Market Report: ENRC firms up as broker sees recovery

Eurasian Natural Resources Corporation traded higher yesterday, after a leading broker highlighted the possibility of an uptick in the demand for ferrochrome, the company's main product and a key component in the production of stainless steel.

ENRC's ferroalloy division is the world's largest producer of ferrochrome on a chrome content basis, and, as a result, the company's share price has been hit by destocking in the stainless steel market. And while the outlook for ferrochrome remains clouded amid continued uncertainty over the global economy and the stainless steel market remains subdued, the share price weakness may have run its course, according to Bank of America-Merrill Lynch.

The broker reckons the equity market has "largely discounted" the slump, leaving room for a rebound as stainless steel and ferrochrome demand picks up. "We consider the possibility that the stainless steel market finishes destocking sometime in the next 12 months, resulting in an improvement in demand for ferrochrome," the broker said. "This would, at the very least, be positive for volumes; the company is presently operating at a 35-50 per cent capacity reduction in chrome and iron ore."

The fact that ENRC has a strong net cash position only makes the investment case more attractive, Merrill added, pointing out that at the company's results presentation "management highlighted the potential for the company to take advantage of its strong balance sheet and depressed asset prices to grow via mergers and acquisitions".

ENRC, which is rated "buy" at Merrill, closed at 675.5p, up 3.4 per cent or 22p. In the wider sector, the broker – whose analysts also raised their copper, nickel and zinc price forecasts yesterday – recommended Rio Tinto, up 27p at 2,952p, and Talvivaara Mining, which was flat at 370p.

Overall, the FTSE 100 was broadly unchanged following a quite session, easing slightly to 4,404.79, down 0.43 points. The mid-cap FTSE 250 index was similarly unmoved by the day's activity, firming slightly to 7,691.65, up 3.79 points.

Thomas Cook, which rose to 235.75p, up just over 10 per cent or 21.5p, was the key talking point among traders, as its controlling shareholder Arcandor filed for insolvency in Germany. Thomas Cook said the move will have no impact on its operations, clarifying its financial arrangements are "completely independent from Arcandor's".

The share price strength was down to speculation that Rewe, Germany's third-biggest tour operator, may acquire Arcandor's stake and make an offer for Thomas Cook. The prospect gained traction as reports suggested that Rewe was indeed open to the idea.

Elsewhere, in the banking sector, things were broadly positive as investors bought in on recent weakness, helping Lloyds climb to 63p, up 3.1 per cent or 1.9p, and taking Barclays to 290p, up 2.2 per cent or 6.25p.

HSBC, 5.75p lighter at 517.75p, lagged behind, however, amid concern that shareholder Saad Group may place its stake in the market. The worries were prompted as traders cited the placing of 16 million shares in Berkeley, the FTSE 250-listed house builder, at 701p apiece. Although there was no official confirmation, the house builder, which closed at 782p, down 5.2 per cent or 43p, said the stake was believed to have been Saad's.

Also on the downside, WPP eased to 425p, down 1.2 per cent or 5p, on a negative read-across from Publicis, the French advertising group which said the second quarter was likely to be its toughest this year.

Further afield, Colt Telecom retreated 3.1 per cent, or 3.75p, to 116.75p, after HSBC reiterated its "underweight" stance, albeit with a revised target price of 78p, up from 58p previously.

Mondi was slightly weaker at 220.5p, down 0.75p, thanks to UBS, which said that, following the strong share price performance over the last three months, the valuation was less compelling given the fundamentals. "We expect earnings to fall 55 per cent year on year in 2009 with lower prices and weak volumes only party offset by cost savings," the broker said, moving its recommendation on the paper and packaging group's stock to "neutral" from "buy".

On the upside, Merrill issued a "buy" note on GKN, which swung to 132.25p, up almost 8 per cent or 9.5p. "We believe market concerns on the balance sheet are one reason for recent share price volatility, as GKN seeks to refinance a £350m revolving facility due in July [next year]," the broker said,

"We think that GKN is unlikely to breach its covenant. Management is committed to addressing the refinancing by the first half results on 8 August." Merrill added that, after considering various options, a rights issue was probably the best solution for the company, "allowing GKN to reduce its high level of financial gearing, improve its credit rating and its appeal to equity shareholders".

Among smaller companies, the AIM-listed, West Africa-focused oil & gas group Bowleven was more than 8 per cent or 6.25p lighter at 67.5p after an equity issue, successfully raising $114m by placing shares at 67p apiece.