KATANGA MINING PROVIDES UPDATE ON KCC RECAPITALIZATION PROCESS AND NOTES COMMENCEMENT OF DRC LEGAL PROCEEDINGS BY GECAMINES
Katanga Mining Ltd. was notified on April 20, 2018, that its joint venture partner, the Democratic Republic of the Congo (DRC) state-owned La Generale des Carrieres et des Mines (Gecamines), in the company's 75-per-cent DRC operating subsidiary Kamoto Copper Company (KCC), has commenced legal proceedings in DRC to dissolve KCC following KCC's failure to address its previously disclosed capital deficiency or, alternatively, if the court provides KCC with a period of time within which to regularize the situation, to request the appointment of an expert to assess and report to the court on KCC's financial position and the recapitalization plan. A court hearing is scheduled to be held in the DRC on May 8 th, 2018. The court may grant KCC a maximum period of six (6) months to regularize the situation. The Company believes that it has several options to remedy KCC's capital deficiency and avoid KCC's dissolution.
As disclosed in the Company's annual information form for the year ended December 31, 2017, dated March 31, 2018, under DRC corporate law applicable to KCC, KCC was obliged to address a capital deficiency that first arose in 2014 when, as a result of historical losses incurred during the rehabilitation of KCC's assets through, amongst others, the servicing of the inter-company loans to fund such rehabilitation, KCC shareholders' equity fell below half of its authorized capital. In accordance with such laws, the capital deficiency should have been rectified by December 31, 2017, and, as a result of this not having been done, an interested party was entitled to commence legal action for the dissolution of KCC before DRC judicial authorities, which Gecamines has now done.
In 2017 the Company proposed a recapitalization plan to Gecamines in compliance with the provisions of DRC law and the terms of the Joint Venture Agreement between them (the "JV Agreement") that would have rectified the capital deficiency. KCC has made numerous attempts to engage in constructive negotiations with Gecamines regarding the recapitalization plan. However, Gecamines has, instead of meaningfully engaging with the Company, unilaterally commenced the proceeding.
The Company will continue to attempt to engage in discussions with Gecamines and will take all other necessary steps to ensure the continuation of the operations of KCC and protect its rights under the law and the JV Agreement.
The Company is continuing to assess options for regularizing the deficiency, including the conversion of a portion of existing intercompany debt owed by KCC to the Company (which is eliminated on consolidation) into equity or forgiving a portion of such debt. Any such outcome would impact the distribution of future cash flows earned by KCC, which might in turn have a materially adverse impact on the Company but would not be expected to have a material impact on the assets, liabilities and net assets of the Company and would be expected only to result in a shift within equity attributable to shareholders of the Company and non-controlling interests.
The regularization of the capital deficiency can be effected by the Company on its own initiative or through negotiations with Gecamines. If the Company and KCC have taken the necessary steps to regularise the deficiency and this is confirmed by KCC's statutory auditor on or before the day on which the court renders a judgment on the merits, the court cannot issue a dissolution order.
As a consequence of the completion of the first train of the Whole Ore Leach project (the "WOL Project") and subsequent operational ramp-up, KCC is generating positive operating cash flow. KCC remains liquid due to operating cash flows and its guarantees from its ultimate parent shareholder. As such, all obligations to KCC's creditors are being honoured, and the company is meeting all of its commercial obligations. 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.
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