Katanga Mining Ltd Ord KATFF

Essential reading

[topdop]

Fresh off my KvN KAT Blog over at Seeking Alpha, essential reading this Patrick Smith piece published today. I classify it as important as it very succinctly summarises exactly what has happened on the Central African Copperbelt and where Glencore, the Chinese, Zambia & DRC presently sit.

https://www.theafricareport.com/17266/china-africa-copperbelt-key-to-the-race-for-the-21st-century/

Unverifiable, but entirely probable, is this passage quoted from Smith's piece: "Jiangxi Mining has quietly purchased about 9.9 % of FQM, listed on the Toronto Stock Exchange. Its purchases have come through derivatives and direct stock purchases and have so far cost about $800 million. It would take about $2 billion to give Jiangxi a shot at majority control."

As a fellow African Copperbelt boy, and copper miner, I have long wondered about what Phil Pascall's end-game was going to be. He and Clive Newall have been at the helm of First Quantum for numerous years, through both up and down cycles and including a near-death experience with FM's lenders back in January 2016 when this once mighty +$50/share mid-tier copper producer could be purchased for under $3/share. If indeed Jiangxi are at 9.9% (the threshold for legally reporting ownership blocks on the Canadian TSX commence begins at 10%) this could foretell the end for those boys and maybe one internally sanctioned and supported by their BoD.

They will all walk away very, very rich men and walk away too, from Zambian tax squabbles, seemingly never-ending African graft scandals, as well as all the other, sometimes insurmountable challenges Mine Builders face. Daily. It's extremely challenging and I think those boys are some of the best Mine Builders in the business... but they are all a lot older now and maybe just tired and now more than ever, a little fed up.

Also up for discussion and conjecture, is Smith's claim that Glencore are preparing it's Mutanda and KAT units for sale: "Glencores Zambian mine Mopani may be ready for auction. Industry insiders say Glencores two majority-owned DRC companies Mutanda and Toronto-listed Katanga Mining, which operate the Kamoto Copper Project, are being prepared for sale".

Smith doesn't name his "industry insiders".

I'm not sure about GLEN giving up just yet. Their 1st big move (shutting in Mutanda) has already benefitted the underlying commodity price by +30%, so why walk now? Upside from here is another $15k/t on the LONG TERM cobalt price according to Citi (and others) so perhaps a treble still on the KAT sp? But we civilians aren't party to what the DoJ (and others) are going to wring out of Glassenberg, his lieutenets & GLEN due to that companies alledged prior, corrupt behavior.

These are my views only. Thanks for reading.

NB: at the point KAT breaks past my ASP (68c CAD) I will be winding up my Seeking Alpha KvN KAT Blog.

[Lech1988]

Indeed very interesting read. Is that your base case now regarding the share price?  We are lucky to get a 1 handle (if the shares were in fact to treble).  Ultimately I think we have much much more upside once we actually start producing (eventually) and the positive cashflow starts flowing.   If they do in fact try to sell KAT any baseline assumptions as to the value? 

[topdop]

@Lech1988 no my "treble" is a base case from current levels & the 200 day m.a., so from 50(ish)c back up to around $1.50.  And as I said, in my opinion, now is not the appropriate time for GLEN to be sellers; not yet anyway. I think they will want to see Co at around $45k/t and stable, steady state ops at KAT. Thereafter - and the wildcard - can GLEN be sucessful coinvincing the

[Sogosohubidu201]

https://www.bloomberg.com/news/articles/2019-07-18/eurasian-resources-is-said-to-weigh-sale-of-congo-mining-assets https://www.cnmn.com.cn/ShowNews1.aspx?id=412687 ERG already said that they wanted to sell their Metalkol mine in DRC. There were Chinese buyers wanted to buy it from ERG.  One of the potential buyers was China Nonferrous Metal Mining Co. No deal yet, but should watch it

[Lech1988]

Does that take into account our (ever growing) debt pile? Personally I think there is a very real chance GLEN looks to sell their DRC assets.  They have been nothing but a headache from regulators, shareholders, and the DRC government.  Not to mention Mutanda is now going to be on maintenance and KAT is still losing money due to hazy at best operational issues.  Why operate in the

[patels96]

If you read the Q2 Transcript from GLEN, they have no intention of selling their DRC assets

[Lech1988]

 Well something positive needs to come out of these assets soon.  They have been nothing but a headache for GLEN and the largest/most profitable has just been mothballed. .

[topdop]

Whether they like it or not, looks like FM might be in play. But I can't see (any) Canadian government being too keen to agree a takeover of a Canadian company to a Chinese company. Not in the present environment. Time for Glencore, or Teck or Rio Tinto to step up? These are my views only. Thanks for reading.

[Lech1988]

More chatter about the takeover interest today on Bloomberg.

[Kidlaw1]

Well I am done for a sell... but the question is... how much is Glencore going to sell the assets and KAT for, and how much will fall into the hands of minority stakeholders.  Will Kat be selling near it's $17 Billion Dollar NPV???/

[Kidlaw1]

Also, this sell will be huge and will literallty give China almost full control of the cobalt market.  Which is bad for the US since batteries are now becoming the new oil....   I am pretty sure the US knows this and would probably intervene...

[Lech1988]

It's impossible to know but I truly think GLEN will throw in the towel on the DRC soon.  "Soon" in mining terms meaning it could be several years from now, but right now these assets are nothing but a headache and  every delay in production means more debt on our balance sheet and a lower valuation.  A Chinese owner can do things to get the DRC government on their side

[Sogosohubidu201]

KAT mine NPV at $17.18 billions includes sunk costs of probably around $9.5 billions based on the previous KCC debts. So if Chinese is willing to offer: $17.18 + $9.5 = $26.68 billions USD, I am sure that Glencore will take the offer for sure.  The same goes for ERG that ERG asks for $7 - $8 billions USD although ERG mine has a NPV of $4.88 billions becasue ERG wants to recover its sunk costs

[Lech1988]

You realise that Glencore's entire market cap is $43 billion right...?  How on earth is KAT alone worth that much?  I find it hard to be believe that the market is mis-pricing KAT by that much, its just not reasonable.  Are you taking into account any taxes?       

[Sogosohubidu201]

The seller does not need to pay taxes from selling the assets. The buyer, the new owner of the mine, will pay taxes from profits of going forward operations.  Of course, the shareholders will all pay capital gains and taxes.

[Lech1988]

Sorry to rehash this but is that NPV using the current tax regime in the DRC?  Glencore stated KAT will be producing an EBITDA of $1billion in free cashflow once fully ramped but that is of course before taxes which at the moment are punitive (especially the 50% "super profit" tax which as worded is effectively the applicable tax rate applied to most mining operations). Are we

[Sogosohubidu201]

@lech, $1 billion Canadian free cash at $15 per pound of cobalt price and $6,500 per tonne of copper price is after tax and capital expenditure. $1.7 billions EBITDA Canadian (which of course before tax as the name indicates) and $1 billion Canadian free cashflow are estimated with the new tax regime including super profit tax. NPV for KCC and ERG mines were estimated and published in October

[johnny54]

$5 a share sounds great when does sp start to reflect potential????

[Lech1988]

When the mine actually starts producing free cashflow.

[Sogosohubidu201]

@johnny, from next year share price should slowly and gradually reflect potential. @lech, KAT should start generating free cashflow from Q3 next year per monthly copper and cobalt production projections. There is good chance for free cash flow from Q1 or Q2 next year depending on the cobalt and copper price.

[topdop]

@sogosohubidu201 and everyone else: be very careful of aggressive calcs on earnings in this degrading Cu market. Accounting practice Provisional Pricing adjustments will likely be large last Q and current Q. KAT is a BIG Cu mine and ignoring the depressed Cu dynamic always ends in disappointment. These are my views only. Thanks for reading.

[Lech1988]

Any clarity you can provide on the metal vs hydroxide question?  KAT's cobalt volumes we always hear about are for Cobalt Metal right?  That is then turned into hydroxide by GLEN and sold to GEM?  Hydroxide prices are much lower than metal prices so am a bit confused as to how this works in practice.    

[bobsacramento]

How much does 70 to 80% NPV come out to for shareholders? What would be  the SP roughly? https://www.miningreview.com/copper-2/drc-mining-code-addressing-the-elephant-in-the-room/ https://www.africa-confidential.com/article/id/12741/The_China_price

[Sogosohubidu201]

@bobsacramento If 75% NPV including sunk costs, that would be $4.61 Canadian dollars per share for minority shareholders after KAT paying off Glencore debts. Please note that the NPV calculation already includes the $ amount spent at the beginning of the project (as KCC debts, in this case around $9.5 billions proximatelly. This has been reduced to around $4 billions currently). The new

[Kidlaw1]

Sounds promising.... :)  this would be insane, so when i comes to mine, the sell price is based on the Net Present Value? I am no finance expert, by my understanding of net present value is the Net Cash Flow of a company over a period of time.  Now in the context of a mining company the  time period would most likely be around the lifecycle of the mine, no?  If thats the case

[Sogosohubidu201]

Net present value (NPV) of a proposed mining project is the sum of all the project projected cash flows over the life of the mining project discounted by an appropriate rate to bring them to a present value. It is the most important tool to value a mining project. At late stage of mine development and particularly when the mine enters production, the mine typically commands a remimum over its NPV

[johnny54]

so $3 a share if a sale takes place is a realistic worst offer situation? id be happy with following the drama that is KAT stock for a coll 2.1 million:)

[Sogosohubidu201]

That may be a reasonable expectation. But I don't think that Glencore is going to sell its crown jewels (KAT mine) in the next several years when they clearly know that cobalt price is going to go up and KAT is ramping up cobalt and copper production, and they are going to be in control of the cobalt supply and thus cobalt price in a large extent in the future. Glencore had already projected

[topdop]

So wisely and so succinctly said @Sogosohubidu201 (and I can now write your @handle without looking it up! = Progress!). Sit tight and be patient. Rome wasn't built in a day.

[Lech1988]

I hope you are right but those numbers just seem very optimistic.  A 12 CAD share price would value KAT at $17b - for comparison Glencore’s market cap is $41b and First Quantum’s current market cap is $6.3b.  I find very hard to believe one mine in the world’s riskiest mining jurisdiction could be worth 40% of Glencore or almost 3x First Quantum (currently Africa’s largest Copper miner).

[Sogosohubidu201]

If KAT delivers those numbers, Glencore will not traded at current market cap. The same applies to FM.TO that is higly leveraged to copper price. If copper price rises, FM share price will rise and it is not going to stay at the current market cap. I actually own Glencore share and see it rising 50%-100% in the next 2-4 years. I also think that there may be bubble coming in the EV related sector,