Glencore weighs options for DRC unit to head off dispute
Switzerland-based miner considers debt forgiveness for subsidiary Kamoto Copper
Neil Hume and Henry Sanderson APRIL 23, 2018
Glencore’s Katanga Mining is assessing options for a recapitalisation of a key unit, as it seeks to head off a dispute with Gecamines, the Democratic Republic of Congo’s state-owned mining company.
The Switzerland-based company said Katanga, which owns the Kamoto Copper Company, was considering a number of options, including “forgiving” a portion of the debt held by its subsidiary.
Glencore warned earlier this year that it could face legal action in the DRC if it did not address a $3.9bn capital shortfall at KCC, which operates one of its most important copper mines.
On Sunday, Gecamines opened proceedings against KCC, saying it should be dissolved because of its failure to address the “previously disclosed capital deficiency”. KCC is 75 per cent owned by Katanga and 25 per cent by Gecamines. In turn, Glencore owns 86 per cent of Katanga.
The dispute with Gecamines is the latest problem to face Katanga. In December, two executives resigned from its board after the company restated its accounts.
Analysts say the legal dispute with Gecamines is another example of the difficulties facing foreign companies operating in the DRC.
“The tangible impact to Glencore from this development is nearly nil, in our view,” said Tyler Broda, analyst at RBC Capital Markets. “That said, the decision by Gecamines to proceed to court in light of the current challenges relating to the new mining code is likely to be taken negatively.”
International mining groups operating in the DRC are fighting a rearguard action against changes to the country’s mining code. These include scrapping a stability clause, which protects holders of mining licences from complying with changes to the DRC’s fiscal and customs regime for 10 years.
The heavy levels of debt carried by mining companies have become a hot issue in the DRC. Gecamines has complained that foreign miners operating in the DRC, one of the poorest countries in the world, have failed to pay sufficient dividends from their projects.
The DRC is the world’s biggest source of cobalt, a metal used in batteries, and Africa’s largest producer of copper. It also boasts large gold reserves and deposits of metals like tantalum.
Albert Yuma, Gecamines chairman, said in February that the country was not benefiting from rising copper and cobalt prices because foreign miners had allowed costs to balloon and structured investments to their subsidiaries as expensive loans.
KCC has largely been funded with debt provided by Glencore because international banks are wary of the DRC. During development of its mines, losses and interest have built up at KCC leading to a capital deficiency. Under DRC law, this needs to be rectified.
Analysts say Glencore can do this either by a debt-for-equity swap or debt forgiveness, which is its favoured option, according to people familiar with its thinking.
“KCC has made numerous attempts to engage in constructive negotiations with Gecamines regarding the recapitalisation plan,” Katanga said in a statement. “However, Gecamines has, instead of meaningfully engaging with the company, unilaterally commenced the proceeding.”
It said that 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 Gecamines.”
A court hearing is scheduled for May 8.
“The most likely (and conservative) outcome?.?.?.?is for Katanga to forgive a portion of such debt as a change in the equity split of 75/25 per cent is likely to face heavy resistance from Gecamines,” said David Pleming, analyst at HSBC.
Katanga expects to produce 150,000 tonnes of copper and 11,000 tonnes of cobalt this year.
Glencore and a group of international miners operating in the DRC said on Monday the government had not responded to an offer to pay higher royalties in return for changes to the mining code, but there had been “constructive” discussions.