Katanga Mining Stock Plunges on DRC Legal Woes

Democratic Republic of Congo (DRC) state-owned mining company has initiated legal proceedings against Katanga Mining Limited (TSX:KAT) for dissolving its joint venture

SmallCapPower | April 24, 2018: Katanga Mining Limited (TSX:KAT) Sunday announced that Democratic Republic of Congo (DRC) state-owned mining company La Générale des Carrières et des Mines (Gécamines) has initiated legal proceedings against it for dissolving Kamoto Copper Company (KCC), a joint venture between Katanga Mining and Gécamines in which Katanga owns a 75% stake. This is on the back of KCC’s failure to address its previously-disclosed capital deficiency. In this case, if the court provides KCC with a period of time within which to regularize the situation, Gécamines has requested the appointment of an expert to assess and report to the court on KCC’s financial position and the recapitalization plan.

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In this matter, a court hearing is scheduled to be held on May 8 in the DRC. The court may grant KCC temporary relief by giving a maximum period of six months for regularizing the situation. Katanga Mining believes that there are various alternatives to resolve KCC’s capital deficiency issue and avoid KCC’s dissolution. Furthermore, the Company will try to engage in discussions with Gécamines and will take necessary steps in order to ensure smooth operations of KCC and protect its rights under the law and the joint venture agreement.

According to DRC corporate law applicable to KCC, KCC was required to tackle a capital deficiency that first arose in 2014 when, because of historical losses incurred during the rehabilitation of KCC’s assets through, amongst others, the servicing of the inter-company loans to fund such rehabilitation, KCC shareholders’ equity fell below half of its authorized capital. The capital deficiency should have been rectified by December 31, 2017 but that was not the done. Thus, an interested party was entitled to commence legal action for the dissolution of KCC before DRC judicial authorities, which Gécamines has now done.

Katanga Mining is assessing options for regularizing the deficiency, including converting a portion of existing intercompany debt owed by KCC to the Company (eliminated on consolidation) into equity or forgiving a portion of such debt. This would affect the distribution of future cash flows earned by KCC, which may have considerably adverse impact on the Katanga Mining but won’t be impacting its assets, liabilities and net assets. This measure is expected only to result in a shift within equity attributable to shareholders of the Katanga Mining and non-controlling interests.

With the completion of the first train of the Whole Ore Leach project (WOL Project) and subsequent operational ramp-up, KCC remains liquid because of the generation of positive operating cash flow and guarantees from its ultimate parent shareholder. The Company is well-positioned to meet all its commercial obligations. As per the current projections, KCC cash flows are adequate for repayment of outstanding shareholders debt and to fund distributions to shareholders, including Gécamines.

Katanga Mining Company trades at market capitalization of $1.74 billion on the TSX with price-to-book multiple of 3.25x. After the announcement, the Company’s stock plunged ~49% to close at $0.91 on Monday.

Disclosure: Neither the author nor his family own shares in the company mentioned above.

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