickbacks, as part of the UN Oilfor-Food Program in the early 2000s3. The company was not charged and claimed to have been unaware of what the money was used for. “For years the company’s critics – mostly activists and NGOs – have claimed that Glencore has profited by nurturing political connections in troubled, often corrupt countries.” Source: Fortune Magazine July 2016, Glencore: The Inside Story of How It Dug Itself Out Of A Hole

Glencore’s Fixers According to an investigation by Foreign Policy4 magazine in 2012, developing political connections in order to drive commercial interests has been a key part of Glencore’s strategy since its early days: “This is the heart of the Marc Rich formula: Access is money, and contacts on the ground mean access. The new Glencore, like the old one, relies on a network of fixers, middlemen, and business partners who might make other companies squeamish.” Glencore’s use of politically connected fixers and middlemen has been most notable in the Democratic Republic of Congo (DRC), where Glencore has worked with the Israeli diamond trader Dan Gertler for years. In Federal court documents filed against Och-Ziff Capital Management in 2016, Gertler is alleged to have paid more than $100 million in bribes to Congolese officials in return for securing mining licenses and other favors for international businesses. According to the US Treasury, Gertler had used his “close friendship” with Joseph Kabila, President of the DRC, to “act as a middleman for mining asset sales in the United States Congressional Serial Set, No. 14778, House Report No. 454 https://www.theguardian.com/business/2017/nov/05/the-inside-story-of-glencore-hidden-dealings-in-drc 4 https://foreignpolicy.com/2012/04/23/a-giant-among-giants/ 2 3


DRC, requiring some multinational companies to go through Gertler to do business with the Congolese state.” Och-Ziff paid $413 million to settle Federal charges and the US imposed severe economic sanctions on Gertler5 in 2017. According to Bloomberg6, Gertler and Glencore participated in more than a dozen transactions involving DRC assets between 2007 and 2017. These deals helped Glencore become the world’s third-largest copper producer and the largest cobalt producer. Gertler had stakes in two of Glencore’s big mines in the DRC: Katanga and Mutanda. He owned a 31% stake in Mutanda via the Fleurette Group and a 14% stake in Katanga via other offshore vehicles. According to a report by Bloomberg Businessweek, Glencore’s CEO Ivan Glasenberg personally managed the Gertler relationship. The magazine added: “The money flowed from Glencore to Gertler’s companies for more than a decade in the form of hundreds of millions of dollars of loans and contracts for various services. Glasenberg would pointedly acknowledge that Glencore’s ability to work in Congo depended almost entirely on Gertler. Without him they could lose their mines, Glasenberg said, admitting he had no other real access to Kabila. The company didn’t even have a representative in Kinshasa, depending instead on a Gertler employee to handle relations with the government.” Source: Bloomberg Businessweek Nov 2018. Trouble In The Congo

The partnership between Glencore and Gertler at Katanga began in 2007 when the commodities group acquired a stake in the mine. According to Board minutes released as part of the Paradise Papers7 leak of documents, Glencore was having difficulty persuading the DRC state-run miner Gecamines to agree a new license for Katanga. “It was suggested that Dan Gertler, who had a substantial indirect interest in the company, should be given a mandate from the board to negotiate with the DRC authorities,” the Guardian quoted from the Board minutes. After Gertler was brought onboard, an agreement with the DRC Government was reached within 17 days prompting speculation that Gertler had bribed officials to get a deal done. Two years later, Glencore issued new shares in Katanga as part of the company’s continued development of the mine. Of the minority investors in Katanga only Gertler participated in the share issue by investing $45 million via his company Lora Enterprises. However, the $45 million was not Gertler’s money and was, in fact, a loan from Glencore. In other words, Glencore generously enabled Gertler to keep his full stake in the business while other shareholders were diluted. According to the Guardian’s reporting of the Paradise Papers leak, Glencore’s loan was contingent on Gertler successfully agreeing another joint venture agreement with Gecamines.

https://www.bloomberg.com/news/articles/2018-02-23/he-got-rich-on-congo-mines-until-bribe-probe-put-future-on-hold https://www.bloomberg.com/news/articles/2018-02-23/he-got-rich-on-congo-mines-until-bribe-probe-put-future-on-hold 7 https://www.theguardian.com/business/2017/nov/05/the-inside-story-of-glencore-hidden-dealings-in-drc 5 6


Both Gertler and Glencore have denied any wrongdoing relating to these transactions. However, with the Och-Ziff evidence showing a pattern of bribery in Gertler’s deals the regulatory authorities are starting to ask pointed questions about how much Glencore might have known – or should have known – about what its partner was up to in the DRC (see next section).

Breaking Up Is Hard To Do Following the Och-Ziff settlement, Glencore paid its partner $960 million to buy out Gertler from his stakes8 ($572m for the shares and $388m in debt forgiveness). Gertler was to continue receiving royalties from the mines but this became problematic after he was sanctioned by the US Treasury. Glencore initially withheld about $29 million in royalties but Gertler and Gecamines separately took the company to court in 2018 to demand payment. The DRC threatened to dissolve Glencore’s operations in the country if it did not pay up, according to reporting by Blooomberg Businessweek. “Glasenberg had to choose between provoking the U.S. administration, which could impose fines at a future date if it found a sanctions violation, or Gertler, who could stop all revenue from Congo overnight. He chose the former, a decision that shocked many familiar with the U.S. sanctions regime, but the company said it had discussed this with U.S. and Swiss authorities.” Source: Bloomberg Businessweek Nov 2018. Trouble In The Congo.

Glencore chose to pay Gertler the royalties in euros in the hope of circumventing US sanctions. This sleight of hand has troubled investors and may have irritated the US Government, which issued subpoenas to Glencore just two weeks after the Gertler payment. Glencore’s desperation to keep Gertler friendly exposes how reliant the company is on its politicallyconnected fixer. As Foreign Policy magazine explained, this goes to the heart of how Glencore has managed to operate for so many years in jurisdictions that other Western companies have shunned due to the inherent corruption. “For Glencore, partnering with operators like Gertler is not a chance occurrence. On the contrary, it reflects the company’s modus operandi: gaining access to resources through gatekeepers who have intimate connections to senior-level decision-makers.” Source: Foreign Policy, April 2012. A Giant Among Giants.

The Foreign Policy investigation also quotes a former Glencore employee saying: “Glencore has a Gertler everywhere. That’s standard.” Kazakhstan Glencore has been in Kazakhstan for over 20 years and throughout that period, the company’s local sponsor has been Bulat Utemuratov. The parallels between Glencore’s relationship with Gertler and its relationship with Utemuratov are troubling. As Foreign Policy explained: 8



“You can’t do any large-scale business in Kazakhstan without the president’s approval, and you can’t get that without direct access to the president, which Utemuratov gets for you.” Source: Foreign Policy April 2012, A Giant Among Giants9

This is almost exactly matches how Glencore used Gertler in the DRC. “A former head of Kazakhstan’s powerful National Security Committee who once held a top position in the ruling party and served as chief of staff to [President] Nazarbayev between 2006 and 2008, Utemuratov is known among insiders as the president’s consigliere.” Source: Foreign Policy, April 2012

Utemuratov is one of the most influential men in Kazakhstan and has a close relationship with President Nursultan Nazarbayev – the country’s autocratic ruler. Utemuratov’s dealings with Glencore have made him billions of dollars while giving the company access to major Kazakh resources. This relationship continues today with Glencore quietly funding Utemuratov’s real-estate ventures and other non-core projects. Most of these related-party transactions have never been revealed to Glencore shareholders. In the light of Glencore’s dealings with Dan Gertler, we believe that shareholders need to take a closer look at the company’s operations in Kazakhstan and ask whether it represents a corrupt arrangement. We believe that shareholders should have serious concerns about the legitimacy and legality of Glencore’s partnership with Bulat Utemuratov.




2. Glencore Under Pressure

When Glencore confirmed in July that the US Department of Justice had issued subpoenas relating to potential money laundering and Foreign Corrupt Practices Act (FCPA) violations, the market reacted dramatically. Glencore’s stock fell by more than 12% immediately after the announcement and ended the week down 7.4%. The company said the documents requested related to its business in the Democratic Republic of Congo (DRC), Nigeria and Venezuela from 2007 onwards. Glencore now faces investigation in the US as well as reportedly facing inquiries by the UK’s Serious Fraud Office. The net is closing and Glencore and its CEO, Ivan Glasenberg, are the target, according to a Financial Times10 article titled “DoJ targets Glasenberg’s Glencore”. The FT quoted an executive at a rival trading house saying: “This has been coming for some time. Glencore under Ivan Glasenberg has always had a reputation for sailing close to the wind, but in recent years they’ve started to act as if they were untouchable.” Glencore shareholders have begun to realize how exposed their company is to allegations of corrupt behavior in the DRC and other countries. The evidence in this report, suggests that Glencore’s dealings in Kazakhstan are potentially even more troubling and could expose the company to even greater liability. Anti-Corruption Laws Glencore has American Depository Receipts (ADRs) listed in New York so falls under the jurisdiction of the US Foreign Corrupt Practice Act. The penalties for violation of the FCPA can be enormous with the Swedish company Telia agreeing to penalties totaling $965m in 2017 for offences in Uzbekistan. The FCPA does have a five-year statute of limitations but that is not seen as a major barrier to holding companies accountable for historic corrupt behavior. According to FCPA specialists, the US Department of Justice can instead bring conspiracy charges and this gives it a much longer time horizon to cover11. ENI, the Italian oil producer, was charged with conspiracy to breach the FCPA in 2010 for historical offenses and ended up paying the DoJ a fine of $240m12. The FCPA states that any payments intended to induce or influence a foreign official to benefit a company are illegal. These terms are broadly interpreted and can include favors or payments to members of a country’s elite who are deemed to be politically connected. Throughout much of Glencore’s business relationship with Bulat Utemuratov he held official roles within Kazakhstan such as Secretary of the Security Council. Utemuratov has also been repeatedly described as an advisor or personal treasurer to President Nazarbayev so even during periods where he held no official title, law enforcement agencies may take the view that he was a de facto agent of the President.

https://www.ft.com/content/32e4f8bc-7ed4-11e8-bc55-50daf11b720d http://www.fcpablog.com/blog/2012/4/30/walmart-and-the-statute-of-limitations.html 12 http://www.fcpablog.com/blog/2010/11/4/fcpa-conspiracy-theories.html 10 11


Meanwhile, the UK’s Serious Fraud Office (SFO) is reportedly considering whether to open a formal investigation into Glencore. The company’s shares are listed on the London Stock Exchange and the company is therefore theoretically under the jurisdiction of the UK Bribery Act. It is worth noting that the UK Bribery Act goes further than the FCPA in a number of areas, specifically it includes private bribery. If the SFO were to look into Glencore’s business in Kazakhstan it would, therefore, not necessarily have to prove that Utemuratov remained a public official if it deemed he was being paid to exert political influence on Glencore’s behalf. According to reporting of the SFO inquiry13, Glencore has responded by suggesting that the UK would have no jurisdiction over a Swiss company’s operations in the DRC (or Kazakhstan for that matter). We feel the company is clutching at straws with this argument. We cannot see how Glencore can remain listed on the London Stock Exchange if it shuns UK oversight.

Financial Impact The US DoJ (and recently the UK SFO) has shown a willingness to penalize companies very harshly for breaches of anti-corruption and money laundering laws. If Glencore were to be found guilty, or agreed a plea deal, in relation to corruption in the DRC and Kazakhstan, the potential fines could run into the billions of dollars. The DoJ and SEC have the power to force the disgorgement of all profits from a corrupt enterprise. In the case of Kazakhstan, Glencore’s theoretical liability should it be found guilty of corruption would therefore be about $6 billion since 2007.

Glencore has the balance sheet to cope with most fines, although any large penalty would severely knock the company’s share price given the short-term impact on profits and dividends.




However, we believe that the intangible costs are what investors should be most concerned about. There are three such costs: 1. Glencore’s trading business is reliant on access to short-term loans and this business could be put at risk if sanctions were brought against the company or if banks viewed it as a compliance risk. 2. Investors also need to question what Glencore’s future might be if the cadre of senior executives, including Glasenberg, who have run the company for decades were forced out as part of a plea deal with the DoJ/SFO. The head of copper, Aristotelis Mistakidis, has already “retired” – his departure was announced shortly before Mistakidis was barred as a director in Canada in relation to an investigation into misreporting by one of Glencore’s DRC operations (the company also paid a C$30 million penalty)14. “It’s becoming apparent that Glasenberg’s ties with Gertler could threaten not only Glencore’s cobalt dreams but also, perhaps, Glasenberg’s career and legacy at the very moment he appears poised to own the future.” Source: Bloomberg Businessweek Nov 2018. Trouble In The Congo. 3. For shareholders the most damaging fallout from Glencore’s troubles has been the share price lag that is now built into the company’s stock. Glencore has significantly underperformed its peer group (BHP Billiton, Rio Tinto and Anglo American) during 2018 and we believe that this situation will worsen.




Companies that develop a reputation for poor corporate governance experience a discount to their price as pension funds and ethical investors limit or sell their holdings. When ENRC, another London-listed mining company with a focus on Kazakhstan, was accused of benefiting from corruption a number of large institutional investors dropped the stock immediately15. The corporate governance discount on ENRC’s stock was generally considered to be about 20% and this was ultimately one of the reasons it delisted. The allegations against Glencore are extremely serious and we think that more institutional investors will shy away from the stock as the regulatory pressure grows. Analysts at Goldman Sachs and JP Morgan Chase both cut Glencore from their lists of recommended stock purchases in 2018, specifically citing regulatory uncertainty around the company16. Arguments about stock value and earnings performance will cease to matter if institutional mandates prohibit fund managers from holding Glencore’s shares. “All of that has weighed on its share price, which was already lagging its peers in 2018 before Tuesday’s sell-off, and raised questions about a strategy that relies on operating in some of the most politically difficult countries while remaining on the right side of the law.” Source: Financial Times July 3rd, 2018. DoJ Targets Glasenberg’s Glencore

We think it is inevitable that governance issues will dominate Glencore’s share performance for a long time to come. As we demonstrate in this report, investors now have to consider Kazakhstan as another potential source of allegedly corrupt business. This is likely to further erode demand for Glencore’s stock as institutional shareholders take fright. We think that Glencore’s stock has become toxic for many investors. It could yet become untouchable.

15 16

https://www.theguardian.com/business/2011/aug/17/enrc-profits-up-but-doubts-on-corporate-governance https://www.ft.com/content/32e4f8bc-7ed4-11e8-bc55-50daf11b720d


3. Glencore in Kazakhstan

The Local Fixer: Bulat Utemuratov Few people outside of Kazakhstan will have heard of Bulat Utemuratov, a former trade inspector who became a billionaire with a fortune estimated at more than $2.5 billion17. Kazakhstan became independent in 1991 and the country’s first (and only) President, Nursultan Nazarbayev, realized that the new republic needed access to foreign capital and trade. According to media reports18, Nazarbayev selected Utemuratov, then head of the Committee on Foreign Economic Relations, to go to Vienna in 1992 and find development opportunities. In particular, Kazakhstan needed help to exploit its vast natural resources. The Vienna role would thrust Utemuratov into the world of commodities trading and start him on the path to becoming Kazakhstan’s richest man. After Vienna, Utemuratov founded Almaty Trade Finance Bank, later renamed ATF Bank (which was sold to Unicredit in 2007 for $2.1 billion in a spectacularly bad deal for the Italian bank). Utemuratov became Kazakhstan’s ambassador to Switzerland in the late 1990s and then the President’s assistant on foreign policy and economic affairs from 1999 to 2003. He was Secretary of the Security Council until 2006 (a powerful position in an autocratic country) and the head of President Nazarbayev’s private office from 2006 to 2008. From 2008 to 2013 he was described as an “adviser to the President” and he also held a role as a special representative to Kyrgyzstan. Utemuratov’s only current official position is as head of the Kazakh Tennis Federation but there has been persistent media reporting that his role in Kazakhstan is far more significant than any job title might indicate. Utemuratov has been described by Reuters19 as Kazakhstan’s “grey cardinal” and by the Daily Telegraph20 and others as “consigliere” to President Nazarbayev. This close relationship has led to speculation that Utemuratov’s wealth stems from his close relationship with Nazarbayev and that he acts as the President’s “personal financial manager” – according to a US diplomatic cable released by Wikileaks21. US Diplomatic Cable Oct 2, 2009 (NOTE: Utemuratov has long been rumored to be Nazarbayev's "personal financial manager." END NOTE.)

https://www.forbes.com/profile/bulat-utemuratov/#4fdb3d1b17ed https://www.bloomberg.com/news/articles/2013-11-13/kazakh-billionaire-says-he-s-got-nothing-to-hide 19 https://uk.reuters.com/article/kazzinc-kazakhstan-stake/update-2-kazakh-fund-adds-29-pct-of-kazzinc-to-stakes-in-minersidUKL5N0B78B020130207 20 http://www.pressreader.com/uk/the-daily-telegraph-business/20110506/281500747821776 21 https://wikileaks.org/plusd/cables/09ASTANA1762_a.html 17 18


Another diplomatic cable released by Wikileaks22 is even more explicit claiming that Utemuratov benefited from corruption and was “a billionaire who has never had a business”. US Diplomatic Cable July 2007: Abilov named Nazarbayev confidante Bulat Utemuratov as another example of high-level corruption, "a billionaire who has never had a business."

The allegations that Utemuratov’s wealth was obtained corruptly were raised in a Bloomberg23 profile of the billionaire in 2013: “Utemuratov defends the wealth he has amassed while serving as Nazarbayev’s loyal lieutenant. He says he never used his government positions or his friendship with Nazarbayev to get rich inappropriately. “I have nothing to hide.” This denial does not wash with opposition figures in Kazakhstan, who wrote an open letter24 to Glencore investors in 2011 warning them about the company’s Kazakh fixer. In the letter they said: “Bulat Utemuratov, the former head of administration for the President of Kazakhstan, is a co-owner of Kazzinc. Utemuratov is widely believed to be holding these assets for the benefit of Nazarbayev.” The letter was signed by 16 opposition leaders including Vladimir Kozlov, leader of the Alga! Party, and Aldamzharov Haziz, first secretary of the Communist Party. In its reporting of the letter, the Daily Telegraph25 said: “The opposition figures claimed that Glencore's partner in Kazzinc may ultimately be Mr Nazarbayev himself but so far the president has been successful in quashing any critical voices against his government.” Utemuratov is politically-connected at the very highest level in Kazakhstan and the origins of his wealth are opaque and potentially corrupt. Despite these concerns, he has been Glencore’s partner in Kazakhstan for decades and the relationship remains strong.

Verny Capital Utemuratov established an investment vehicle called Verny Capital in 2006 and the fund has an estimated $4 billion under management. Utemuratov’s involvement in Verny is not in doubt (he discusses Verny’s investments on his website) but the size of his investment is unknown.

https://wikileaks.org/plusd/cables/07ASTANA1848_a.html https://www.bloomberg.com/news/articles/2013-11-13/kazakh-billionaire-says-he-s-got-nothing-to-hide 24 http://kazakhstanvoice.blogspot.com/2011/05/to-investors-of-glencore-on-kazakhstan.html 25 https://www.telegraph.co.uk/finance/commodities/8510797/Glencores-7.6bn-Kazakh-business-under-threat.html 22 23


However, it has been reported26 that Utemuratov is Verny’s lead shareholder and the fund’s board of directors27 is controlled by the billionaire. Verny’s directors are: Erlan Ospanov, Xavier de Sarrau and Yevgeniya Kuzmenko, who appears to the company secretary. Ospanov28 was formerly deputy chairman at ATF Bank, which was owned by Utemuratov, and de Sarrau reportedly manages Utemuratov’s private office in Monaco through a company called Janus29. Based on this evidence, we see Verny and Utemuratov as one in the same.

Utemuratov and Glencore According to media reports, Marc Rich and Utemuratov formed a close relationship in the mid 1990s.30 Glencore International AG acquired a number of assets in Kazakhstan during this period, including a 15.2% stake in Utemuratov’s ATF Bank. Utemuratov is thought to have returned the favor and brokered a deal that enabled Glencore to acquire assets from the Kazakh Government at a knock-down price in 1997. These assets are known collectively as Kazzinc31. Viktor Khrapunov, the former Kazakh energy minister and mayor of Almaty, claims in a book he wrote called “Nazarbayev – Our Friend the Dictator: Kazakhstan’s Difficult Path to Democracy” that Glencore paid Utemuratov millions of dollars to facilitate the Kazzinc deal. “Everything that worked well in the non-ferrous industry in Kazakhstan was sold to Glencore… for laughable amounts of money,” he wrote. After Khrapunov fell out with the Nazarbayev regime, he fled the country and has been convicted in absentia of corruption and money laundering. He may not, therefore, be a reliable witness but his claims do add to a general picture of how Glencore came to have such a lucrative foothold in Kazakhstan. Utemuratov has been a director of Kazzinc Holdings LLC, a company affiliated with Glencore’s Kazzinc subsidiary, for the past five years32.

Kazzinc According to Glencore’s IPO prospectus, Kazzinc is comprised of six mines, an ore stockpile, two concentrators, two zinc smelters, a gold recovery plant and various other smelters. It is a large enterprise and has been a core part of Glencore’s business since 1997. The company initially acquired a 69% stake in Kazzinc via two entities: Kazastur Zinc AG and Karison AG. They held respectively 62.96% and 7.55% of Kazzinc and were Glencore subsidiaries based in Switzerland.

Bloomberg, The Daily Telegraph, Foreign Policy etc. https://nationalbank.kz/index.cfm?docid=3033&switch=english&view=organization&id=501 28 https://www.bloomberg.com/research/stocks/private/person.asp?personId=137357758&privcapId=114205196 29 https://www.mediapart.fr/journal/france/171016/un-intime-de-sarkozy-construit-les-montages-offshore-de-la-dictaturekazakhe?onglet=full 30 https://www.neweurasia.info/archive/2001/top5/03_06_619.htm 31 http://www.glencore.com/dam/jcr:c7bf3049-12a7-4bf2-bef5-c1bcaa38f409/201111030800-Glencore-presentation.pdf 32 http://kazzincholdings.kz/company/board-of-directors/ 26 27


On August 5, 2005, an additional 1% stake in Kazzinc was bought for $5 million by Karison AG33. On August 8, 2005, a further 4% stake was acquired by Karison for $21.3 million34, bringing Glencore’s ownership of Kazzinc to 75.5%. These deals imply a valuation for Kazzinc of about $500 million in 2005. In January 2006, Glencore acquired a further 22.7% of Kazzinc and this was reported in the company’s 2005 Annual Report:

Kazzinc’s annual accounts show that the shareholding was owned by Pasar Holdings Incorporated AG, which in much later Glencore documents is listed as a wholly-owned subsidiary. (This appears to be a different “Pasar” to the one Glencore owns in the Philippines.) Oddly, Glencore’s list of subsidiaries in 2006 continued to show that it owned 75.5% of Kazzinc and it did not mention Pasar or that its actual holding in Kazzinc was now 98.6%.

Source: Glencore Annual Report 2006

This is only the first of several unusual and questionable transactions relating to Glencore’s interests in Kazakhstan.

33 34

http://kase.kz/en/news/show/178135/ http://kase.kz/en/news/show/178202/


4. Glencore and Utemuratov Deals

The Vasilkovskoye gold mine was one of the largest in the Soviet Union but by the time Kazakhstan became an independent country in 1991, the easily accessible metal had been exhausted and significant capital expenditure was required to continue developing the asset. The mine, located in Northern Kazakhstan, was identified as a key asset for sale in the early days of President Nursultan Nazarbayev’s administration and efforts to bring in foreign investors date back to about 1993. Various international miners became involved at Vasilkovskoye in the 1990s but from 2000, the mine was 60% owned by Floodgate Holding BV with the Kazakh Government owning the remainder. In 2005, Floodgate increased its stake via a series of auctions starting with the purchase of a 20% stake in May 2005 for KZT1.5 billion35 (c$12m) and a further 15% in August acquired for KZT855 million36 (c$6.8m). Vasilkovskoye was therefore valued at roughly $54 million in 2005, based on the Floodgate share purchases.

Verny Acquires Vasilkovskoye The exact timing of Verny Capital’s acquisition of the Vasilkovskoye gold mine from Floodgate is unclear with the company itself claiming to have taken control in May 2007. This date is contradicted by various Glencore publications, which state that the mine was acquired in 2006. For example, the Kazzinc website states that new management arrived at Vasilkovskoye mine in 200637 and Utemuratov’s son Alidar is cited in a number of online biographies as being president of the project from October 2006 to June 2012. If we assume that Verny took control of Vasilkovskoye in 2006, it did so about one year after Floodgate’s share purchases valued the mine at $54 million. There does not appear to have been substantial capital investment by Floodgate in the months prior to the sale so it is reasonable to assume that Verny paid a price that was in same ballpark as the 2005 valuation: roughly $54m plus premium. We will assume a range of $60 million to $80 million. Meanwhile, Glencore’s Kazzinc subsidiary had a valuation of approximately $500 million in 2005 (see previous section). Valuations







http://www.mineral.ru/News/20821.html http://www.mineral.ru/News/19182.html 37 http://kazzincholdings.kz/altyntau-kokshetau/ 35 36


Although Verny was the owner of Vasilkovskoye, it was Kazzinc that financed the capital development of the mine, specifically a new ore processing plant that went into operation in 2009. JSC Vasilkovskoye GOK38 signed a loan agreement with Kazzinc in 2006 for about $500 million. A share prospectus issued by Glencore for its Altyntau Kokshetau JSC39 subsidiary in 2016 explains the financing deal: “In 2006, Kazzinc LLP became a new investor into Vasilkovskiy GOK JSC. Development of a new business plan for the enterprise began and it was decided to build an absolutely new ore-dressing plant. The total investment in the Vasilkovskoye field in the period from 2007 to 2009 was $ 500 million.” The financing available from Kazzinc was increased several times and by 2009, the loan facility was up to $750 million.

Source: JV Vasilkovskoye Zoloto JSC 2009 Annual Accounts, page 29

The capital invested in the development of Vasilkovskoye, and therefore any increase in the value of the asset, was fully financed by Glencore.

2008 Deal In March 2008, Glencore struck a deal to acquire a 40% stake in Vasilkovskoye from Verny Capital. According to Glencore’s 2008 accounts, the company acquired the stake through its subsidiary Kazzinc for a cash consideration of $300 million.

At the time JSC Vasilkovskoye GOK was a subsidiary of JSC Vasilkovskoye Zoloto, which was also known as VasGold. Later, the holding company was renamed JSC Altyntau Resources or Altyntau Kokshetau. 39 http://kase.kz/files/emitters/ATKT/atktf7_2016.pdf 38


This is consistent with Kazzinc’s annual accounts for 2010, which show cash flow expenditure of $300 million for the 2008 acquisition of 40% of Vasilkovskoye.

Source: Kazzinc JSC Annual Accounts 2010


There are, however, inconsistencies with later reports that state the transaction was a share swap and that Verny Capital exchanged 40% of JSC JV Vasilkovskoye Zoloto for a 29.5% stake in Kazzinc.40 There is no mention of this asset swap in the accounts of either Glencore or its subsidiary Kazzinc but it certainly appears to have taken place.




The swap can be seen in a change of ownership within Glencore’s holding companies. Before the Vasilkovskoye deal, we know that Glencore held a 98.6% stake in Kazzinc through its Swiss subsidiaries. These included Kazastur Zinc (62.97%) and Karison AG (12.94%) and an apparent indirect holding via Pasar Holdings Incorporated AG (22.65%). As previously set out, Glencore only officially accounted for the 75% owned via Kazastur and Karison even though Pasar was also under its control. After the Vasilkovskoye deal, Karison AG’s stake in Kazzinc decreased to 6.02% and the shares were transferred to a Kazakh entity called TOO Logic Invest Capital, which was controlled by Verny Capital.

Source: Kazzinc JSC Annual Accounts 2008

The corporate records of Pasar Holdings Incorporated AG also show that an individual named Victor Lorenz Gnehm, a Zug-based lawyer, became the Swiss entity’s director on April 9, 2008, shortly after Kazzinc’s acquisition of 40% of the Vasilkovskoye gold mine. A review of Gnehm’s other directorships in Switzerland show a number of links to Verny Capital’s corporate structures and investments. Specifically, Gnehm was a director of Verny AG between May 2007 and October 2014 and is currently a director of VIP Kazakhstan Holding AG and VIP Kyrgyzstan Holding AG, entities holding interest in Kar-Tel and Bitel, Utemuratov’s telecom investments.

In other words, Glencore handed control of Pasar Holdings Incorporated AG and its 22.65% stake in Kazzinc to Verny Capital in April 2008. Verny also received shares from Karison AG in order to reach a 29.5% stake in Kazzinc.


Even Glencore’s 2008 Annual Report shows the reduction in its shareholding in Kazzinc, although it does not include the Pasar shares, which are mysteriously missing:

So, despite both Glencore and Kazzinc’s accounts reporting the transaction as a $300 million cash deal, Verny Capital actually received cash plus a 29.5% stake in Kazzinc. This stake in Kazzinc would have been worth hundreds of millions of dollars but we found no accounting for the transaction. Based on this evidence, we suggest two options: 1. Either Glencore secretly channeled additional shares to its partner, Bulat Utemuratov, and fudged its accounts so this payment was hidden. This would represent a backhander worth hundreds of millions of dollars paid to an individual who, at about this time, was chief of staff to Kazakhstan’s President. 2. Or, Glencore did not own the Pasar shares when they were transferred to Verny, despite stating that it did own them. This option also raises alarming questions about who Glencore’s secret partner might have been and why its accounts were misleading. It is difficult to see how either of these options would be legal. We cannot explain this anomaly. It appears that the $300 million cash deal morphed into a share deal in later explanations. Subsequent deals repeatedly use the $300 million valuation despite Verny gaining a large shareholding in Kazzinc that is never explained. For the sake of convenience, we will assume that the total value of the 2008 Vasilkovskoye deal was $300 million and that this value holds regardless of whether cash or shares were exchanged. Based on that figure, we can extrapolate valuations for both Kazzinc and Vasilkovskoye in 2008: • 29.5% of Kazzinc = $300 million o 100% of Kazzinc = $1 billion. • 40% of Vasilkovskoye = $300 million o 100% of Vasilkovskoye = $750 million




2005 2008

$500m $1bn

$54m $750m

Note: Kazzinc contributed little in the way of dividends for its shareholders between 2007 and 2013, apart from in 2008. This was the first year that Verny became a shareholder in Kazzinc with a 29.5% stake. The


total dividend was $95 million, which meant that Verny’s share was $28 million. Is it a coincidence that the only year Kazzinc paid a material dividend was the year Verny arrived on the share register?

2010 Deal In February 2010, Glencore bought the remaining 60% of Vasilkovskoye for $204 million in cash plus a further 18.3% of Kazzinc. This reduced Glencore’s stake in Kazzinc to 50.7%. The value of the deal to buy 60% of Vasilkovskoye was put at $1.14bn, which implied a valuation of $1.9bn for the entire asset – 2.5x greater than the valuation two years before and 35x greater than the valuation five years before.

Source: Glencore Annual Report 2010 The higher valuation for Vasilkovskoye meant that Glencore’s existing 40% holding also gained in value, increasing to $760 million. This allowed Glencore to recognize a net gain of $462 million on the shareholding it had acquired in 2008. [Note: the new value of $760 million and gain of $462 million confirms that the valuation of the 2008 transaction was $300 million.] The 2010 deal also had the effect of increasing Kazzinc’s value. According to Glencore, the total value of the deal was $1,140 million and it paid $204 million in cash, which implies that the remainder ($936 million) is the value attached to Kazzinc shares given to Verny, which were equivalent to an 18.3% stake41. Extrapolating, this gives a new valuation for Kazzinc at $5.1 billion. Valuations



2005 2008 2010

$500m $1bn $5.1bn

$54m $750m $1.9bn

The Kazzinc accounts suggest that the share transaction was more complicated than presented in Glencore’s annual report but the overall effect was to reduce Glencore’s shareholding in Kazzinc from 69% to 50.7%. We can therefore determine that Verny gained shares equivalent to an 18.3% stake in Kazzinc. 41


2011 Deal 2011 was an important year for Glencore as the company made its IPO debut in London. As part of the IPO process, Glencore announced that it planned to buy back Kazzinc shares from Verny. It wanted to increase its holding in Kazzinc up to 93% with an option to go higher. The price put on this deal was $3.2 billion, comprising $2.2 billion cash and $1 billion of new shares issued at the IPO price42. This deal valued Kazzinc, which now included 100% of Vasilkovskoye, at $7.6 billion. When Glencore listed in London shortly after this deal was announced its market capitalization was $60 billion43. Kazzinc therefore represented 12.5% of the company’s book value. Valuations



2005 2008 2010 2011

$500m $1bn $5.1bn $7.6bn

$54m $750m $1.9bn n/a

2012 Deal Although the Kazzinc transaction was part of the IPO plan, Glencore was unable to increase its stake in Kazzinc until 2012. A new deal was struck that saw Glencore buy 18.91% of Kazzinc back from Verny for $1.359 billion in cash and shares, giving a valuation for Kazzinc of $7.2 billion. The transaction, completed in October 2012, included $400 million in cash plus shares in Glencore that are now equivalent to 1.33% of the company. Utemuratov’s Glencore stake is worth roughly $700 million (at current prices). Valuations



2005 2008 2010 2011 2012

$500m $1bn $5.1bn $7.6bn $7.2bn

$54m $750m $1.9bn n/a n/a

Verny Capital sold the remainder of its Kazzinc stake, equivalent to 29%, to the Kazakh sovereign wealth fund Samruk Kazyna in February 2013. The initially quoted price was $2.1 billion44, which would have given Kazzinc a valuation of $7.2 billion. The Samruk Kazyna fund later confirmed that it actually paid $1.65 billion45, giving Kazzinc a valuation of $5.69 billion. http://www.glencore.com/dam/jcr:f2c5681a-1bd1-4a07-b92f-1f6a0557b911/Glencore-Prospectus.pdf https://www.reuters.com/article/us-glencore-ipo/glencore-11-billion-ipo-to-make-billionaires-of-bossesidUSTRE7430EF20110504 44 https://uk.reuters.com/article/kazzinc-kazakhstan-stake/update-2-kazakh-fund-adds-29-pct-of-kazzinc-to-stakes-in-minersidUKL5N0B78B020130207 45 https://www.reuters.com/article/kazzinc-kazakhstan-stake/update-1-kazakh-wealth-fund-paid-1-65-bln-for-kazzinc-stakeidUSL5N0BEBGQ20130214 42 43


There were just four months between Glencore’s purchase of Kazzinc shares and the Samruk Kazyna purchase. In that time, the value of Kazzinc had fallen by $1.6 billion (or 22%), which cannot be explained by market factors given that Glencore’s share price went up during this period. This raises the possibility that Glencore overpaid in order to transfer yet more wealth to Utemuratov at the expense of investors. It also demonstrates how overvalued Kazzinc was when Glencore undertook its IPO. Valuations



2005 2008 2010 2011 2012 2013

$500m $1bn $5.1bn $7.6bn $7.2bn $5.69bn

$54m $750m $1.9bn n/a n/a n/a

The Great Gold Flip During the period from 2008 to 2011/2012, average gold prices doubled so it is not surprising to see gold assets increase in value. But the valuation increases seen by Glencore’s assets in Kazakhstan defy explanation. Between 2005 and 2012, the value of Kazzinc rose from $500 million to $7.3 billion. But there is nothing in Kazzinc’s balance sheet to support this sort of staggering increase in valuation. Between 200746 and 2012, Kazzinc’s operating income increased by 50% from $1.9 billion to $2.9 billion but gross profits fell by 23% from $1.1 billion to $800 million. Net profits were down 50% to $329 million, despite the inclusion of Vasilkovskoye. There was, therefore, no significant change in earnings to justify Kazzinc’s meteoric increase in value. Instead, the increase was achieved by flipping the assets between related parties - a time honored way of artificially inflating an asset’s value. When investors bought into Glencore’s IPO at a valuation of $60 billion in 2011, they were, therefore, buying stock that had been inflated by a series of transactions between Glencore and Bulat Utemuratov.


The earliest year for which Kazzinc accounts are available.


The Vasilkovskoye deal was also extremely lucrative for Utemuratov and Verny. We estimate that Verny acquired the mine for between $60 million and $80 million in 2006 and then put little or no more money into the business. When Verny sold out in January 2013, it had received $3.5 billion (not including a possible $300 million backhander in 2008): 2008 2010 2012 2013 Total:

$300m + $28m dividend $204m $1.359bn (cash + shares) $1.65bn $3.54bn

+shares (sold later) +shares (sold later) Shares still owned

This represents a return of more than 5,000% on the purchase of a mine that was already in production. The Vasilkovskoye transaction raises serious questions about whether Glencore fraudulently increased the value of its assets in the run up to its IPO. The deal also transferred a vast amount of money to Utemuratov at a time when Glencore’s partner was an advisor to President Nazarbayev and managing the President’s affairs. Given Utemuratov’s political connections and the sweetheart deals struck in Kazakhstan, there are clear concerns that some of the money generated by the Kazzinc/Vasilkovskoye deal might have been funneled to other members of the Kazakh elite and specifically President Nazarbayev.


What Happened Next Vasilkovskoye was renamed Altyntau Kokshetau JSC and it has continued as a subsidiary of Kazzinc. Glencore has discussed the possibility of spinning off its gold assets and in 2016 there were reports that Altyntau Kokshetau JSC was being prepared for sale. According to a Financial Times47 article published in March 2016, Glencore was seeking $2 billion for the company but evidently no buyer emerged. In October 2016, Glencore issued a share prospectus48 for Altyntau Kokshetau JSC in Kazakhstan. The shares were listed on the Kazakh stock exchange, although the gold mine remains wholly owned by Kazzinc. According to the Kazakh stock exchange website49, Altyntau Kokshetau JSC is currently valued at $1.8 billion. This is about half the amount that Glencore’s local fixer, Bulat Utemuratov, made from selling the gold mine.

https://www.ft.com/content/3ef63bb4-112d-11e6-91da-096d89bd2173 http://kase.kz/files/emitters/ATKT/atktf7_2016.pdf 49 https://kase.kz/en/issuers/ATKT/ 47 48


5. Kazzinc Reporting and Valuations

When Kazzinc acquired the Vasilkovskoye mine, the deal was mainly funded via a share swap using inflated company values. These values had to manifest somewhere in the books and we believe Glencore’s shares have been overvalued as a result. Kazzinc’s 2010 accounts reflect the overstated value attached as a result of the Verny transactions. In 2009, the Glencore subsidiary reported intangible assets of $86 million. In 2010, after purchasing 100% of Vasilkovskoye, Kazzinc’s intangibles assets were reported at over $2 billion.

Source: Kazzinc 2010 annual report, page 4

Intangible assets can, in this case, only represent mining rights, intellectual property, brand value or goodwill (the premium paid for a company if its purchase price is greater than the value of reported assets). According to Kazzinc’s accounts, the massive increase in intangible assets is the result of gaining valuable mining rights following the Vasilkovskoye acquisition:

Source: English translation of Kazzinc accounts 2010


However, according to the pre-acquisition accounts for Vasilkovskoye, it had intangible assets of only $2.5 million plus rights to subsoil use (mining rights) worth $18.9 million.

Source: Vasilkovskoye Zoloto Annual Report 2009 p4

Translation: Vasilkovskoye Intangibles 2009 Intangibles (Tenge) 2009 Rights to subsoil use (Tenge) Tenge to USD Dec 31st 2009 exchange rate 2009 Intangibles (USD) 2009 Rights to subsoil use (USD)


367,339,000 2,803,262,000 0.006740361 2,475,998 18,894,999

In other words, Kazzinc is claiming that the value of Vasilkovskoye’ mining rights increased by more than 10,000% in one year. We think this is very unlikely. Rather, it appears to represent Kazzinc justifying the inflated values given to itself and Vasilkovskoye as a result of these related-party transactions. So how did Glencore account for these inflated transactions? Given that Kazzinc has been majority-owned by Glencore for years, we would normally expect its intangibles to be consolidated onto Glencore’s balance sheet but this does not appear to have happened. Below is a table outlining Glencore’s intangibles, goodwill (and impairment of goodwill) in each year since the company’s IPO.

Intangibles (US$ m) Goodwill ($US m) Accumulated Goodwill Impairment

2011 2012 2013 2014 2015 2016 2017 $ 201.00 $ 2,664.00 $ 9,158.00 $ 8,866.00 $ 7,516.00 $ 6,716.00 $ 6,787.00 $ 169.00 $ 1,085.00 $ 5,998.00 $ 5,998.00 $ 5,879.00 $ 5,050.00 $ 5,050.00 $ $ $ 7,480.00 $ 8,124.00 $ 8,124.00 $ 8,243.00 $ 8,243.00

Source: Extracts from Glencore financial statements 2011-2017

The large increase in intangibles during 2012 and 2013 relate to other acquisitions (Viterra, Xstrata etc.) and are detailed in the Glencore annual report. It is clear that Kazzinc’s intangibles have not been consolidated into Glencore’s accounts, despite the subsidiary being owned 69.7% by Glencore.


Instead, Glencore appears to have reported these intangible assets as tangible – specifically as “property, plant and equipment (PPE)”. The section of the company’s 2011 annual report on acquisitions shows that PPE assets attributed to the Vasilkovskoye acquisition were valued at $2.85 billion:

Source: Glencore Annual Report 2011

Digging deeper into the Glencore annual report, there is a section on Plant Property and Equipment. This gives some more detail for how the asset values have been attributed. Under the “business combination” line, which relates to acquisitions, we can see that the bulk of assets ($2.28 billion) are attributed to mineral rights.

Source: Glencore Annual Report 2011

Glencore therefore appears to be treating the Vasilkovskoye mineral rights as a tangible asset while its subsidiary has reported them as intangible. This has remained the case:


Source: Kazzinc annual accounts 2017 showing intangible assets

Regardless of the accounting treatment, we do not believe that these are real assets but rather the legacy of a scheme to inflate the value of Kazzinc. We therefore believe that the phantom $2 billion should be deducted from the value of Kazzinc, and thereby reduce Glencore’s shareholder equity in the subsidiary. According to Glencore’s 2017 annual report, the equity attributed to shareholders for Kazzinc is $3.3 billion. Glencore owns 69.7% of Kazzinc so its share of the phantom goodwill is $1.36 billion, which if deducted from the equity attributable to the owners gives us $1.3bn: Glencore Overvaluation Kazzinc intangible assets Glencore share of Kazzinc intangibles Equity attributable to owners Actual Equity Value after removing intangibles

$1,950,432,000 $1,359,451,000 $3,314,000,000 $1,954,549,000

If we subtract this value from the market cap (current equity value) of Glencore, we find that the actual trading value of Glencore should be at least 3.5% lower. Glencore Overvaluation Share of Kazzinc intangible assets Glencore Market Cap % overstatement

$1,359,451,000 $38,500,000,000 3.5%

In other words, Glencore’s shares are at least 3.5% overvalued – and this does not include any penalties associated with this potentially fraudulent and corrupt scheme.


6. Orion Minerals

Verny Capital’s involvement in Kazzinc ended in February 2013 when it sold its remaining shares to Samruk Kazyna, the Kazakh sovereign wealth fund, but within a few weeks Glencore was back in business with Bulat Utemuratov. Kazzinc and Verny acquired50 a Kazakh gold miner called Orion Minerals for $199.3m (KZT30 billion) on February 26, 2013. Kazzinc bought 89.5% for $178.7m and Verny acquired the remaining 10.5% for $20.6m. Orion Minerals Kazzinc (Glencore) Verny (Utemuratov) Total

% 89.5 10.5 100

$m 178.7 20.6 199.3

Orion Minerals comprised various gold assets, some of which had been producing since the Soviet era. At the time of acquisition, Orion comprised the following assets: • Raigorodok field o North Raigorodok o South Raigorodok o Novodneprovskoye • Komarovskoye51 field According to media reports at the time of the deal, the Raigorodok field was estimated to contain roughly 30 tonnes of gold reserves while the Komorovskoye field had reserves of 40 tonnes52. Raigorodok therefore represented roughly 42% of the underlying assets in Orion. In July 2013, the mineral rights to North and South Raigorodok as well as the Novodneprovskoy gold deposit were transferred to a new company called Raigorodok LLP, which was 100% owned by Orion. Then Glencore did something really strange… In April 2014, Kazzinc and Verny entered into an agreement to do an asset swap. Verny sold its 10.5% stake in Orion to Kazzinc for $60.3m – three times more than it had paid 14 months before. The payment comprised $36.5m in cash and the transfer of Raigorodok LLP (the newly created entity that contained the rights to the Raigorodok and Novodneprovskoye fields) to Verny. According to Kazzinc’s accounts, Raigorodok LLP’s carrying value was $23.8m.

https://www.reuters.com/article/gold-kazakhstan-kazzinc/update-1-kazzinc-verny-capital-buy-two-kazakh-gold-depositsidUSL6N0BJ3V920130219 51 This location is also referred to as Kamarovskoe by Glencore 52 http://www.interfax.com/newsinf.asp?id=407285 50


The asset swap was not mentioned in Glencore’s annual report or filings. Neither was the deal reported as a related-party transaction by Glencore despite Utemuratov sitting on the board of a Kazzinc-affiliated company at the time. Perhaps Glencore chose to keep this transaction a secret from its shareholders because it was such a bad deal for them. In simplistic terms, Verny received cash and approximately 42% of Orion’s assets in exchange for a 10.5% stake in Orion. Verny’s total outlay to take control of the Raigorodok assets was therefore negative $16 million:


2013 2014 Net

$20.5m -$36.5m -$16m

Payment for 10.5% of Orion Received from Kazzinc + Raigorodok LLP

The total consideration paid by Kazzinc for the Komarovskoye asset was $239m: 2013 2014 2014 Total

$178.7m $36.5m $23.8m $239m

Cash for 89.5% of Orion Cash to Verny Value of Raigorodok LLP

Just one year later in 2015, Glencore’s accounts put a value on Orion Minerals/Komarovskoye of $70 million. Adding to the lack of commercial rationale, Glencore then said that following a strategic review of the Komarovskoye gold mining deposit, the company had decided to cease further development at the site. As a result, the full carrying value of $70 million was impaired.

Source: Glencore Annual Report 2015

Kazzinc held on to Orion Minerals/Komarovskoye until April 2016, when it was sold to Polymetal International, a UK-listed miner, for $100 million plus a deferred consideration of up to US$80 million depending on future production from Komarovskoye and future gold price performance53.

Orion Now Verny still owns the Raigorodok fields, which were renamed RG Gold in 2015. RG Gold announced earlier this year that after a review of its deposits, its JORC code-certified resources had increased to 6Moz of gold54. This is six times greater than when Kazzinc and Verny bought Orion in 2013. RG’s gold production has also stepped up with both North and South Raigorodok fields now delivering metal. The company produced over 33koz of gold last year and this is expected to increase to about 47koz in 201855. These production figures are still small by global standards but according to a presentation RG Gold, the company is forecasting EBITDA of $31.8 million in 2018. Based on a typical multiple for gold companies of approximately 9x earnings56, that implies a valuation of $286 million. https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/POLY/12761313.html https://www.rggold.kz/rg-gold-kazakhstan-based-gold-producer-announces-results-of-updated-mineral-resources-estimatein-compliance-with-jorc/ 55 http://www.rusmininfo.com/news/12-07-2016/kazakh-%E2%80%9Craigorodok%E2%80%9D-produce-15-tons-gold-2018 53 54




Source: RG Gold presentation May 2018

In summary, Glencore paid a total consideration of $239 million for an asset that it dumped for $100 million within two years. Meanwhile, Verny and its owner Bulat Utemuratov were paid a net $16 million and given an asset that is worth nearly $300 million today. This is either an egregious case of management incompetence or another example of Glencore secretly transferring wealth to its politically-connected local sponsor in Kazakhstan. Anti-corruption laws generally prohibit the transfer of any form of value to officials or individuals who are able to exert political influence on behalf of a company. In this case, Glencore gifted a close friend and adviser to the President of Kazakhstan an asset worth hundreds of millions of dollars and kept the deal quiet. It is difficult to see a legitimate explanation for this behavior.


7. Glencore and Utemuratov: A Continuing Relationship Talan Towers Glencore’s partnership with Bulat Utemuratov theoretically ended in February 2013 when Verny Capital sold its last shareholding in Kazzinc. However, despite selling his shares Utemuratov remained on the board of Kazzinc Holdings LLC and is still doing business with Glencore today. In 2013, Verny Capital announced57 that it was planning to invest $300m in a high-end real estate development in the center of Astana, Kazakhstan. The prestigious project was called Talan Towers and it would combine a hotel, office space, apartments and retail. Construction was completed in 2017, at a cost of about $430m58. As the picture below demonstrates, the Talan Towers project is located in the heart of Astana and is a short distance from the Presidential palace. The location of Talan Towers is akin to being permitted to build on the National Mall in Washington DC. It is important to understand why this matters. Astana, called the “world’s weirdest capital city” by CNN59, was created just over 20 years ago to be President Nazarbayev’s home and the center of government in newly independent Kazakhstan. The city is widely viewed as President Nazarbayev’s vanity project so Talan Towers cannot simply be seen as a real estate deal. It is also a statement of support for the autocratic President and his capital city.

http://talantowers.com/news/verny-capital-to-build-300-million-tower-complex-in-astana/ https://www.theconstructionindex.co.uk/news/view/turner-team-completes-kazakhstan-towers 59 https://edition.cnn.com/2012/07/13/world/asia/eye-on-kazakhstan-astana/index.html 57 58


Glencore Gets Into Real Estate The development vehicle for Talan Towers was set up by Verny in 2013 and called Astana Property Management LLP (APM). Shortly after APM was incorporated, Kazzinc purchased a 50% stake for about $13m.

As the English translation shows, Kazzinc was holding the stake in APM as an asset for sale. This suggests that the company acquired the stake knowing it would quickly be sold on. About 18 months later, the APM stake was duly sold back to Verny for the same amount it was bought for: $13 million.


During its brief ownership of the APM stake, Kazzinc provided an unsecured short-term loan of $13.4m to the developer.


It appears that Glencore shareholders provided initial seed funding for the Talan project at high risk (the loan was unsecured) and with little obvious return. Glencore did not disclose this transaction to its shareholders despite the parties being related through Utemuratov’s previous shareholding and his current role as a director of a Kazzinc affiliated company60).

Glencore Loans Not content with this generous favor to Utemuratov, Glencore’s management then approved a further loan facility between Kazzinc and APM. Kazzinc extended to APM a credit facility of up to $150 million with an interest rate of 4%.




The amount drawn down by APM in the first year of the loan was $118 million and in subsequent years the loan agreement was amended to increase the credit facility. The amount loaned to APM is detailed in Kazzinc’s annual accounts: • as at 31 December 2014: US$118,957,000 • as at 31 December 2015: US$129,980,000 (plus an additional short-term loan of US$20 million repaid in 2016) • as at 31 December 2016: US$204,645,000 • as at 31 December 2017: US$250,877,000 (including a short-term loan of $30m).


The last increase in the loan facility to $250 million came with an additional sweetener for APM, a shortterm loan of $30 million that was repayable by the end of 2018. According to the accounts, the loan was eventually secured against a 50% stake in APM – a stake that was worth a mere $13 million when Kazzinc sold it back to Verny in December 2014. So why did Glencore divert shareholder funds from building mines to building tower blocks? Not for money. The interest rate on the loan facility is 4%, which is at least half the rate that banks usually offer to finance projects in Kazakhstan according to the National Bank of Kazakhstan61. And a 4% return is substantially below what Glencore would normally expect from issuing a loan. According to Glencore’s 2013 Annual Report (p157), its weighted average interest rate for loans and advances was 10%, which is 2.5x greater than the interest rate granted to the Talan project. The amount Glencore paid for its own debt also demonstrates what a bad deal this was for shareholders. In 2013, the company’s average interest paid on debt issued was 3.2% based on our calculations. This had risen to 4.7% in 2017. Glencore Interest Rate Paid 2013 2013 Borrowings 2013 Interest Expense 2013 Average Interest Rate Paid

$ 55,185,000,000.00 $ 1,781,000,000.00 3.228%

Glencore Interest Rate Paid 2017 2017 Borrowings 2017 Interest Expense 2017 Average Interest Rate Paid

$ 33,934,000,000.00 $ 1,619,000,000.00 4.771%

In other words, for part of the life of this loan Glencore’s cost of financing was more than the interest it received from the Talan project.

The security for the Kazzinc loan is weak; the return is poor; and the investment is in a non-core business where Glencore has no expertise. These facts make it impossible to argue that the Talan loan was intended to be profitable, or that its coupon reflected any of the risk in the project. It is also worth bearing in mind that during this period Glencore was under significant pressure over its indebtedness. Concern over Glencore’s debt levels led to a dramatic slide in its share price, falling by two thirds during 2015: 61



Ivan Glasenberg, the CEO, admitted that drastic actions were required to restore faith in Glencore’s balance sheet: “Recent stakeholder engagement in response to market speculation around the sustainability of our leverage highlights the desire to strengthen and protect our balance sheet amid the current market uncertainty.62” Glencore’s response was to reduce its debt by $10 billion by issuing $2.5 billion of new shares, cutting its dividend, mothballing mines, cutting capital expenditure and selling assets, including a 40% stake in its agriculture unit for $2.5 billion63. These measures were clearly damaging to investors both in the short term and the long term. But while Glencore was undertaking these crisis measures, it was also engaged in a non-core commercial property deal that was done on very unattractive terms. Glencore did get an office in Talan Towers for its troubles but otherwise this deal appears only to benefit Utemuratov and Verny Capital. Verny received seed funding for the Talan project; it got financing for 50% of the project on very generous terms; and it only had to put up minimal collateral. The Talan transaction is non-sensical. This was an undisclosed and related-party transaction that appears to have been driven by motives that were beyond shareholder returns. The suspicion must be that it was done to enrich Glencore’s Kazakh sponsor, Bulat Utemuratov, and to gain favor with President Nazarbayev.

62 63

http://www.mining.com/glencore-fights-back-to-slash-debt-by-10bn-halt-copper-mines-in-africa/ https://www.bbc.co.uk/news/business-35976608


8. Haileybury School

Talan Towers is not the only non-core deal that Glencore has done with Utemuratov recently. The company’s investment in the Haileybury Astana school appears to be another waste of shareholder funds. Haileybury is a private school in Hertfordshire, England. It was founded in 1806 by the Honourable East India Company to educate the administrators needed to run its private empire. One of its former pupils was Rudyard Kipling. In 2008, a branch of the school was opened in Almaty, Kazakhstan, and three years later Haileybury Astana was launched. The English school has a partnership and licensing agreement with its Kazakh offshoots but the schools have separate owners. It is the Astana school that is of particular interest in relation to Glencore. According to Kazzinc’s accounts, the Glencore subsidiary provided Haileybury Astana LLP with a loan of $17.4m in 2011, presumably to fund the launch of the school.


Among the other initial backers for Haileybury Astana was Utemuratov, according to a book written by the former British politician Jonathan Aitken. Utemuratov’s stake in the school was likely held via a company called Aktaustroyinvest, which was registered at Verny’s address in Astana.

Source: Kazakhstan: Surprises and Stereotypes by Jonathan Aitken

Utemuratov again appears to have been using Kazzinc as a private bank to arrange funding for his various projects. Kazzinc Buys a School The Kazzinc loan was repaid by Haileybury Astana LLP in 2012 and over the course of that year the miner acquired a 56.61% stake in the school for $23m. Kazzinc states in its accounts that it did not expect to recover its investment in Haileybury Astana and so immediately provided for a probable loss.

On December 31, 2014, Haileybury Astana LLP was replaced with a non-profit entity called Haileybury Astana School JSC. Shares in the new entity were allocated to the existing shareholders of the LLP at the time of transfer. At this point Aktaustroyinvest’s holding was transferred to Utemuratov’s charity fund “Asyl Miras”. In 2016, Kazzinc transferred its shares in Haileybury Astana to Utemuratov’s charity “Asyl Miras”. Kazzinc’s cash flow statement for 2016 shows no proceeds being received for the Haileybury shares so we assume they were given away for no consideration.


The following table shows the shareholding structure for Haileybury Astana JSC in 2016: Participant 2016 Private Fund “Bulat Utemuratov’s 61.99% Charity Fund Asyl Miras” Private Fund “Fund of the First President 26.16% of Kazakhstan – Leader of the Nation”







Serzhan Zhumashov




Nurzhan Subhanberdin




Kazzinc LLP







As the table above shows, one of the other shareholders in Haileybury Astana was the fund of the “First President of Kazakhstan – Leader of the Nation”. The Foundation is a Nazarbayev charitable venture and the President formally opened Haileybury Astana in August 2011. Charity for whom? The Kazzinc loan to Haileybury Astana was not disclosed by Glencore. The purchase of 56.61% of the school and immediate write down of $23 million was not disclosed by Glencore. The transfer of the Kazzinc stake to Utemuratov’s charity for zero consideration was not disclosed by Glencore. And neither Glencore or Kazzinc classified the Haileybury Astana investment as a charitable venture (not that charity is a protection against FCPA violations). So why was Glencore involved in this bizarre deal? Mining companies often invest in schools in the areas where they work but usually these schools are charitable ventures bringing education to deprived communities. They are not exclusive private schools established for the children of Kazakhstan’s elite. The fees at Haileybury Astana are reportedly64 between $16,000 and $20,000 a year in a country where the average GDP per capita is about $10,800. So, we can rule out altruism as a motive. Glencore blew $23m of shareholder funds on a non-core investment that it immediately wrote off and gave back to its politically-connected fixer for free. It is difficult to draw any other conclusion from this transaction than Glencore was buying influence and favors in Kazakhstan, particularly given that the other major shareholder in Haileybury Astana was President Nazarbayev’s personal charity.