Key Glencore DRC Copper Project at Risk

Kamoto Copper Company (KCC) is at risk of dissolution after legal proceedings were filed against it in a Congo court when it missed a deadline for rectifying a capital deficiency.

Glencore’s (LSE:GLEN) Katanga Mining (TSX:KAT), which has a 75-percent stake in KCC, has until a May 8 court hearing to take all the necessary steps to ensure the company can continue to operate under Democratic Republic of Congo (DRC) law.

The issue is going to court as a result of actions taken by Gécamines, a DRC state-owned copper-mining company that controls the other 25 percent of KCC in a joint venture with Katanga.

KCC is expected to produce 150,000 tonnes of copper in 2018, and according to current projections cashflow is “expected to be sufficient to allow the repayment of outstanding shareholders debt and to fund distributions to shareholders, including Gécamines.”

In a statement published on Sunday (April 22), Katanga said KCC had been obliged under DRC corporate law to rectify a 2014 capital deficiency by the end of last year, but has not done so.

The Toronto-listed company said the proceedings taken on Gécamines’ part were in spite of attempts by Katanga to solve the situation.

In 2017, Katanga proposed a recapitalization plan to Gécamines in compliance with the DRC law and the terms of the joint venture deal between them that would have rectified the capital deficiency.

“KCC has made numerous attempts to engage in constructive negotiations with Gécamines regarding the recapitalization plan. However, Gécamines has, instead of meaningfully engaging with the company, unilaterally commenced the proceeding,” the company said.

Gécamines had previously indicated that it wanted to renegotiate contracts with its international partners so that the state would receive a bigger share of revenues, with Gécamines Chairman Albert Yuma saying that existing deals were unbalanced in multinationals’ favor.

This would be in line with a new law passed by the DRC parliament in January to raise more royalties and taxes from mining companies.

The legal proceedings further complicate the situation for Katanga, which was already grappling with the new law as well as an ongoing probe by Canadian regulatory authorities that remains unresolved.

The myriad issues will frustrate the production plans of Glencore, one of the largest mining companies in the world. Katanga is projected to produce 300,000 tonnes of copper next year, a fifth of Glencore’s global copper production.

“Katanga should be one of the best assets in the world,” analyst Ben Davis at Liberum Capital in London told Bloomberg. “Instead, it has been a perennial disappointment for Glencore and the situation looks like it is set to continue.”

Katanga said it will continue to attempt engagement with Gécamines to ensure KCC keeps operating. According to Katanga, some of the options being considered include converting a portion of existing intercompany debt owed by KCC to Katanga into equity, or forgiving a portion of the debt.

The company said the resolution of the capital deficiency can be completed with or without Gecamines, and if confirmed by KCC’s statutory auditor, the DRC court will not issue a dissolution order.

On Monday (April 23), Katanga saw its share price close down almost 50 percent on the TSX at C$0.91.

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Securities Disclosure: I, Scott Tibballs, hold no direct investment interest in any company mentioned in this article.