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

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 lOx 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:
Valuations Kazzinc Vasilkovskoye
2005 $500m $54m
2008 $lbn $750m
2010 $5.1bn $1.9bn
2011 $7.6bn n/a
2012 $7.2bn 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 Vern/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.

See full report on ISSUU

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