Katanga Mining Announces 2019 Third Quarter Financial Results

ZUG, Switzerland, Nov. 7, 2019 /CNW/ - Katanga Mining Limited (TSX: KAT) ("Katanga" or the "Company") today announces its 2019 third quarter financial results. Katanga's unaudited interim financial statements and management's discussion and analysis for the three and nine months ended September 30, 2019 ("MD&A") are available on SEDAR (www.sedar.com).

Operating Results

		Three months ended			Nine months ended
		Sep 30,	Jun 30,	Sep 30,	Sep 30,	Sep 30,
		2019	2019	2018	2019	2018
Sales*	$'000	347,794	301,091	428,116	1,003,741	920,386
Mining, processing and other costs (net of changes in metal stocks)*	$'000	(272,689)	(270,370)	(220,282)	(877,796)	(452,605)
Royalties and transportation costs*	$'000	(70,904)	(68,170)	(73,704)	(195,324)	(147,356)
Depreciation and amortization	$'000	(109,744)	(57,327)	(74,955)	(223,466)	(190,917)
Gross (loss) profit	$'000	(105,543)	(94,776)	59,175	(292,845)	129,508
Other income (expenses)*	$'000	(5,844)	1,883	(738)	(6,742)	(10,195)
Write-offs / loss on disposal of property, plant and equipment*	$'000	(555)	(27,684)	(32,678)	(31,196)	(42,149)
Net finance costs	$'000	(106,420)	(116,999)	(102,244)	(339,610)	(349,689)
Restructuring expenses	$'000	-	-		-	(248,128)
Income tax expense	$'000	(8,395)	(2,551)	(9,383)	(14,935)	(9,383)
Net loss and comprehensive loss	$'000	(226,757)	(240,127)	(85,868)	(685,328)	(530,036)
Non-controlling interests	$'000	(41,189)	(46,573)	(7,361)	(126,547)	(49,057)
Attributable to shareholders of the company	$'000	(185,568)	(193,554)	(78,507)	(558,781)	(480,979)
Adjusted EBITDA*	$'000	(2,198)	(63,249)	100,714	(107,317)	268,081
Basic and diluted loss per common share	$/share	(0.10)	(0.10)	(0.04)	(0.29)	(0.25)
C1 costs**	$/lb	2.50	2.66	0.95	2.71	1.43

*	The aggregation of sales, mining, processing and other costs, royalties and transportation costs, other income (expenses) and write-offs / loss on disposal of property, plant and equipment are included within adjusted EBITDA (Refer to item 22 'Non-IFRS measures' of the Company's MD&A).
**	C1 costs after by-product credit. Refer to item 22 'Non-IFRS measures' of the Company's MD&A.

		Three months ended			Nine months ended
		Sep 30, 2019	Jun 30, 2019	Sep 30, 2018		Sep 30, 2019	Sep 30, 2018
Copper revenue	$'000	320,264	280,226	246,289		955,578	597,152
Cobalt revenue	$'000	27,530	20,865	181,827		48,163	322,971
Concentrate revenue	$'000	-	-	-		-	263
Total revenue	$'000	347,794	301,091	428,116		1,003,741	920,386
Including net provisional pricing adjustment		7,389	(23,149)	5,585		6,611	5,694
Copper cathode sold	tonnes	60,530	53,700	43,596		170,631	97,057
Cobalt contained in hydroxide sold	tonnes	2,020	1,245	3,737		3,265	5,913
LME average copper price	$/lb	2.63	2.77	2.77		2.74	3.01
Realized copper price*	$/lb	2.02	1.91	2.30		2.12	2.30
MB average cobalt price	$/lb	14.82	15.22	34.65		15.94	38.49

*	Realized copper prices are based on gross copper revenue (above) after deducting realization charges, royalties and other selling expenses.

The movement in revenue is due to the following price and volume factors:

• Copper revenue increased to $320.3 million in Q3 2019 from $280.2 million in Q2 2019. Copper revenue increased to $955.6 million in Q3 2019 YTD from $597.2 million in Q3 2018 YTD. The increase in copper revenue in Q3 2019 versus Q2 2019 was due to slightly higher copper sales (and production) and an increase in the realized copper price. The increase in copper revenue during Q3 2019 YTD versus Q3 2018 YTD is due to the increase in copper sales (and production), driven by the WOL Project ramp-up, partially offset by a lower realized copper price.
  
  
• Cobalt revenue increased to $27.5 million in Q3 2019 from $20.9 million in Q2 2019. Cobalt revenue decreased to $48.2 million in Q3 2019 YTD from $323.0 million in Q3 2018 YTD. The increase in cobalt revenue in Q3 2019 versus Q2 2019 was due to increased sales volumes with a focus during Q3 2019 on exporting dried material which has a higher cobalt contained value compared to Q2 2019 where a mixture of high moisture and dried material was sold. The decrease in cobalt revenue in Q3 2019 YTD versus Q3 2018 YTD is due to the effect of the temporary suspension of export and sale of cobalt from November 6, 2018 to April 15, 2019 as well as sales deferrals due to the mechanical breakdown of the dryers noted earlier.
  
  
• Included in sales is a net provisional pricing adjustment resulting from movements in the commodity price between the date of sale and the final pricing, based on average prices for a specified contractual period thereafter. At each reporting date, provisionally priced sales that have not been finalized retain an exposure to future changes in prices and are marked-to-market, based on London Metal Exchange ("LME") and Metal Bulletin ("MB") forward prices. These adjustments are recorded in sales in the Statement of Loss and Comprehensive Loss and within receivables on the Statement of Financial Position. These embedded derivatives comprising provisional pricing, included in receivables, are classified within level 2 of the fair value hierarchy.

The movement in cost of sales, depreciation, royalties and transportation costs comprises:

		Three months ended			Nine months ended
		Sep 30, 2019	Jun 30, 2019	Sep 30, 2018		Sep 30, 2019	Sep 30, 2018
Open pit mining costs	$'000	38,006	29,704	29,550		97,438	79,702
Underground mining costs	$'000	13,437	14,508	14,361		43,124	37,104
KTC processing costs	$'000	22,331	22,678	21,902		72,448	52,727
Luilu refinery costs	$'000	141,777	132,817	83,330		424,819	186,799
Change in metal stock	$'000	(36,179)	(9,654)	13,371		(49,148)	(75,161)
Mine infrastructure and support costs	$'000	93,317	79,366	57,357		285,578	168,950
Expense on issue of capital spares to production	$'000	-	950	411		3,537	2,484
Depreciation and amortization	$'000	109,744	57,327	74,955		223,466	190,917
Royalties and transportation costs	$'000	70,904	68,170	73,704		195,324	147,356
Total cost of sales	$'000	453,337	395,866	368,941		1,296,586	790,878

Review of Expenses for the Three and Nine Months Ended September 30, 2019:

• Gross loss increased to $105.5 million in Q3 2019 from $94.8 million in Q2 2019. Gross loss increased to $292.8 million in Q3 2019 YTD from $129.5 million gross profit in Q3 2018 YTD. The increase in gross loss in Q3 2019 compared to Q2 2019 is due to increased costs of production. The cost of production increased due to higher reagent costs and increased depreciation. The increase in gross loss in Q3 2019 YTD compared to Q3 2018 YTD gross profit is driven by reduced cobalt revenue (volume and price), higher reagent costs at Luilu and an increase in total volumes processed, in line with the optimized mine plan. These were partially offset by an increase in copper revenue due to increased copper sales (and production). In addition, the inventory obsolescence provision was increased from $14.8 million in 2018 to $62.0 million in Q3 2019 YTD.
  
  
• Open pit mining costs increased to $38 million in Q3 2019 compared to $29.7 million in Q2 2019. Open pit mining costs increased to $97.4 million in Q3 2019 YTD from $79.7 million in Q3 2018 YTD. The increase in open pit mining costs is due to an increase in total material mined.
  
  
• KTC processing costs decreased to $22.3 million in Q3 2019 from $22.7 million in Q2 2019. KTC processing costs increased to $72.4 million in Q3 2019 YTD from $52.7 million in Q3 2018 YTD. KTC processing and operational costs have moved in line with the amount of material milled during the respective periods.
  
  
• Luilu refinery costs increased to $141.8 million in Q3 2019 from $132.8 million in Q2 2019. Luilu refinery costs increased to $424.8 million in Q3 2019 YTD from $186.8 million in Q3 2018 YTD. Luilu refinery costs increased due to increased reagent costs and an increase in total oxide feed from KTC, in line with the optimized mine plan.
  
  
• Royalties and transportation costs have increased to $70.9 million in Q3 2019 from $68.2 million in Q2 2019. Royalties and transportation costs have increased to $195.3 million in Q3 2019 YTD from $147.4 million in Q3 2018 YTD. Royalties and transportation costs have increased due to higher copper revenues and sales tonnes. The Q3 2019 YTD negative variance includes the impact from implementation of a new mining code in the DRC effective mid-2018 (the "2018 Mining Code"), which changed the basis of royalties from a net revenue to gross revenue basis, increased base royalty rates and then cobalt being declared a strategic mineral metal and taxed at a higher 10% from Q4 2018 (previously 3.5%).

Cash Flows

		Three months ended			Nine months ended
		Sep 30, 2019	Jun 30, 2019	Sep 30, 2018	Sep 30, 2019	Sep 30, 2018
Cash flow generated (used) in:
Operating activities before changes in working capital	$'000	10,055	(26,501)	135,684	10,528	140,224*
Changes in working capital	$'000	(13,296)	(73,164)	(40,607)	(113,793)	(148,520)
Taxes paid	$'000	(17,106)	-	-	(17,106)	-
Operating activities	$'000	(20,347)	(99,665)	95,077	(120,371)	(8,296)
Investing activities	$'000	(125,591)	(85,304)	(111,162)	(381,824)	(282,228)
Financing activities	$'000	135,000	115,000	-	510,000	273,682
(Decrease) increase in cash	$'000	(10,938)	(69,969)	(16,085)	7,805	(16,842)
					.
Cash, beginning of period	$'000	24,321	94,238	37,462	5,499	38,144
Effect of exchange rate changes on cash held in foreign currencies	$'000	(470)	52	43	(391)	118
Cash, end of period	$'000	12,913	24,321	21,420	12,913	21,420

*	Includes $191 million as cash component of the one-time restructuring expense under the Gécamines Settlement Agreement (Refer to item 9 of the Company's MD&A).

Review of the Cash Flows for the Three and Nine months ended September 30, 2019

• Cash flows from operating activities before changes in working capital increased to $10.1 million inflow in Q3 2019 from $26.5 million outflow in Q2 2019. Cash flows from operating activities before changes in working capital decreased to $10.5 million generated in Q3 2019 YTD from $140.2 million generated in Q3 2018 YTD. The increase in cash inflows in Q3 2019 compared to Q2 2019 cash outflow was driven principally by an increase in copper revenue due to slightly higher copper sales (and production) and an increase in cobalt revenue. The decrease in cash flows in Q3 2019 YTD compared to Q3 2018 YTD was driven mainly by an increase in processing and mine infrastructure and support costs and lower cobalt revenue.
  
  
• Changes in working capital cash outflows decreased to a $13.3 million outflow in Q3 2019 from an outflow of $73.2 million Q2 2019. Changes in working capital outflows decreased to $113.8 million in Q3 2019 from $148.5 million Q3 2018 YTD. The decrease in working capital cash outflows in Q3 2019 compared to Q2 2019 outflows resulted primarily from an increase in accounts payable and accrued liabilities, offset by an increase in inventories and trade receivables. The decrease in outflows in Q3 2019 YTD compared to Q3 2018 YTD was driven by an increase in accounts payable and accrued liabilities partially offset by an increase in trade receivables, an increase in inventory and an increase in prepaid expense and other current and non-current assets.
  
  
• During Q3 2019 income taxes relating to the 2018 income tax liability and tax on super profits were paid. No cash flows relating to tax payments occurred during Q3 2018 YTD.
  
  
• Cash outflows from investing activities increased to $125.6 million in Q3 2019 from $85.3 million in Q2 2019. Cash outflows from investing activities increased to $381.8 million in Q3 2019 YTD from $282.2 million in Q3 2018 YTD. The increase in the cash outflows reflects the underlying costs of expansionary capital expenditures in the respective periods.
  
  
• Cash inflows from financing activities increased to $135 million in Q3 2019 from $115 million in Q2 2019. Cash inflows from financing activities increased to $510 million in Q3 2019 YTD from $273.7 million in Q3 2018 YTD. The increase in cash inflows from financing activities reflected the rate of drawdowns under the Bank Loan and other Facilities (please see item 2 of the Company's MD&A for further details).

Outlook

On April 29, 2019, the Company announced that KCC had commenced a comprehensive business review targeting mining efficiencies and processing improvements as well as enhancements to product quality realizations and overhead cost reductions (the "Review").

Initial indications suggest there may be scope for margin improvements in the order of $200-250 million per annum. Further work, seeking to develop detailed implementation plans to deliver these improvements, is being undertaken, which if successful, are expected to be realizable by 2022.

To effect these improvements, KCC has created a transformation office to facilitate a 36 month turnaround plan, designed to unlock the potential of the people and assets across the site. To ensure timely project delivery, KCC has defined business priorities such as, but not limited to, improved efficiencies, maintenance, labor productivity and production quality, while decreasing the costs associated with procurement, sourcing and information technology.

These improvements are expected to materially increase the cash flow generation of KCC from 2022, when it is projected to achieve targeted life of mine average production of approximately 300kt of copper and 30kt of cobalt, resulting in a steady state copper unit cash cost of $1.65/lb, before cobalt by-product credits, and $0.75/lb after cobalt by-products revenue, net of allocable cobalt direct production and realization/selling costs of approximately $0.60/lb.^[1]

Production guidance for copper and cobalt has been moderately revised, compared to the August 2019 release, as follows:

Commodity		Units	Production Guidance
			FY 2019	FY 2020	FY 2021
Copper^(1)		Kt	233	270	295
Cobalt^(2)		Kt	16	29	32

Notes:
(1)	Annual copper production guidance subject to +/- 15 kt variation
(2)	Annual cobalt production guidance subject to +/- 2 kt variation

Notwithstanding these targets, production in any given year will fluctuate as a function of numerous factors, including availability and utilization of the plant, geological and mining conditions, logistics, availability of reagents, availability of electricity, macro-economic factors such as commodity prices, input costs and geopolitical developments (including the 2018 Mining Code).

Subsequent Events
The Company announces that it has entered into an agreement with GIAG to complete a rights offering (the "Rights Offering") to partially repay the Glencore Loan Facilities. Under the terms of the Rights Offering, each holder of a common share would receive one right (a "Right") to subscribe for that number of common shares equal to approximately $5.8 billion, divided by the subscription price. The subscription price per common share is agreed to be at a 25% discount to the 5-day volume-weighted average price of common shares on the date the final prospectus is filed. Shareholders who exercise in-full their Rights to purchase common shares will also be entitled to subscribe for additional common shares if there are unexercised Rights available at the expiry time. GIAG has agreed to purchase, at the subscription price, all common shares that are not otherwise subscribed for under the Rights Offering. The residual amount of the Glencore Loan Facilities after the partial repayment is expected to be approximately $1.5 billion as at December 31, 2019. Upon closing of the Rights Offering, the Glencore Loan Facilities will be merged into a single $1.75 billion facility consisting of the remaining approximately $1.5 billion of Glencore Debt not repaid under the Rights Offering and undrawn committed liquidity of approximately $250 million, which Glencore has agreed to provide under a subsequent facility agreement. The subsequent facility will mature on January 1, 2023, and bear interest at a rate of 7% per annum. The interest will be capitalized to the extent the Company has insufficient cash to pay it when due.

The Company also announces that Peter Freyberg has resigned from his position as a director of the Company. The Board has subsequently appointed Hilmar Rode as a director, effective November 7, 2019.

The KCC board of directors also appointed on October 29, 2019, Mark Davis as Managing Director of KCC, replacing Samuel Rasmussen, as well as Clint Donkin as Operations Director of KCC, replacing Michael Fleming.

The Company further announces that Jeff Gerard intends to resign as Chief Executive Officer and director of the Company, effective following the filing of the final prospectus related to the Rights Offering. Mark Davis, already appointed as Managing Director of KCC, will be appointed CEO of the Company pursuant to the Management Agreement and as a director of the Company, effective following the filing of the final prospectus related to the Rights Offering. The executive services of Mr. Davis will be provided to the Company by GIAG pursuant to the Management Agreement.

Qualified Person

Tahir Usmani, PEng, APEGA, Chief Mine Planning Engineer of KCC, has reviewed and approved the scientific and technical disclosure in this news release. Mr. Usmani is a "qualified person" for the purposes of NI 43‐101 ‐ Standards of Disclosure for Mineral Projects.

About Katanga Mining Limited

Katanga Mining Limited operates a major mine complex in the Democratic Republic of Congo producing refined copper and cobalt. The Company has the potential to become Africa's largest copper producer and the world's largest cobalt producer. Katanga is listed on the Toronto Stock Exchange under the symbol KAT.

Forward Looking Statements

This press release may contain forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or describes a "goal", or variation of such words and phrases or state that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved. This press release may contain forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as "plans", "expects", or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or describes a "goal", or variation of such words and phrases or state that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved.

All forward-looking statements reflect the Company's beliefs and assumptions based on information available at the time the statements were made. Actual results or events may differ from those predicted in these forward-looking statements. All of the Company's forward-looking statements are qualified by the assumptions that are stated or inherent in such forward-looking statements, including the assumptions listed below. Although the Company believes that these assumptions are reasonable, this list is not exhaustive of factors that may affect any of the forward-looking statements. The key assumptions that have been made in connection with the forward-looking statements include the following: the ramp-up of production following commissioning of the WOL Project (as defined in the Company's annual information form for the year ended December 31, 2018 dated April 1, 2019 (the "AIF")); the realization of the expected improvements from the WOL Project; there being no significant disruptions affecting the operations of the Company whether due to legal disputes, judicial action, labour disruptions, supply disruptions, power disruptions, rollout of new equipment, damage to equipment or otherwise; permitting, development, operations, expansion and acquisitions at KCC being consistent with the Company's current expectations; the Company being able to confirm any of the margin improvements identified by the Review and then successfully implementing any such margin improvements; continued recognition of the Company's mining concessions and other assets, rights, titles and interests in the DRC; the completion of the ion exchange plant in the time contemplated, at the expected cost of construction; the completion of the Acid Plant in the time contemplated, at the expected cost of construction; political and legal developments in the DRC being consistent with its current expectations; the continued provision or procurement of additional funding from Glencore for operations, the completion of the T17 Underground Mine and additional phases of the WOL Project and the Power Project (as defined in the Company's AIF); new equipment performs to expectations; the exchange rate between the US dollar, South African rand, British pounds, Canadian dollar, Swiss franc, Congolese franc and Euro being approximately consistent with current levels; certain price assumptions for copper and cobalt; prices for diesel, natural gas, fuel oil, electricity and other key supplies being approximately consistent with current levels; production, operating expenses and cost of sales forecasts for the Company meeting expectations; the accuracy of the current ore reserve and mineral resource estimates of the Company (including but not limited to ore tonnage and ore grade estimates); and labour and material costs increasing on a basis consistent with the Company's current expectations.

Forward-looking statements involve known and unknown risks, future events, conditions, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any future results, prediction, projection, forecast, performance or achievements expressed or implied by the forward-looking statements. Although Katanga has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements.

The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise, except in accordance with applicable securities laws.

^1

Realization costs are based on an assumed copper price of $6,500/t and realized cobalt price of $15/lb.

SOURCE Katanga Mining Limited

Longview Communications Inc., Joel Shaffer (Toronto), [phone], [email protected]; Alan Bayless (Vancouver), [phone], [email protected]

Related Links

http://www.katangamining.com/