Let’s try to look at the bigger picture, Glencore wants to get Katanga up and running by the end of this year. According to Glencore’s Q2 Earnings Call with Analyst on August 2017 “Ivan Glasenberg” told Analyst:
- “We have Katanga, which will come in operation during 2018, 150,000 tonnes of copper in '18 plus another 150,000 tonnes coming from Katanga in '19, being a 300,000-tonne producer, which will also produce roundabout 20,000 tonnes of cobalt when it's in full production
- We nearly finished the Whole Ore Leach program at Katanga, the first part of it, and that will bring Katanga in to operation at the end of this year
Doing business in Congo isn’t easy, but you have to remember that before Katanga went offline, it contributed approximately 15-18% of Congo’s Tax Revenue. It goes to say that Congo gets approximately 85-90% of its Tax Revenue from Mining Companies and Katanga isn’t a small time Miner…the impact Katanga has on Tax Revenues is significant and the Government as well as Glencore both want Katanga online as soon as possible.
This was a classic example of Director-Shareholder conflict that arose because the Board of Directors (BOD) neglected to have proper internal controls to monitor management and financial reporting. However, Glencore has stepped up to ensure proper Corporate Governance going forward by directing new BOD members (which includes a CFO). The previous BODs were significantly tied to compensation which would have deteriorated independence of the BOD. Aristotelis Mistakidis (the previous BOD and Head of Copper at Glencore) had close to 2% stake in Glencore which could have impacted his objectivity as a board member. It’s better to have had a internal control issues before the mine went into production…If the mine had gone into production and news about accounting practices had been revealed about a year or 2 into production then who would known what Katanga would have done.
The long picture is what matters…Copper/Cobalt are driven by the Electric Vehicle (EV) revolution…According to Bloomberg EVs need about 18 lbs of Cobalt and about 4x more Copper (about 80-90 lbs) then current combustible engines. Recently, Goldman Sachs has reiterated that it is very bullish on Copper and that recent price rally is justified by global growth and predicts that 2018 the markets will see a Copper deficit.
Also, remember that since Copper prices were low for such a long time, there aren’t many new projects that are expected to come online. In addition, according to Wood Mackenzie it takes approximately 6-8 years for a Copper project to come online from exploration to development to production. If you take a look at the Financials of some of the biggest Copper Miners (Codelco, Rio Tinto, Grasberg Freeport) they all have been experiencing declining head grades in Copper and only Congo presents a current solution to high grade Copper (since Congo only made the country Mining friendly in 2002 with a revamped Mining Code which led Katanga Mining to be a major force in Congo). Codeldo also recently said that higher Copper grades will experience a premium in 2018
So in 2018 we will see Katanga produce about 150,000 tonnes of Copper and about 11,000 tonnes of Cobalt, which will ramp up to 300,000 tonnes of Copper and about 20,000 tonnes of Cobalt in 2019.
I am long Katanga Mining (KAT), if you cant weather the volatility in the short term or cant handle the political uncertainty in Congo, then I would stay away. KAT isnt for the faint of heart or pussies.
These are my personal opinions...Thanks for reading
Best,
Katanga Shareholder