A new mandatory convertible loan from Glencore is far more dilutive to current Katanga Mining Ltd. (OTCPK:KATFF) shareholders than anticipated, according to UBS analyst Onno Rutten.
Under terms of the loan, worth C$265-million and needed desperately to save Katanga from its current liquidity crisis, Glencore will loan Katanga C$100-million on January 12 and renegotiate a C$165-million debenture only due on Nov. 5, 2009.
Mr. Rutten noted that Katanga has suggested that it will seek C$250-million in additional equity or debt financing in the first half of this year, at which time, it will convert the new loan into stock at C$0.34 per share, increasing the share capital of Katanga from 206 million shares to 1,159-million shares.
He told clients that depending on the take-up by insiders and following the mandatory conversion, Glencore could end up controlling as much as 88% of Katanga's shares. with current common shareholders controlling less than 6%.
He said in a research note:
While we had cautioned for equity dilution risk in our October 6, November 12 and December 15 reports, the terms of Katanga's new loan facility are more dilutive than anticipated and we therefore lower our NAV by 38% to C$0.83 per share based on a new pro-forma diluted share count of 1,160 million shares.
He lowered his rating on the stock from "neutral" to "buy" and his price target from C$0.45 to C$0.20.
He added that an opt-out clause that gives Katanga the right to terminate the Glencore loan if it can secure a third party equity offer of 350-million by Jan 12, is "highly unlikely."