KAT with Mine Lives
By Marston Gordon
Mar 11, 2018, 13:23
Katanga Mining Limited is a publicly traded company listed on the Toronto Stock Exchange and is engaged in the mining, processing and selling of copper and cobalt metals in the Democratic Republic of Congo. Glencore the Swiss mining giant owns 86% of its outstanding shares.
Katanga suspended mining in Congo in 2015 as copper price slumped to six year lows and cobalt (a by-product of copper) continued to languish at decades low. In December 2017 the company announced its decision to restart the mine after copper rose by over 50% in the last 12 months, and cobalt up almost 200%.
A month before the announcement, Katanga was forced to restate its financial statements and an internal review found that the company had failed to disclose compensation paid to some executives. Prior to then, March 2017, Global Witness said more than $100 million due to Congo’s state-owned Gecamines was paid instead to a firm controlled by Israeli businessmen Dan Gertler. Glencore bought out Gertler’s share in Katanga a month before the payment.
Joseph Kabila, President of Congo, is a childhood friend of Gertler and is said to have introduced him in 2000 to his father, Laurent Kabila, then President of Congo.
A new mining code was passed by the Congolese parliament on January 24, 2018. The new law raised the royalty on most metals from 2% to 3.5%, and designate certain metals as “strategic”, possibly raising royalty on cobalt from 2% to 10%. Worse than that is the removal of a clause protecting mining-license holders from complying with changes to the fiscal and customs regime for 10 years.
Last week Kabila met with leaders of Congo mining companies and decided to sign the mining code. He assured the mining executives that their concerns will be dealt with on a case by case basis.
Over 60% of cobalt comes from Congo. And cobalt is a key component in lithium-ion batteries that power smart-phones and electric cars. Artisanal mining in Congo has become quite widespread because of the decline of the formal mining sector but major western companies that require the metal are concerned about its source not having any link to human rights abuses. They are also interested in securing future supplies, so companies like Apple, Tesla, Volkswagen and BMW have initiated discussion with Glencore and others miners to sign long-term supply contracts.
Investor’s negative response to the mining tax is baffling, and is not unlike what transpired in November 2017 when Katanga announced the restatement of its financial statement; the mine was decommissioned in 2015 and the restatement would not have affected earnings.
The Bauxite Levy imposed by Michael Manley government in Jamaica in 1974 offers some useful insight into the likely outcome of the new mining tax in Congo:
1. The mining companies had to accept the levy
2. The companies increased their investments in other bauxite producing countries and Jamaica subsequently lost its position near the top as a world leading producer.
The situation in Congo is markedly different for a number of reasons:
a. Congo produces about 60% of the world’s cobalt, and Katanga is the largest producer
b. It will take years to develop new mines and demand for cobalt already exceeds supply
c. The mining tax will reflect in increased price of cobalt
Other compelling factors:
a. The President of Congo will likely face the electorate in 2018 and the additional tax revenue could boost his chances at the polls. A change in the leadership of the country is risky for the mining companies given Mr. Kabila’s willingness to have one-to-one dialogue
b. Glencore is a Swiss company and Mr. Kabila ought to be mindful of what transpired last year in Zimbabwe with Robert Mugabe, and this year with Jacob Zuma of South Africa
c. Katanga, as stated earlier, has played ball with Mr. Kabila in not too distant past
Katanga is a buy at the current price of CAD$1.76 with Copper at USD3.10/lb and Cobalt USD38.00, this compares favourably with January 2008 stock price of CAD$14.80 with Copper and Cobalt at USD3.20 and 48.00/lb respectively.
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