Katanga Mining Stock Slide Continues Following Accounting Questions

Despite the recent stock-price weakness, shares of Katanga Mining Limited (TSE:KAT) have risen nearly six-fold year to date

SmallCapPower | November 22, 2017: Katanga Mining Limited (TSX:KAT) shares have fallen more than 26% during the past three trading sessions, to its current price of $0.93, after the announcement on Monday that three key Glencore Plc executives exited from Katanga Mining’s Board of Directors following the completion of an internal review that identified material weaknesses in Katanga’s internal controls over financial reporting. The three directors who submitted resignations included Aristotelis Mistakidis, a key figure at Glencore overseeing the copper group- one of the seven groups within the metals and minerals unit. The three directors will be replaced by three other Glencore executives – Steve Kalmin, CFO at Glencore; Mike Ciricillo, part of Glencore’s copper smelting and refining; and Tony Moser, part of finance department.

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Katanga Mining announced the internal review and restatement of financial statements in August 2017, as part of an ongoing investigation by the Ontario Securities Commission (OSC) over the appropriateness of its accounting practices. Conducted by three independent directors (Robert G. Wardell, Terry Robinson and Hugh Stoyell), the review found several irregularities including over-statement of copper cathode production by 6,650 tonnes in fiscal 2014, overvaluation of concentrate inventories, and additional compensation for certain executive management, amongst others. These irregularities were corrected and Katanga Mining filed certain restated historical financial statements and related management’s discussion and analysis. As part of the announcement, Katanga Mining also published its third-quarter results ending September 2017, which showed revenues of $5.9 million compared to the restated -$30.1 million in the third-quarter of 2016 while EBITDA came in at -$69.1 million compared to the restated -$174 million.

Following the announcement of the internal review completion by Katanga Mining, Glencore announced that it has carefully considered the findings of the review and is committed to ensuring that the weaknesses identified in the review are addressed and do not reoccur. Furthermore, Glencore said it will also be implementing various structural and control changes across its copper department to strengthen its financial processes and procedures.

Katanga Mining Limited, through its 75%-owned subsidiary Kamoto Copper Company SA (KCC), operates a large-scale, copper-cobalt project at the Kamoto/Mashamba East mining complex in the Democratic Republic of Congo. The Company suspended processing of copper and cobalt at the mine on September 11, 2015, and continued through 1Q17. Production at the mine is not expected to resume until the WOL Project is commissioned, expected in Q4 2017. As of December 31, 2016, the project holds the world’s largest reserves of cobalt at 1.3 billion lbs (124.7 MT @ 0.52 % Co) and high-grade copper reserves of 8.7 million lbs (124.7 @ 3.51% Cu).

Shares of Katanga Mining have risen nearly six-fold year to date and the recent dip on the accounting lapses seems miniscule. With Katanga fully cooperating with the OSC on the ongoing investigation along with firm commitment from its parent Glencore that accounting lapses do not reoccur, a further decline in shares of Katanga Mining could be limited. On the contrary, the stock price may move higher on any announcement of production commencement expected in 4Q17.

Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own shares in the company mentioned above.

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