Katanga Mining - A View On Its Balance Sheet And Latest News

| About: Katanga Mining (KATFF)

Summary

Stock price 500% up since end of December ("Fivebagger").

Continued loss of approx. $160M each quarter.

Interest against Glencore increasing while equity decreasing.

Still unsure when production will restart; unlikely in September.

Katanga Mining (OTCPK: OTCPK:KATFF) – currently trading at CAD 0.78 (USD 0.62; EUR 0.54)

The stock price of the cobalt mining company rose over fabulous 500% since beginning of January. A fantastic story for all investors so far – but how long the rally can go? Which risks should be considered? When you should opt out?

This article will not deal with general political risks arising from investments in Congo or demand for cobalt driven by batteries for electric vehicles like Tesla (NASDAQ:TSLA). I will focus on the balance sheet of the company, mainly on equity.

KATTF stock price rally

KATTF Q2 news dated July 26, 2017

Katanga announced verbally second quarter production results on their website (Source). It was no surprise that the mining company continued with waste mining in preparation for the commissioning of the Whole Ore Leach Project (“WOL Project”). In Q2 the mining of copper and cobalt ore was still suspended. The waste mined increased by 60% compared to first quarter. Management told us that “significant progress continues” with regard to the infrastructure. They spent capital expenditures amounting to $69.5M. The full financial report of Q2 should be released on August 9, 2017.

Katanga’s weak balance sheet

I had a closer look at KATFF’s unaudited IFRS consolidated B/S incl. P&L statement as of March 31, 2017. In detail, I analyzed the remaining equity and the ongoing loss situation due to the care and maintenance.

The total loss FY2016 was $641M (including 25% allocated to non-controlling interests related to the investment in KCC held by DRC’s government company). Therefore, the average loss each quarter was approx. $160M. The same amount applies for Q1 2017 and is likely to be expected for Q2 as the announced capital expenditures of $69.5M fits to the prior quarters. Screenshot of equity overview (shown on page 5 of report):

Hence, the remaining equity including non-controlling interests should be decreased to approx. $217M end of Q2. Status quo given, the consolidated B/S will “touch” 0 in a few months, end of 2017 at the latest.

Please also remind the facts about the well-known debt facilities with Glencore (OTCPK:GLCNF): interest is accrued and there is not yet capitalized interest payable on maturity each growing up.

It is getting more and more critical that the ongoing waste mining burns equity and all is depending on the planned ramp up.

On the other hand, it can be argued that Katanga’s main shareholder – Glencore – has enough economic power to take care of Katanga and its mining assets located in Congo.

KATFF potential production restart

Management previously said that the mine will re-start in 09/2017 instead of Q1 2018 (Source Technical Mining Report March 2017). According to the latest published news, they told us “commissioning of the WOL Project is expected to commence in Q4 2017”. In my opinion that means it is uncertain whether the ramp up can be done within the next months and it sounds it is likely more end of 2017 instead of 09/2017 (=Q3).

Whenever the announcement will be done, it will take some weeks until copper and cobalt ore will be milled, concentrated, shipped and last but not least sold to customers.

Conclusion

Be aware of the weak balance sheet. Every day with waste mining will increase the critical equity and debt structure of Katanga. It might be possible that a capital injection or another debt facility with 10% interest rate by Glencore is required to keep Katanga alive until production will restart.

Another option for Glencore will be to convert its debt to shares (as debt is already secured by the 75% interest stake in KCC) and squeeze out the remaining shareholders.

To sum up, every delay in production restart means “it’s all about Glencore”. For the time being you should think about “safe heaven” and maybe realize your gains.

Potential investors should wait until announcement of production restart.

Disclosure: I am/we are long KATFF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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