Dwindling Cash Position Doesn't Help Unfortunate Situation at Katanga Mining

Shares in Katanga Mining Ltd. (KATFF.PK) were down 27% to C$0.94 Wednesday afternoon following news that copper and cobalt production at Katanga's Luilu metallurgical plant in the Democratic Republic of Congo will likely be delayed between two and four weeks due to a transformer fire. 

Interim CEO Steven Issacs said:

Fortunately, the fire was quickly brought under control and no injuries were reported. Revenues are unlikely to be impacted in the short term due to the immediate availability of finished metal inventories. We expect production to resume shortly after a replacement transformer is fitted.

Mr. Issacs added that operations at Kamoto Underground Mine and the Kamoto and Kolwezi Concentrators are not affected by the fire.

Also weighing on Katanga's stock price, which hit C$0.90 in Wednesday morning trading, its lowest intraday level since 2005, is the company's dwindling cash position, says UBS analyst Onno Rutten .

Mr. Rutten told clients in a note:

Katanga has only C$178-million in cash on hand remaining and we estimate it cannot continue with its current operations without access to external financing by Q1/09. With the Mining Contract Review in the DRC preventing access to most conventional sources of financing, we believe that there is a risk of equity dilution or business interruption.

The analyst also expressed concern that ramp-up of the Kamoto underground mine continues to lag expectations in both tonnes and grade, and added:

Katanga's lack of funding could result in a further downgrade of long-term production capability relative to our conservative 170,000 tonne projection.

He reduced his price target by 13% from C$1.60 to C$1.40 and maintained his "neutral" rating.