Katanga Mining
Katanga Mining. View of the Musonoie-T17 open pit mine

DRC state-owned mining company Gécamines has commenced legal proceedings against TSX-listed Katanga Mining to dissolve Kamoto Copper Company – a joint venture between the two companies in which Katanga Mining owns a 75% share.

Katanga Mining was notified on 20 April 2018 that Gécamines has commenced legal proceedings in the DRC to dissolve Kamoto Copper Company (KCC) following KCC’s failure to address its previously disclosed capital deficiency.

If the court provides KCC with a period of time within which to regularise the situation, Gécamines has requested the appointment of an expert to assess and report to the court on KCC’s financial position and the recapitalisation plan.

A court hearing, during which is scheduled to be held in the DRC on 8 May 2018.

The court may grant KCC a maximum period of six months to regularise the situation.

Katanga Mining said in a statement that it believes that it has several options to remedy KCC’s capital deficiency and avoid KCC’s dissolution. Katanga Mining will continue to attempt to engage in discussions with Gécamines and will take all other necessary steps to ensure the continuation of the operations of KCC and protect its rights under the law and under its joint venture (JV) agreement with Gécamines.

Capital deficiency

As disclosed in Katanga Mining’s annual information form for the year ended 31 December 31 2017, under DRC corporate law applicable to KCC, KCC was obliged to address a capital deficiency that first arose in 2014 when, as a result of historical losses incurred during the rehabilitation of KCC’s assets through, amongst others, the servicing of the inter-company loans to fund such rehabilitation, KCC shareholders’ equity fell below half of its authorised capital.

In accordance with such laws, the capital deficiency should have been rectified by 31 December, 2017, and, as a result of this not having been done, an interested party was entitled to commence legal action for the dissolution of KCC before DRC judicial authorities, which Gécamines has now done.

Recapitalisation plan

In 2017 Katanga Mining proposed a recapitalisation plan to Gécamines in compliance with the provisions of DRC law and the terms of the JV agreement between them that would have rectified the capital deficiency.

KCC has made numerous attempts to engage in constructive negotiations with Gécamines regarding the recapitalisation plan; however, Gécamines has, instead of meaningfully engaging with Katanga Mining, unilaterally commenced the proceeding.

Katanga Mining says that it will continue to attempt to engage in discussions with Gécamines and will take all other necessary steps to ensure the continuation of the operations of KCC and protect its rights under the law and the JV agreement.

Katanga Mining is continuing to assess options for regularising the deficiency, including the conversion of a portion of existing intercompany debt owed by KCC to Katanga Mining (which is eliminated on consolidation) into equity or forgiving a portion of such debt. Any such outcome would impact the distribution of future cash flows earned by KCC, which might in turn have a materially adverse impact on Katanga Mining but would not be expected to have a material impact on the assets, liabilities and net assets of Katanga Mining and would be expected only to result in a shift within equity attributable to shareholders of Katanga Mining and non-controlling interests.

The regularisation of the capital deficiency can be effected by Katanga Mining on its own initiative or through negotiations with Gécamines.

If Katanga Mining and KCC have taken the necessary steps to regularise the deficiency and this is confirmed by KCC’s statutory auditor on or before the day on which the court renders a judgment on the merits, the court cannot issue a dissolution order.

As a consequence of the completion of the first train of the Whole Ore Leach project and subsequent operational ramp-up, KCC is generating positive operating cash flow. KCC remains liquid due to operating cash flows and its guarantees from its ultimate parent shareholder. As such, all obligations to KCC’s creditors are being honoured, and the company is meeting all of its commercial obligations. Based on current projections, cash flows of KCC are expected to be sufficient to allow the repayment of outstanding shareholders debt and to fund distributions to shareholders, including Gécamines.