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May 22 (Bloomberg) -- Kazakhmys Plc dropped the most in a month in London after UBS AG cut its rating to neutral from buy following a lower-than-expected takeover offer by Kazakhstan’s biggest copper company for Eurasian Natural Resources Corp.

Kazakhmys slid 6 percent, the biggest loss since April 22, to 343.30 pence at the close. UBS analysts Danielle Chigumira, Daniel Major and Myles Allsop cut a price estimate to 385 pence from 465 pence in a note. Kazakhmys owns 26 percent of ENRC.

ENRC’s founding shareholders Alexander Machkevitch, Patokh Chodiev and Alijan Ibragimov and the Kazakh government, together holding 54 percent, last week sent a letter to the independent committee set up by London-based ENRC’s board with a proposed offer of 175 pence in cash and 0.231 shares of Kazakhmys Plc for each ENRC stock. That’s equivalent to 260 pence a share based on a Kazakhmys price of 370 pence and “materially undervalues” ENRC, the committee said in a statement on May 20.

UBS estimates the so-called net present value of an ENRC investment at 620 pence a share, according to the analysts.

“Initially, we took the view that the consortium, as long-term fundamental shareholders, would be willing to pay somewhere between fair value and the share price to buyout ENRC,” they said. “Given the value of the initial proposal is dramatically below estimated fair value, we believe it likely that an offer for ENRC is more likely to be in the range of 300-350 pence.”

ENRC was little changed at 266.2 pence. UBS said to buy the ferroalloy producer “given we still see a high probability that an offer for ENRC is above its current share price.”

Fund Raising

The founders are raising $1.6 billion to fund the cash part of the deal and the government is offering its 26 percent in Kazakhmys, said people familiar with the matter who asked not to be identified as the information isn’t public. Kazakhmys will be offered $885 million and 77 million of its own shares for its ENRC stake, they said. One of the people said Kazakhmys plans to cancel the 77 million shares, about 15 percent of total stock.

“We would note the potential for a re-rating post-crystalizing value for the ENRC stake and stronger balance sheet,” UBS said in the report. “However, with current ENRC shareholders likely to be event-driven, there is the potential these holders will not be long-term holders in Kazakhmys.”

Kazakhmys is targeting 500,000 metric tons of copper output annually by 2017 after construction of the Bozshakol and Aktogay mines is complete. The company, which produced 294,000 tons in 2012, forecasts 285,000 to 295,000 tons this year.

The U.K. Panel on Takeovers and Mergers last week agreed to extend to June 3 the deadline by which the bidding group must either improve its offer or walk away, according to ENRC.

The cash and share offer will prevent Kazakhmys cutting its net debt to earnings before interest, tax, depreciation and amortization, UBS said. “We had initially assumed the offer for ENRC minorities would be in cash; however the initial proposal is split between cash and equity,” the analysts said.

“This means that the potential deleveraging is less than we had originally hoped, meaning that even with a significant bump to the cash portion of the offer, Kazakhmys’s net debt:Ebitda would be much higher than the rest of the sector.”

To contact the reporter on this story: Firat Kayakiran in London at

To contact the editor responsible for this story: John Viljoen at

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