katanga mining limited · nodules still to be exported. profitability in q2 to q3 2012 and q1 2013...
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KATANGA MINING LIMITED
Management’s Discussion and Analysis For the three months ended March 31, 2013 and 2012
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following discussion and analysis is management’s assessment of the results of operations
and financial condition of Katanga Mining Limited (“Katanga” or the “Company”) and should
be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes thereto of the Company for the three months ended March 31, 2013, and 2012, and
the audited consolidated financial statements and the notes thereto of the Company for the years
ended December 31, 2012, and 2011,. The unaudited interim condensed consolidated financial statements have been prepared in accordance with IAS 34 “Interim Financial Reporting” (“IAS
34”) using accounting policies consistent with the International Financial Reporting Standards
(“IFRS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations
of the International Financial Reporting Interpretations Committee (“IFRIC”). All dollar
amounts are in United States dollars unless otherwise indicated. This information has been
prepared as of May 9, 2013. Katanga’s common shares trade on the Toronto Stock Exchange
(“TSX”) under the symbol “KAT”. Katanga’s most recent filings, including Katanga’s Annual Information Form for the year ended December 31, 2012, dated March 28, 2013, are available
on the System for Electronic Document Analysis and Retrieval (“SEDAR”) and can be accessed
through the internet at www.sedar.com. This Management’s Discussion and Analysis contains
forward looking statements that are subject to risk factors as set out in item 19.
1. Company Overview
Katanga is a limited company whose common shares are listed on the TSX under the symbol
“KAT”. The Company’s registered office address is Suite 300, 204 Black Street, Whitehorse, Yukon Territory, Canada Y1A 2M9. Katanga's ultimate parent company is Glencore Xstrata plc
(“Glencore Xstrata”) which owns 75.3% of Katanga's shares through Jangleglade Limited and
another Glencore Xstrata subsidiary.
Katanga, through its 75% owned subsidiary Kamoto Copper Company SARL (“KCC”), is
engaged in copper and cobalt mining and related activities in the Democratic Republic of Congo (“DRC”). KCC is engaged in the exploration, mining, refurbishment, rehabilitation and operation
of the Kamoto / Mashamba East mining complex, the KOV copper and cobalt mine (“KOV Open
Pit” or “KOV”), various oxide open pit resources, the Kamoto Concentrator (“KTC”) and the
Luilu Metallurgical Plant (collectively, the “Project”), in the DRC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2
2. Highlights during the three months ended March 31, 2013, and Outlook
Mining
During the three months ended March 31, 2013 (“Q1 2013”), the Company mined 1,113,653
tonnes of ore (a 10% decrease over the three months ended March 31, 2012 (“Q1 2012”)) at a
grade of 4.74% resulting in contained copper in ore mined of 52,825 tonnes (a 21% increase
over Q1 2012)):
Ore mined at KOV Open Pit during Q1 2013 was 709,885 tonnes, a 13% decrease over Q1
2012 due to lower contractor equipment availability, power interruptions and heavy rains.
The average copper grade of ore mined from KOV Open Pit during Q1 2013 was 5.55%,
resulting in contained copper in ore mined of 39,434 tonnes (a 36% increase over Q1 2012).
Ore mined and hoisted at KTO Underground Mine during Q1 2013 was 403,768 tonnes, a 3%
decrease over Q1 2012. The average copper grade of ore mined from KTO Underground Mine during Q1 2013 was 3.32%, resulting in contained copper in ore mined of 13,391
tonnes (a 10% decrease over Q1 2012).
Two large diesel Caterpillar shovels (30 tonnes and 60 tonnes bucket capacity) and two 2MW
generators dedicated to support the electric RH340 shovel and KOV dewatering activities were commissioned during Q1 2013, reducing the dependence on power supply for KOV
Open Pit mining activities.
Four additional Caterpillar 777 trucks (100 tonnes load capacity) were brought into
production that have improved operating costs as these trucks haul direct to the crusher, reducing handling and contractor costs.
Processing
Ore milled at the Kamoto Concentrator (“KTC”) during Q1 2013 was 1,252,824 tonnes, a
25% increase over Q1 2012.
Notwithstanding the residual power availability issues, copper produced in metal and
concentrate for Q1 2013 totalled a production record of 28,600 tonnes, a 53% increase over
Q1 2012. A noticeable improvement in power availability was observed in Q1 2013
compared to Q4 2012 due to the commissioning in mid-December 2012 of the Power Project synchronous condenser and the World Bank converter.
A record 146,861 tonnes of concentrate containing 33,808 tonnes of copper were produced
(Q1 2012 – 105,504 tonnes containing 27,154 tonnes of copper).
In Q1 2013, a further 288 Electro-Winning (“EW”) cells with an annual capacity of 80,000
tonnes of copper cathode were commissioned as part of the Updated Phase 4 Expansion Project (as described below), bringing the total installed annual capacity to 120,000 tonnes of
copper cathode.
Copper metal produced through the commissioned section of the new plant, as part of the
Updated Phase 4 Expansion Project, reached 9,120 tonnes during Q1 2013 as compared to
603 tonnes in Q4 2012.
Cobalt produced totalled 332 tonnes for Q1 2013, a 44% decrease over Q1 2012.
Capital Projects
The Updated Phase 4 Expansion Project is expected to be completed on time during Q3 2013
for a cost of $769 million. The initial budget was $635 million. The additional costs comprise of:
o Scope changes – Mupine tailings dam, KOV in-pit crusher, acid receiving and
storage facility and catering camp, for a combined $57 million; and
o Cost increments – import duties, contractual tax obligations and other inflation factors for a combined $77 million.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3
Financial
Total sales for Q1 2013 were $188.1 million, a 40% increase over Q1 2012.
The realised copper price for Q1 2013 was $3.34/lb, an 11% decrease over Q1 2012, while
the realised price of cobalt was $9.75/lb, a 15% decrease over Q1 2012
For Q1 2013, the Company earned a net income attributable to shareholders of $30.1 million,
a 70% increase over Q1 2012. Cash and cash equivalents as at March 31, 2013, amounted to $45.1 million (December 31,
2012 - $57.0 million).
Recent Developments
As part of the Updated Phase 4 Expansion Project, two KTC mills (CM6 and CM7) were
planned to be converted from Autogenous to Semi-Autogenous Grinding (“SAG”) Mills.
Subsequent studies indicated that upon completion of the conversion, the increased weight of the mills could lead to the possible failure of the mill structures.
To increase KTC milling capacity to a production level of 310,000 tonnes per annum ("tpa")
of copper cathodes, Katanga will acquire a new 9,000 tonnes per day SAG mill which is
expected to be commissioned by the end of Q4 2014 at a cost of $58 million. Upon completion of the Updated Phase 4 Expansion Project, EW2 capacity is expected to be
200,000 tpa of copper cathode. In line with the Companies goals to introduce new technology
to the operations, the Company has decided to erect two additional 35,000 tpa copper cathode EW tankhouses for $139 million. The company has the option to build a third module at a
later stage.
Outlook
In the three months ending June 30, 2013 (“Q2 2013”), the Company’s third RH340 electric
shovel (60 tonnes bucket capacity) is expected to be commissioned, along with five new
Caterpillar 793 trucks (240 tonnes load capacity).
The first phase of the feasibility study for the potential T17 underground mine is still
expected to be completed during Q2 2013. This may potentially allow for the exploitation of
additional T17 mineral resources below the bottom of the current open pit using underground
mining techniques.
Updated Phase 4 Expansion Project commissioning highlights for Q2 2013 are expected to
include amongst others: o Commissioning of the second train of Solvent Extraction (“SX”) plant increasing
SX plant capacity to 200,000 tpa of copper cathode;
o Completion and commissioning of the converted EW facility with all cells brought into operation increasing the new tankhouse capacity to 200,000 tpa of
copper cathode; and
o Commissioning of the new sulphide concentrate receiving section.
The remainder of the Updated Phase 4 Expansion Project (which is set out in the 2012 ITR) remains on track for completion in the quarter ending September 30, 2013 (“Q3 2013”),
including among other things, the new floatation circuit at KTC, the oxide receiving, leaching
and CCD facilities, the third train of SX plant, the new roaster and the new lime loading and
storage plant.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
4
3. Summary of Quarterly Results
The following table sets out a summary of the quarterly results of the Company for the last eight quarters:
* Includes royalty payments, transportation costs, depreciation and amortization.
** Basic and diluted income per common share are the same for the periods presented since the
outstanding share options do not have a dilutive effect since their exercise prices exceeded the average market value of the common shares at each period end.
*** Includes impact of provisionally priced sales which retain exposure to future changes in
commodity prices being marked-to-market based on the London Metal Exchange (“LME”) spot
rate for copper and concentrate and the Metal Bulletin spot rate for cobalt at the balance sheet date
and repricing of those provisional sales in future periods.
**** Net of repricing adjustments relating to prior quarters.
During the first half of 2011, as production and commodity prices generally increased, there had been an
improvement in the operating results of the Company. In the last two quarters of 2011, declining commodity prices led to lower profitability. During Q1 2012, profitability was impacted by the payment of
$14.5 million related to additional customs taxes and penalties to the customs authorities on historic export
of copper nodules. In addition, to ensure that these penalties did not reoccur, the Company did not export
copper nodules until clarification on the value for customs duty purposes was obtained. During Q3 2012,
management obtained clarity on the export value of such materials from the DRC authorities and the export
of nodules commenced during Q3 2012 with the backlog of tonnes cleared by Q1 2013. Profitability in Q2
to Q4 2012 was adversely impacted by the decrease in the realized price of copper, the effect of copper
nodules still to be exported. Profitability in Q2 to Q3 2012 and Q1 2013 was adversely impacted by the
lower volumes of cobalt sold. During Q3 2012, profitability was impacted by the payment to the tax
authorities of a non-recurring $9.2 million related to additional payroll taxes and penalties levied on the
expatriate workforce. These movements in the results are also reflected in the cash flows from operating activities. Investing activities have increased up to Q4 2012, as the Company commenced the Updated
Phase 4 Expansion Project (as detailed in the Technical Report filed by the Company on March 30, 2012
(“2012 ITR”) – refer to item 16) and this has also resulted in an increase in the net additions to mineral
2011 2011 2011 2012 2012 2012 2012 2013
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
($ millions except where indicated)
Statement of Operations
Total sales 165.6 129.3 108.4 134.7 102.5 133.6 229.8 188.1
Cost of sales* (121.6) (117.9) (118.5) (137.3) (132.0) (140.7) (258.4) (174.8)
Gross profit (loss) 44.0 11.4 (10.1) (2.6) (29.5) (7.1) (28.7) 13.4
General administrative and other expenses (2.9) 3.3 (3.3) (5.5) (11.1) (12.1) (5.8) (5.0)
Interest income 0.1 0.0 0.0 0.0 0.7 0.1 0.2 0.1
Income taxes (expense) recovery 2.5 5.9 16.4 13.1 21.7 18.6 26.2 7.5
Net income (loss) 43.6 20.6 3.1 5.0 (18.2) (0.6) (8.0) 16.0
Basic and diluted income per common share ($ per share) 0.02 0.02 0.01 0.01 0.00 0.01 0.01 0.02
Realized copper price ($ per lb)** 3.72 3.16 3.33 3.76 3.34 3.48 3.21 3.34
Realized cobalt price ($ per lb)** 15.56 7.28*** 9.26*** 11.49 12.03 10.23 8.20 9.75
Realized concentrate price ($ per tonne)** 1,196 1,207 666*** 955 377*** 2,404*** 1,327 1,113
Total copper sold (tonnes) 14,870 13,806 11,613 11,249 11,488 12,078 24,553 18,846
Total copper metal produced (tonnes) 15,075 13,818 16,177 15,608 15,389 16,224 14,218 15,016
Total copper produced in metal and concentrate (tonnes) 24,896 23,690 24,179 18,749 24,313 25,868 24,033 28,600
Total cobalt sold (tonnes) 734 629 404 674 514 430 626 291
Total cobalt produced (tonnes) 663 593 542 593 477 521 537 332
Total concentrate sold (tonnes) 15,511 19,039 22,435 25,543 11,111 12,992 33,488 38,579
Statement of Financial Position
Cash and cash equivalents 23.6 57.0 57.1 41.6 38.1 33.8 57.0 45.1
Other current assets 302.5 298.9 390.3 515.9 574.3 749.0 702.8 832.4
Mineral interests, property, plant and equipment and
other long term assets 1,839.8 1,899.0 1,976.4 2,041.2 2,169.4 2,342.1 2,556.8 2,687.0
Total assets 2,166.0 2,254.9 2,423.9 2,598.6 2,781.8 3,125.0 3,316.6 3,564.5
Current liabilities 248.9 327.1 496.2 667.8 869.6 1,213.7 895.9 1,115.8
Debentures payable 124.1 117.5 - - - - - -
Loan facilities - - 119.5 122.5 125.5 128.8 650.1 666.2
Other non-current liabilities 85.4 81.9 78.3 73.1 69.3 65.5 61.7 57.5
Total liabilities 458.5 526.5 693.9 863.4 1,064.4 1,408.0 1,607.7 1,839.4
Total equity 1,707.5 1,728.4 1,729.9 1,735.3 1,717.4 1,717.0 1,709.0 1,725.0
Cash Flow
Operating activities 23.6 113.6 83.8 58.3 103.6 165.7 (249.2) 111.3
Investing activities (78.0) (71.9) (74.0) (75.3) (105.2) (169.9) (224.8) (122.7)
Financing activities 34.4 (8.8) (11.1) (0.1) (0.1) (0.0) 497.2 (0.2)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
5
interest and other assets. Other movements on the statement of financial position can be primarily attributed
to the changes in production.
The following production information sets out the quarterly results of the Company for the last eight quarters:
2011 2011 2011 2012 2012 2012 2012 2013
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
Cobalt and Copper
Production Statistics
Underground Mining
Waste mined (tonnes) 116,340 122,463 107,467 68,751 101,717 147,690 123,780 101,718
Ore mined (tonnes) 415,028 398,474 409,080 416,445 456,440 505,008 460,723 403,768
Copper grade (%) 3.84 3.88 3.51 3.57 3.71 3.64 3.46 3.32
Cobalt grade (%) 0.54 0.50 0.59 0.57 0.54 0.54 0.64 0.53
Open Pit Mining - T17
Waste mined (tonnes) 490,012 - - - - - - -
Ore mined (tonnes) 277,914 - - - - - - -
Copper grade (%) 3.77 - - - - - - -
Cobalt grade (%) 0.98 - - - - - - -
Open Pit Mining - KOV
Waste mined (tonnes) 5,001,372 8,319,173 5,882,746 4,742,500 7,411,688 4,576,941 4,423,489 5,566,403
Ore mined (tonnes) 603,070 841,221 532,116 814,628 843,948 1,091,814 955,695 709,885
Copper grade (%) 5.05 4.48 4.99 3.55 4.43 4.59 4.81 5.55
Cobalt grade (%) 0.45 0.37 0.25 0.43 0.34 0.42 0.32 0.38
Concentrator
Ore processed (tonnes) 1,085,484 1,031,151 1,090,544 1,004,277 1,232,440 1,274,850 1,100,761 1,252,824
Concentrate produced (tonnes) 135,169 126,407 114,513 105,504 133,803 134,539 121,795 146,861
Metullurgical Plant
Total concentrate feed (tonnes) 78,390 69,983 84,372 90,576 89,602 96,126 81,300 84,326
Copper produced (tonnes) 15,075 13,818 16,177 15,608 15,389 16,224 14,218 15,016
Cobalt produced (tonnes) 663 593 542 593 477 521 537 332
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
6
4. Production for the first quarter
The process of producing copper cathode, cobalt metal and concentrate is achieved through distinct processes which are described and reviewed below. The production statistics for each of
these areas is presented in item 3 – Summary of Quarterly Results and below in graphical
analysis.
KTO Underground Mine
During Q1 2013, 403,768 tonnes of ore (Q1 2012 – 416,445 tonnes) and 101,718 tonnes of waste (Q1 2012 – 68,751 tonnes) were mined from underground. An average copper grade of 3.32%
(Q1 2012 – 3.57%) and an average cobalt grade of 0.53% (Q1 2012 – 0.57%) were achieved.
During Q1 2013, KTO ore production was adversely affected due to longer hauls associated with
access maintenance to certain areas, hydraulic backfilling capacity and chamber availability in
addition to traffic disruption during the rehabilitation thereof.
During the quarter, the backfill plant operated at capacity and additional backfilling capacity is
currently being installed and is expected to be completed in Q2 2013. This will allow for greater
flexibility with regard to chamber availability.
In addition, primary development improved to 1,081 metres in Q1 2013 (Q1 2012 – 740 metres),
primarily in high grade zones, which allows for mining of higher grade material in greater quantities.
During Q1 2013, a higher proportion of ore continued to be mined from the Etang North and
Etang South zones resulting in reduced overall copper grade.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
7
T17 Open Pit
As a result of sufficient ore stockpiles and due to the increasing productivity at KOV Open Pit, mining at T17 Open Pit was suspended at the end of Q2 2011. During Q1 2012, the Company
completed studies to delineate 1.6 million tonnes of probable ore reserves (3.52% TCu / 0.56%
TCo) at T17 Open Pit Extension and 0.9 million tonnes of probable ore reserves (3.51% TCu / 0.57% TCo) at T17 Underground (which estimates are set out in the 2012 ITR).
Mining of T17 Open Pit Cut 3 and 4 is expected to recommence by Q4 2013. Dewatering of T17
Open Pit is in progress and is expected to be completed by the end of Q2 2013. This will allow for ore extraction and facilitate the start of infrastructure works related to the potential T17
underground mine.
The first phase of the feasibility study for the potential T17 underground mine is expected to be
completed during Q2 2013. This may potentially allow for the exploitation of additional T17
mineral resources below the bottom of the current open pit using underground mining techniques.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
8
KOV Open Pit
709,885 tonnes of ore were mined in Q1 2013 (Q1 2012 – 814,628), with an average copper grade of 5.55% (Q1 2012 – 3.55%) and cobalt grade of 0.38% (Q1 2012 – 0.43%). Total waste
mined for the quarter was 5,566,403 tonnes (Q1 2012 – 4,742,500 tonnes) of which 4,005,997
tonnes were a result of pre-strip activities.
The lower ore tonnes mined are due to lower contractor equipment availability, power
interruptions, and ground water inflows at the bottom of the pit, due to heavy rains in Q1 2013. KOV Open Pit water management improved towards the end of the wet season and is now under
control with the construction of two sumps to manage water ingress. The copper grade was higher
due to the greater proportion of high grade ore mined in Cut 1D and the Variante zone which
became available in those areas, as mud was removed from the bottom of KOV Open Pit.
Two large diesel Caterpillar shovels (30 tonnes and 60 tonnes bucket capacity) and two 2MW
generators dedicated to RH340 electric shovels and pit dewatering activities were commissioned during Q1 2013, reducing the dependence on power supply for mining activities. In addition, four
Caterpillar 777 trucks (100 tonnes load capacity) were brought into production that have
improved operating costs as these trucks haul direct to the crusher, reducing handling and contractor costs.
In Q2 2013, the Company’s third RH340 electric shovel (60 tonnes bucket capacity) is expected
to be commissioned, along with five new Caterpillar 793 trucks (240 tonnes load capacity). This new fleet will allow the Company to accelerate mining activities.
The Company is currently establishing a new short haul road to allow for waste material to be stored in Kamoto East which is expected to represent a cost saving for the remainder of the year.
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Ore mined (tonnes) Copper grade (%)
Cobalt grade (%)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
9
Kamoto Concentrator
KTC processes ore from KTO Underground Mine and the KOV Open Pit. In Q1 2013, KTC processed 1,252,824 tonnes of ore (Q1 2012 – 1,004,277 tonnes) from which a record 146,861
tonnes of concentrate containing 33,808 tonnes of copper were produced (Q1 2012 – 105,504
tonnes containing 27,154 tonnes of copper).
In Q1 2013, the Company produced 62,535 tonnes of concentrate for sale (Q1 2012 – 14,580
tonnes) with contained copper of 13,584 tonnes (Q1 2012 – 3,140 tonnes).
This record production was achieved despite lower tonnes of ore mined, continuing power
disruptions in the DRC and various mechanical issues. During the quarter, the decision was taken
to proceed with a comprehensive relining program for all the mills, which will allow for greater availability of the mills in the latter part of the year.
The interim double floatation circuit, based on the Updated Phase 4 Expansion Project design
continues to improve recoveries and total concentrate production by capturing the sulfide component of the mixed ore mined from the KOV Open Pit.
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Sulphide Concentrate Oxide Concentrate
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
10
Luilu Metallurgical Plant
The Luilu Metallurgical Plant is a SX-EW plant that processes sulphide and oxide concentrate from KTC. In Q1 2013, 15,016 tonnes of copper (Q1 2012 – 15,608 tonnes) and 332 tonnes of
cobalt (Q1 2012 – 593 tonnes) were produced.
In December 2012, the Company commenced production of the first copper cathodes from the
newly commissioned facilities as part of the Updated Phase 4 Expansion Project. The new
facilities include the first SX train with an annual capacity of 100,000 tonnes of copper and the
first 144 EW cells with an annual capacity of 40,000 tonnes of copper cathode. In Q1 2013, a further 288 EW cells with an annual capacity of 80,000 tonnes of copper cathode were
commissioned, bringing the installed annual capacity to 120,000 tonnes of copper cathode.
Production from the newly commissioned plant, increased from 603 tonnes in Q4 2012 to 9,120
tonnes in Q1 2013. The ramping up of the plant has gone according to plan with no major issues
encountered during the transition phase.
Copper and cobalt production was adversely impacted by the lower tonnes of ore mined, various
mechanical issues and continuing power disruptions. Power disruptions have reduced, although
not completely dissipated, since the new converter and synchronous condenser were commissioned in Q4 2012. In line with commissioning practices, the synchronous condenser was
taken off-line in February 2013 for rebalancing. No issues were identified and the unit is
operating as designed. In the medium to long term, improvements in infrastructure as a result of the Power Project (see item 7) are expected to improve the reliability and stability of electricity
supplies generally.
Cobalt production was further impacted by the lower cobalt head grade and tenor of the KOV ore as compared to the T17 stockpiled ore which was processed in 2012. In addition, the increased
volumes of the various tanks and ponds commissioned together with the first train of SX and EW
part of the Phase 4 Expansion Project, has substantially increased the residence time in order to reach the tenors required for plating of the cobalt. As tenors increase in solution, production of
cobalt is expected to recover in the next few months.
Progress on the Updated Phase 4 Expansion Project remains on schedule, with the following Q2
2013 highlights expected to include amongst others:
Commissioning of the second train of SX increasing SX capacity to 200,000 tpa,
Completion and commissioning of the converted EW facility with all cells brought into
operation increasing the new tankhouse capacity to 200,000 tpa of copper cathode, and
Commissioning of the new sulfide concentrate receiving section.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
11
5. 2013 First Quarter Financial Discussion
Operating Results
Three months ended March 31,
2013 $’000
March 31,
2012 $’000
Copper sales 138,934 93,226)
Cobalt sales 6,253 17,062)
Copper concentrate sales 42,950 24,400)
Cost of sales* (174,784) (137,311)
Gross profit (loss) 13,353) (2,623)
Other expenses (4,931) (5,423)
Income tax recovery 7,528) 13,086)
Net income 15,950) 5,040)
Non-controlling interests (14,116) (12,601)
Attributable to equity holders 30,066) 17,641)
Basic and diluted income per common share** $0.02) $0.01)
* Includes royalty payments, transportation costs, depreciation and amortization
** Basic and diluted income per common share are the same for the periods presented since the
outstanding share options do not have a dilutive effect since their exercise prices exceeded the
average market value of the common shares at each period end.
The Company reported a net income attributable to shareholders of the Company for Q1 2013 of
$30.1 million, $0.02 basic income per share, compared with a net income attributable to
shareholders of the Company for Q1 2012, of $17.6 million, $0.01 basic income per share.
Copper sales increased by $45.7 million for Q1 2013 compared to Q1 2012 due to:
o an increase in copper metal sold from 11,249 to 18,846 tonnes largely due to the
resolution of the delay in shipment of copper nodules caused by the Company
awaiting clarity on the DRC customs duty value for export purposes of such material. 4,680 tonnes of copper nodules produced in 2012, were recognized as
sales in Q1 2013; offset by
o a decrease in the realized copper price per pound to $3.34 from $3.76 as a result
of the decrease in commodity prices compared to the prior period.
Cobalt sales decreased by $10.8 million due to:
o cobalt metal sales decreasing from 674 to 291 tonnes due to the decrease in
production discussed above; and
o a decrease in the realized cobalt price per pound to $9.75 from $11.49 as a result of the decrease in cobalt prices compared to the prior period.
Copper concentrate sales increased by $18.6 million for Q1 2013 compared to Q1 2012
due to:
o an increase in concentrate sold from 25,543 to 38,579 tonnes as production capacity has increased; and
o an increase in the realized copper price per tonne to $1,113 from $955 because of
an increase in higher grade sulphide concentrate sold.
Included in revenue is a net re-pricing gain incurred during Q1 2013, for copper, cobalt
and concentrate of $0.4 million (Q1 2012, $4.7 million gain). Re-pricing adjustments result from sales being made at a provisional price in the month of shipment with final
pricing based on average prices at a specified period thereafter.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
12
Included in the net re-pricing loss are movements in the marked-to-market provision for
provisionally priced copper, cobalt and concentrate (i.e. product for which final pricing
had not been determined). The movement for the current three months was a loss of $3.4
million (Q1 2012, $3.6 million loss).
The cost of sales for Q1 2013, totalled $174.8 million (Q1 2012, $137.3 million). The
major variance between the periods being:
o Royalty payments and transportation costs for Q1 2013 were $20.4 million
higher than Q1 2012. The increase was due to the higher sales volume transported and due to changes in the sales mix.
o Costs directly attributable to mining operations (KTO and KOV), processing
operations (KTC and Luilu Metallurgical Plant), engineering and maintenance
costs for Q1 2013 increased by $25.3 million compared to the same period in 2012. This was mainly as a result of the increase in mining costs of $7.5 million
and processing costs of $12.3 million due to the increased volumes and general
inflationary increases in cost inputs. o Site infrastructure and support costs were $13.6 million lower due to $14.5
million of non-recurring customs taxes and penalties incurred in Q1 2012 on the
export of copper nodules ($12.5 million was included in cost of sales and $2.0 million in other expenses relating to penalties).
o $26.5 million has been credited against cost of sales and added to inventories
with respect to the increased level of work in progress and finished goods not yet
sold (Q1 2012, $28.1 million credited). o Depreciation and amortization of $33.0 million in Q1 2013, represented an
increase of $4.0 million on the same three months in 2012. The increase is a
result of the additional amortization and depreciation being charged due to the amortization of the pre-stripping costs at KOV as mining has increased.
The other expenses for Q1 2013 were $4.9 million (Q1 2012, $5.4 million). The major
variances were:
o A foreign exchange loss of $1.7 million (Q1 2012, $1.3 million gain) largely due
to adverse movements in the USD:ZAR exchange rate during Q1 2013; o A decrease in interest expense of $0.5 million due to decreased bank charges in
the DRC; and
o A $2.9 million decrease in corporate overheads largely due to $2.0 million penalties incurred on the export of nodules as discussed above.
Income tax recovery of $7.5 million which was $5.6 million lower than the comparative
three months as a result of a decrease in tax losses carried forward in the DRC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
13
Cash Flows
Three months ended
Cash flow from (used in): March 31,
2013 $’000
March 31,
2013 $’000
Operating activities 111,294) 58,274) Investing activities (122,726) (75,315) Financing activities (220) (112)
For Q1 2013, cash inflows from operating activities were $111.3 million (Q1 2012, $58.3
million inflow). The net increase of $53.0 million was primarily due to:
o The increase in net income, net of non cash items, of $21.5 million, as described above; and
o A working capital inflow of $68.6 million (Q1 2012, $37.0 million inflow). This
change is a result of an increase in customer prepayments of $38.6 million, an increase in prepayments of $29.0 million (due to payments related to long lead-
time mining equipment being transferred from prepayments to property, plant
and equipment upon commissioning of these assets), a decrease in inventory of $12.6 million, an increase in accounts payable and accrued liabilities of $7.1
million, and an increase in accounts receivable of $2.5 million, when compared
to the previous period’s first quarter movement.
Investing activities in Q1 2013, totalled $122.7 million which was an increase of $47.4
million from Q1 2012. The additions to mineral interests and property, plant and equipment relate mainly to the additional expenditures incurred on the Updated Phase 4
Expansion Project ($69.5 million) and the KOV pre-strip ($25.3 million).
Financing activities were an outflow of $0.2 million in Q1 2013 (Q1 2012, $0.1 million)
consisting of financing costs on the Loan Facilities.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
14
6. Statement of Financial Position Discussion
March 31, 2013
$’000
December 31, 2012
$’000
Assets Cash and cash equivalents 45,117 56,955 Receivables 165,645 133,741 Inventories 484,223 435,894 Prepayments and other current assets 182,515 133,192 Mineral interests and property, plant and equipment 2,544,315 2,421,922 Other non-current assets 142,700 134,907
3,564,515 3,316,611
Liabilities Current liabilities 191,346 165,385 Customer prepayments 924,428 730,487 Loan Facilities 666,201 650,118 Other non-current liabilities 57,465 61,660
1,839,440 1,607,650
Total equity 1,725,075 1,708,961
Cash and cash equivalents / liquidity
The cash and cash equivalents balance at March 31, 2013 decreased to $45.1 million from $57.0 million at December 31, 2012. This is as a result of the movements discussed in item 5 under the
heading “Cash Flows”.
Receivables
As at March 31, 2013, the receivables balance of $165.6 million principally represents
outstanding balances for copper, cobalt and copper concentrate sales invoiced and other receivables mainly consisting of VAT input credits receivable. Copper, cobalt and copper
concentrate sales are made under various sales agreements. Sales are made at a provisional price
in the month of shipment with final pricing based on average prices at a specified period thereafter.
Inventories
Inventories increased to $484.2 million at March 31, 2013, from $435.9 million at December 31,
2012, primarily due to an increase in product inventories of $26.5 million and an increase in
consumables inventories of $21.9 million. Product inventories have increased in line with the increased production capacity. Consumables inventory has increased to support the Updated
Phase 4 Expansion Project.
Prepayments and other current assets
Prepayments and other current assets increased to $182.5 million at March 31, 2013, from $133.2
million at December 31, 2012, primarily due to an increase in prepayments as a result of payments for certain long-lead time items in respect of the Updated Phase 4 Expansion Project
and of mining equipment.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
15
Mineral interests and property, plant and equipment
Mineral interests and property, plant and equipment at March 31, 2013 increased to $2,544.3 million from $2,421.9 million at December 31, 2012, primarily due to operational capital
expenditures of $35.8 million, KOV pre-stripping and dewatering of $25.3 million, project related
capital expenditures of $73.5 million and capitalized borrowing costs of $22.6 million offset by depreciation and amortization expense of $33.0 million.
Other non-current assets
Other non-current assets increased to $142.7 million at March 31, 2013, from $134.9 million at
December 31, 2012, due to an increase in the net deferred income tax asset ($7.8 million).
Current liabilities
Current liabilities at March 31, 2013, have increased to $191.3 million from $165.4 million at
December 31, 2012. This is primarily due to an increase in trade payables, accruals and provisions of $25.5 million and an increase in the current portion of non-current liabilities of $0.4
million.
Customer prepayments
Customer prepayments at March 31, 2013 have increased to $924.4 million from $730.5 million at December 31, 2012. This is due to advance payments received on future sales and contractual
obligations to invoice upon shipment of goods from the mine site.
Loan Facilities
The Loan Facilities (refer to item 9) have increased from $650.1 million at December 31, 2012, to
$666.2 million at March 31, 2013, due to the accrual and capitalization of interest which is payable on maturity in December 2014. The Loan Facilities were provided by a Glencore Xstrata
subsidiary and incur interest at 10% per annum.
Other non-current liabilities
The other non-current liabilities consist of the Pas de Porte liability (an “entry premium”
obligation payable to La Générale des Carrières et des Mines (“Gécamines”) for access to the Project), the finance lease liability arising on the sale and leaseback of mining equipment and the
decommissioning and environmental provisions. Other non-current liabilities have decreased
from $61.7 million as at December 31, 2012, to $57.5 million as at March 31, 2013, due to the non-current portion of the Pas de Porte obligation decreasing by $2.5 million and the non-current
portion of the finance lease liability decreasing by $2.1 million. Additionally, the
decommissioning and environmental provisions increased by $0.5 million due to the accretion of
the provision for the period.
Off-Balance Sheet Arrangements
As at March 31, 2013, the Company had no off-balance sheet arrangements.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
16
7. Commitments
The following table summarizes the Company’s contractual and other obligations as at March 31,
2013.
(1) The capital expenditure commitments relate to the Updated Phase 4 Expansion Project.
Glencore Xstrata has indicated it will provide or procure the additional funding required for the completion of the Updated Phase 4 Expansion Project (refer to item 9).
(2) Pursuant to the terms of the Joint Venture Agreement (the “JVA” – refer to item 15), all
installations and infrastructures within the perimeter of the KCC concession area are being rented for an annual minimum royalty payment to Gécamines of $1.8 million.
(3) In order to meet the needs for additional and reliable electrical power for the development of
the mining activities of KCC, Mutanda ya Mukonkota Mining SPRL (“Mutanda”) and
Kansuki SPRL (“Kansuki”) (both related parties of the Company and part of the Glencore Xstrata group) entered into agreements with SNEL, to fund the Power Project. KCC will
fund $283.6 million for the Power Project commencing from the second quarter of 2013 to
the end of 2015 but will be reimbursed $189.1 million by Mutanda and Kansuki. Accordingly, KCC's net funding contribution will be $94.5 million, of which $4.5 million has
been funded during the year ended December 31, 2012 (included in other non-current assets
in the statement of financial position) and $ nil in the three months ended March 31, 2013. $261.8 million of this amount will be reimbursed by SNEL ("Debt Amount") via credits to
power bills payable by the Company and its affiliates. Interest will accrue at 6 months LIBOR
+ 3% on the Debt Amount from date of drawdown to date of reimbursement. SNEL will
retain ownership of the generation and transmission infrastructures throughout the duration of the Power Project and thereafter. Glencore Xstrata has indicated it will provide or procure
the additional funding required for the completion of the Power Project.
8. Contingent liabilities
The Company and its subsidiaries are subject to routine legal proceedings and tax audits. Whilst the Company cannot predict the results of any legal proceedings, it believes it has meritorious
defences against those claims. The Company believes the likelihood of any liability arising from
these claims to be remote and that the liability, if any, resulting from any litigation or tax audits,
individually or in aggregate, will not have a material adverse effect on its interim condensed consolidated earnings, cash flow or financial position.
The Company’s operations in the DRC are subject to various environmental laws and regulations. The Company is in material compliance with those laws and regulations. Environmental
contingencies are accrued by the Company when such contingencies are probable and reasonably
estimable. At this time, the Company is unaware of any material environmental incidents at its
operations in the DRC.
Refer to item 18 of this Management Discussion and Analysis.
Total Less than 1
year 1-3
years 4-5
years After 5
years
Payments due by period $’000 $’000 $’000 $’000 $’000 Capital expenditure
commitments(1) 177,058 177,058 - - -
Gécamines minimum royalty
payment(2) 21,600 1,800 5,400 3,600 10,800
Power Project(3) 90,017 47,414 42,603 - -
288,675 226,271 48,003 3,600 10,800
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
17
9. Liquidity and Capital Resources
As at March 31, 2013, the Company had cash and cash equivalents of $45.1 million (December 31, 2012 – $57.0 million) and a working capital deficiency of $238.3 million (December 31, 2013
working capital deficiency of $136.1 million).
In December 2011, the Company announced the execution of two loan facilities with a Glencore
Xstrata subsidiary with total available borrowing of up to $635.5 million (the “Loan Facilities”).
$120.0 million was provided to the Company during the year ended December 31, 2011, as a new
term loan facility (the “Term Loan”) to fund in substantial part the redemption of the Company's debentures.
On December 13, 2012, the second facility (the “Senior Facility”), making up the balance of the available borrowing and amounting to $515.5 million, was provided to a Company subsidiary
with the Company and other Company subsidiaries as guarantors, as a senior secured credit
facility to fund a portion of the Updated Phase 4 Expansion Project not covered by the Company's
cash flows. The $515.5 million includes principal of $497.5 million and $18.0 million interest accumulated from the dates of drawdown until December 13, 2012. The Company's 75% interest
in KCC (which holds the copper and cobalt project assets) has been pledged as security for the
Senior Facility along with certain other assets of the Company and its subsidiaries. As security for the Term Loan and additional security for the Senior Facility, the Company has agreed, if a
Loan Facility is in default, to complete a discounted rights offering with Glencore Xstrata or its
subsidiary providing a standby commitment, to repay the Loan Facility. In the case of the Senior Facility, a Glencore Xstrata subsidiary has agreed to exercise its right to compel the Company to
complete the discounted rights offering prior to realizing on Glencore Xstrata subsidiary's other
security. The Loan Facilities contain undertakings which restrict the Company’s and other
Company subsidiaries’ ability to (i) make acquisitions, (ii) grant loans, (iii) provide guarantees, (iv) pledge or dispose of their assets, as well as certain additional undertakings which are
customary for these type of transactions.
The Loan Facilities will mature on December 31, 2014, and interest is payable on any amount
drawn under the Loan Facilities at a rate of 10% per annum. The Loan Facilities balance is
comprised of the following:
March 31, 2013 $’000
December 31,
2012 $’000
Balance, beginning of the period 650,118) 119,501)
Changes during the period: )) ))
Loan Facility draw-down -) 497,501)
Deferred financing costs (220) (484)
Accretion 102) 360)
Interest capitalized and payable on maturity(1) -) 30,409)
Interest payable on maturity but not yet capitalized(1) 16,201) 2,831)
Balance, end of the period 666,201) 650,118)
(1) Interest is capitalized twice a year to the Loan Facilities and payable on maturity. The
amount of interest payable has therefore been split between interest capitalized and
interest payable but not yet capitalized to the Loan Facilities.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
18
The Company has in place a rigorous planning and budgeting process to help determine the funds
required to support the Company’s normal operating requirements on an ongoing basis and its
planned capital expenditures. The budgeting process included stress testing of the assumptions underlying the budget. It is anticipated that the Company’s existing cash balances, cash flow
from operations, existing credit and loan facilities and advances from Glencore Xstrata will be
sufficient to fund the operations, the Updated Phase 4 Expansion Project, the Power Project, the expenditure for the new SAG Mill and EW3 tankhouses for the next twelve months. Glencore
Xstrata has indicated it will provide or procure the additional funding required for the completion
of the Updated Phase 4 Expansion Project, the Power Project, the SAG Mill and the EW3
tankhouses. Further detail on the Company’s commitments can be found in item 7 and 18 of this Management’s Discussion and Analysis.
During the period ended March 31, 2013, the Company incurred $0.2 million financing costs on the Loan Facilities. During the year ended December 31, 2012, the Company drew down $497.5
million on the Senior Facility offset by $0.5 million deferred financing costs.
10. Accounting policies
The unaudited interim condensed consolidated financial statements have been prepared using the
same accounting policies and methods of computation as applied in the 2012 annual audited consolidated financial statements. The following new and revised standards and interpretations
were adopted as of January 1, 2013:
IAS 1, “Presentation of Financial Statements” (amendment);
IAS 16, “Property, Plant and Equipment” (amendment);
IAS 19 “Employee Benefits” (amendment);
IAS 27, “Separate Financial Statements” (amendment);
IAS 28, “Investments in Associates and Joint Ventures” (amendment);
IAS 32, “Financial Instruments: Presentation” (amendment);
IAS 34, “Interim Financial Reporting” (amendment);
IFRIC 20, “Stripping Costs in the Production Phase of a Surface Mine” (new);
IFRS 7, “Financial Instruments: Disclosure” (amendment);
IFRS 10, “Consolidated Financial Statements” (new);
IFRS 11, “Joint Arrangements” (new);
IFRS 12, “Disclosure of Interests in Other Entities” (new); and
IFRS 13, “Fair Value Measurement” (new).
The adoption of these new and revised standards and interpretations did not have a significant
impact on Katanga’s unaudited interim condensed consolidated financial statements.
11. Outstanding Share Data
(a) AUTHORIZED
An unlimited number of common shares with no par value.
(b) ISSUED AT MARCH 31, 2013
1,907,380,413 common shares.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
19
(c) SHARE OPTIONS
The following table reflects the continuity of share options during the years presented:
Number of share
options Weighted Exercise
Price per Share (2)
Outstanding at January 1, 2012 6,474,715) $6.49) Granted during the year 3,006,126) $0.97) Forfeited during the year (1,266,529) ($1.14) Expired during the year (1,000,000) ($14.97) Outstanding at December 31, 2012 7,214,312) $3.96) Granted during the period 2,607,466) $0.90) Forfeited during the period (516,848) ($1.33) Expired during the period (500,000) ($14.77) Outstanding at March 31, 2013 8,804,930) $2.59) (2)
Denominated in Canadian dollars.
During the period ended March 31, 2013, 2,607,466 share options were granted pursuant to the
Company’s share option plan with an average exercise price of Canadian $0.90. The values assigned to these options were calculated using the Black-Scholes valuation model with the
following assumptions: dividend yield 0%, risk free rate of return 0.42%, expected volatility
(based on historical volatility of the Company’s publicly traded shares) 80% and expected maturity of 3 years. The weighted average grant date fair value of each option was Canadian
$0.46 and the total fair value assigned was Canadian $1.2 million. The options vest on
February 15, 2016.
During the year ended December 31, 2012, 3,006,126 share options were granted pursuant to the
Company’s share option plan with an average exercise price of Canadian $0.97. The values
assigned to these options were calculated using the Black-Scholes valuation model with the following assumptions: dividend yield 0%, risk free rate of return 0.41%, expected volatility
(based on historical volatility of the Company’s publicly traded shares) 81% and expected
maturity of 3 years. The weighted average grant date fair value of each option was Canadian $0.50 and the total fair value assigned was Canadian $1.5 million. The options vest on
February 18, 2015 and May 17, 2015.
The Company did not declare or pay dividends to officers or employees for these share options.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
20
12. Related Party Transactions
Related parties and related party transactions not otherwise disclosed in these consolidated
financial statements include:
Galif Investments Limited (“Galif”), registered in Bermuda, is an aircraft management company
whose ultimate beneficial owner is Glencore Xstrata. During 2013 and 2012, Galif provided aircraft maintenance and auxiliary services to the Company.
Gécamines, a state owned and operated mining enterprise of the DRC, has a 25% non-controlling
interest in KCC. KCC is required to make royalty payments to Gécamines pursuant to the JVA. During the year ended December 31, 2012, KCC made an advance payment of $30.0 million net
to Gécamines to be set off from future royalty payments due until repaid. The balance still to be
set off as at March 31, 2013, amounted to $8.3 million (December 31, 2012 - $10.5 million).
Glencore Xstrata is the Company’s majority shareholder and is represented on the Board of
Directors of the Company. In November 2007, Glencore Xstrata’s wholly owned subsidiary,
Glencore International AG entered into a 100% off-take agreement for concentrate sales with the Company and commencing January 1, 2009, pursuant to additional off-take agreements, all
copper and cobalt metal produced are sold to Glencore International AG on market terms for the
life of any mines and plants operated, acquired and or developed by the Company in the DRC. The off-take agreements were entered into before Glencore Xstrata was a related party of the
Company. In December 2011, the Company entered into the Loan Facilities with total available
borrowing of up to $635.5 million, which was fully drawn down during 2011 and 2012.
Kansuki is a copper and cobalt development project located in the DRC. Glencore Xstrata
indirectly owns 37.5% of Kansuki. During the year ended December 31, 2012, the Company
commenced the Power Project with Kansuki (refer to item 7).
Kazzinc Limited (“Kazzinc”) is a zinc, lead and copper producer located in Kazakhstan and is a
69.6% owned subsidiary of Glencore Xstrata. During 2013 and 2012, the Company sold mining equipment to Kazzinc, in the normal course of business and on arm’s length commercial terms.
Mopani Copper Mine Plc (“Mopani”) is a copper and cobalt producer located in Zambia. Mopani is a 73.1% owned subsidiary of Glencore Xstrata. During 2013 and 2012, Mopani
supplied sulphuric acid and other consumables to the Company, and purchased concentrate from
the Company. In February 2011, the Company’s Board of Directors, including its independent
directors, unanimously approved entering into the 2011 oxide concentrate contract for sales to Mopani, in the ordinary course of business and on arm’s length commercial terms. In August
2012, the Company also entered into the 2012 sulphide concentrate contract for sales to Mopani,
in the ordinary course of business and on arm’s length commercial terms. In May 2012, the Company’s Board of Directors, including its independent directors, unanimously approved
entering into a contract for the sale by Mopani of copper electrowinning starter sheets to the
Company, in the ordinary course of business and on arm’s length commercial terms.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
21
Mutanda is a copper and cobalt producer located in the DRC. Mutanda is a 60% owned
subsidiary of Glencore Xstrata. There is an agreement in place for employees to use charter
flights operated by either company with associated costs invoiced. Additionally, during 2013 and 2012, Mutanda supplied medical services to the Company. These services were provided in the
normal course of business and on arm’s length commercial terms. During the year ended
December 31, 2012, the Company commenced the Power Project with Mutanda (refer to item 7).
Sable Zinc Kabwe Limited (“Sable”) is a copper producer located in Zambia and is a 100%
owned subsidiary of Glencore Xstrata. During 2013 and 2012, Sable purchased concentrate from
the Company. The Company’s Board of Directors, including its independent directors, unanimously approved entering into the 2012 oxide concentrate contract for sales to Sable, in the
ordinary course of business and on arm’s length commercial terms.
Xstrata Queensland Ltd (“Xstrata”) became a subsidiary of Glencore Xstrata on May 2, 2013,
upon the merger of Glencore International plc and Xstrata plc. During 2013 and 2012, Xstrata
provided mining equipment and services to the Company, in the normal course of business and on
arm’s length commercial terms.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
22
All transactions were in the normal course of business and recorded at exchange amounts. The
following table provides the total amount of the transactions entered into with these related
parties:
Three months ended
March 31,
2013 $’000
2012 $’000
Purchases from related parties
Galif 604 1,269
Gécamines 5,541 3,720
Glencore International AG(1) 35,481 13,816
Mopani 16,163 1,742
Mutanda 168 232
Xstrata 572 5,844
Sales to related parties
Glencore International AG 145,187 110,288
Kazzinc(2) 179 -
Mopani 10,509 24,400
Mutanda(3) 7 1,118
Sable 32,441 -
As at
March 31, 2013 $’000
As at
December 31,
2012 $’000
Amounts owed to related parties
Galif 379 791
Gécamines(4) 41,827 44,031
Glencore International AG(5) 1,596,341 1,382,807
Mopani 3,625 3,844
Amounts owed by related parties
Gécamines(6) 8,327 10,634
Glencore International AG 57,565 36,956
Kazzinc 535 715
Mopani 12,555 9,422
Mutanda 9 561
Sable 19,172 11,663
(1) Amount includes interest payable under the Loan Facilities. (2) Amounts included in cost of sales in the Operating Results as these arose on the disposal
of mining equipment. (3) Amounts included in cost of sales in the Operating Results as these are recoverable
charter flight costs which are netted against the underlying expense. (4) Amount includes Pas de Porte obligation. (5) Amount includes customer prepayments and Loan Facilities. (6) Amount includes prepayments.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
23
13. Financial Instruments
At March 31, 2013, and December 31, 2012, the Company’s financial instruments consisted of
cash and cash equivalents, receivables, accounts payable and accrued liabilities, other non-current liabilities and the Loan Facilities. With respect to all of these financial instruments, the Company
estimates that the fair value of these financial instruments approximates the carrying values at
March 31, 2013 and December 31, 2012, respectively.
The Company values instruments carried at fair value using quoted market prices, where
available. Quoted market prices represent a Level 1 valuation. When quoted market prices are not available, the Company maximizes the use of observable inputs within valuation models. When
all significant inputs are observable, the valuation is classified as Level 2. Valuations that require
the significant use of unobservable inputs are considered Level 3.
The following table outlines financial assets and liabilities measured at fair value in the
consolidated financial statements and the level of the inputs used to determine those fair values in
the context of the hierarchy as defined above as at March 31, 2013, and December 31, 2012:
Hierarchy Level
March 31, 2013 $’000
December 31,
2012 $’000
Cash and cash equivalents 1 45,117) 56,955) Receivables from provisionally priced sales
(1) 2 (3,593) (231)
(1) Open provisionally priced sales which retain an exposure to future changes in commodity
prices are marked-to-market based on the LME spot prices for copper and the Metal Bulletin
spot prices for cobalt offset by the contractual discount to the LME / Metal Bulletin price. As such, these receivables are classified within Level 2 of the fair value hierarchy.
The risks associated with these financial instruments and the policies on how to mitigate these risks are set out in item 18.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
24
14. Health, Safety, Community and Environment
In terms of the health and safety policy, there is explicit recognition of the importance of a safe
and healthy work environment, created as a result of joint responsibility between the Company,
its employees and contracting companies involved in work on the operating site. With a full
complement of qualified health and safety resources, the Company is actively developing and implementing procedures, practices, training, and audit protocols across its operation which
includes the implementation of an Occupational Health and Safety Management System
(“OHSMS”) which is based on OHSAS18001 and the establishment of an Emergency Response Team (“ERT”) and a mines rescue team trained to international standards. Additionally, during
2011, Katanga completed the construction of an on-site hospital designed to provide medical and
occupational health services to all employees, contractors and their dependents.
In the period after March 31, 2013, a fatality occurred during the maintenance of equipment.
There were two fatalities in the year ended December, 31 2012, one as a result of sampling whilst
a machine was operating and one as a result of inappropriate mobile fleet use by a contractor. It is the Company’s policy in such instances to provide assistance and support directly to the families
affected and to investigate the accidents with our internal safety personnel and local government
officials to determine if additional measures should be taken by the Company to prevent any reoccurrence.
In March 2008, the Company’s consultants completed a draft Environmental & Social Impact
Assessment (“ESIA”) which is supported by a series of Environmental & Social Management Plans. This ESIA was carried out on a project description that envisaged a full build-out to
increase the production to in excess of 300,000 tonnes per annum of copper production.
Arrangements were subsequently made to review the draft ESIA based on the Accelerated Development Plan, the updated technical report and in consideration of DRC legal requirements
and to re-draft an Environmental Impact Study (“EIS”). Public consultation was completed on
April 15, 2010. The EIS was submitted to the DRC authorities for approval in January 2011. Through the Department for the Protection of Mining Environment, the DRC Ministry of Mines
approved the EIS in March 2011 and as a consequence, the Company has commenced all
necessary steps required to comply with its environmental commitments referenced in the EIS
and its Environmental and Social Management Plans.
Decommissioning and environmental provisions
Decommissioning and environmental provisions arise from the acquisition, development,
construction and normal operation of mining property, plant and equipment due to government
controls and regulations that protect the environment on the closure and reclamation of mining properties.
The decommissioning and environmental provisions are calculated at the net present value of
estimated future cash flows of the reclamation and closure costs which total approximately $138.5 million (undiscounted) and are required to satisfy the obligations over the next 19 years.
A risk-adjusted discount rate of 14% was applied to the expected future cash flows to determine
the carrying value of the provisions.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
25
The following table details the items that affect the decommissioning and environmental
provisions:
As at
March 31, 2013 $’000
As at
December 31,
2012 $’000
Provisions, beginning of the period 12,467 12,144)
Accretion 459 1,608)
Charged to cost of sales 9 35)
Revision to estimate(1) - (1,320)
Provisions, end of the period 12,935 )112,467)
(1) As at March 31, 2012, the Company reassessed its decommissioning and environmental
provisions due to the completion of its 2012 ITR (refer to item 16). This resulted in a
$1.3 million decrease in the provisions.
15. Joint Venture Agreement
The amended JVA was signed with Gécamines on July 25, 2009, and all provisions remain
consistent with those described in the Company's Annual Information Form for the year ended December 31, 2012, dated March 28, 2013, which is available under the Company’s profile on
SEDAR at www.sedar.com.
16. Technical report
The Company filed its 2012 ITR on March 30, 2012, that covers the mineral reserves and mineral
resources (as defined by National Instrument 43-101 of the Canadian Securities Regulators) and operations of the Company’s operating subsidiary in the DRC, KCC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
26
17. Disclosure Controls and Procedures and Internal Control over Financial Reporting
Disclosure control and procedures have been designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company’s management as
appropriate to allow timely decisions regarding required disclosure.
The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are
responsible for establishing and maintaining disclosure controls and procedures (DC&P) and
internal controls over financial reporting (ICFR), as those terms are defined in National
Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the Company.
The CEO and CFO have concluded that, as at March 31, 2013, the Company’s DC&P have been designed effectively to provide reasonable assurance that (a) material information relating to the
Company is made known to them by others, particularly during the period in which the annual
filings are being prepared; and (b) information required to be disclosed by the Company in its
annual filings, interim filings or other reports filed or submitted recorded, processed, summarized and reported within the time periods specified in securities legislation. They have also concluded
that the Company’s ICFR have been designed effectively to provide reasonable assurance
regarding the reliability of the preparation and presentation of the financial statements for external purposes and were effective as at March 31, 2013.
It should be noted that while the Company’s CEO and CFO believe that the Company’s disclosure controls and procedures provide a reasonable level of assurance that they are effective,
they do not expect that the disclosure controls will prevent all errors and fraud. A control system,
no matter how well conceived or operated, can only provide reasonable, not absolute, assurance
that the objectives of the control system are met.
Internal controls over financial reporting are designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of the financial statements for external reporting purposes in line with IFRS. Management is responsible for establishing and maintaining
adequate internal controls over financial reporting appropriate to the nature and size of the
Company. However, any system of internal control over financial reporting has inherent limitations and can only provide reasonable assurance with respect to financial statement
preparation and presentation.
The Company uses the Committee of Sponsoring Organizations of the Treadway Commission control framework. There were no changes to the Company’s internal controls over financial
reporting that occurred during the period ended March 31, 2013 that materially affected, or are
reasonably likely to affect, the Company’s internal controls over financial reporting.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
27
18. Risk Factors
The risks associated with the financial instruments (set out in item 13) and the policies on how to mitigate these risks are set out below. Management manages and monitors these exposures to
ensure appropriate measures are implemented on a timely and effective manner. The Company
does not enter into or trade financial instruments including derivative financial instruments, for speculative purposes.
Credit risk
The Company’s credit risk is primarily attributable to short-term deposits, trade receivables from
copper, cobalt and concentrate sales and other receivables mainly consisting of value added tax
input credits receivable. The Company has a concentration of credit risk with all sales to four customers, which is closely monitored by management. Three of the four customers
(representing 99% of the trade receivables from copper, cobalt and concentrate sales balance at
March 31, 2013) are related parties of the Company (refer to item 12). The value added tax input
credits are receivable from the tax authorities in the countries in which the Company operates and the collection thereof is closely monitored by management. The majority of the Company’s cash
and cash equivalents are on deposit with banks or money market participants with a Standard and
Poor’s rating of BBB or greater in line with the Company’s treasury policy.
Market risk
(a) Interest rate risk
The Company has cash balances, the Loan Facilities and financing received through customer
prepayments as at March 31, 2013, and December 31, 2012. The Loan Facilities have a fixed interest rate of 10% and the financing received through customer prepayments incurs interest at a
floating interest rate of 3 month LIBOR plus 3%. If the interest rate charged on the Company’s
outstanding floating rate debt at March 31, 2013, were to increase or decrease by 50 basis points, the increase or decrease in the interest cost for the period ended March 31, 2013 would be
approximately $0.9 million (period ended March 31, 2012 – $0.4 million).
(b) Foreign currency risk
The Company’s functional currency is the U.S. dollar. Sales are transacted in U.S. dollars and the
majority of major purchases are transacted in U.S. dollars and South African rand. The Company maintains the majority of its cash and cash equivalents in U.S. dollars but it does hold balances in
South African rand, British pounds, Canadian dollars, Swiss franc, Congolese franc and Euros
(for future expenditures which will be denominated in these currencies). The Company has not entered into any derivative instruments to manage foreign exchange fluctuations; however,
management monitors foreign exchange exposure.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
28
The carrying amounts of the Company’s foreign currency denominated monetary assets and
monetary liabilities at the respective dates of the statement of financial position are as follows:
Assets Liabilities
March 31, December 31, March 31, December 31,
As at 2013
$ 2012
$ 2013
$ 2012
$
Assets
South African rand 1,381 676 1,381 (8,379)
British pounds 578 615 -) -)
Canadian dollars 432 318 (121) (47)
Swiss franc 31 146 (1) (4)
Congolese franc 8,997 35 (476) (1,985)
Euros 1,304 78 (4,906) (1,248)
12,018 2,573 (13,883) (12,364)
If the U.S. dollar moved by plus or minus 5% at March 31, 2013, the unrealized foreign exchange
gain or loss would move by approximately $0.1 million (year ended December 31, 2012 – $0.5 million).
Commodity risk
The Company sells copper, cobalt and concentrates at prevailing market prices. Under certain
revenue contracts, final pricing adjustments are made after delivery to customers. The Company
is therefore exposed to changes in commodity prices of copper and cobalt both in respect of
future sales and previous sales which remain open to final pricing.
The Company has not used any commodity price derivatives in this or the prior year. There is
currently no intention to hedge future copper and cobalt sales.
As at March 31, 2013, the Company had 7,278 tonnes of copper (March 31, 2012 – 3,121 tonnes),
191 tonnes of cobalt (March 31, 2012 – 345 tonnes) and 29,462 tonnes of concentrate sales (March 31, 2012 – 29,964 tonnes) for which final commodity prices have yet to be determined.
These were valued at March 31, 2013, at a closing commodity price net of contractual discounts
of $7,328 per tonne for copper (March 31, 2012 – $8,264 per tonne), $22,636 per tonne for cobalt
(March 31, 2012 – $28,069 per tonne) and $1,094 per tonne for concentrate (March 31, 2012 – $909 per tonne) (amounts in whole numbers). A 5% plus or minus movement in the copper price
at March 31, 2013 would result in a $4.2 million change to revenue and trade receivables (period
ended March 31, 2013 – $2.6 million). A 5% plus or minus movement in the cobalt price at March 31, 2013 would result in a $0.2 million change to revenue and trade receivables (period
ended March 31, 2013 – $0.5 million).
Liquidity risk
It is anticipated that the Company’s existing cash balances, cash flow from operations, existing
credit and loan facilities and advances from Glencore Xstrata will be sufficient to fund the
operations, the Updated Phase 4 Expansion Project and the Power Project for the next twelve months. Glencore Xstrata has indicated it will provide or procure the additional funding required
for the completion of the Updated Phase 4 Expansion Project, the Power Project, the expenditure
for the new SAG Mill and EW3 tankhouses. It is expected that the existing customer prepayments as at March 31, 2013 will be rolled into a long-term facility, the terms of which are
under discussion.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
29
The following table details the Company’s expected remaining contractual maturities for its
financial liabilities at March 31, 2013. The table is based on the undiscounted cash flows of
financial liabilities based on the earliest date on which the Company can be required to satisfy the liabilities.
As at March 31, 2013 6 months
or less 6 to 12 1 to 2 Over months years 2 years Total
Accounts payable and accrued
liabilities 152,427 - - - 152,427 Loan Facilities – related parties - - 791,754 - 791,754
Other non-current liabilities Pas de Porte obligation - 15,000 15,000 30,500 60,500 Finance lease liability - - 9,071 7,286 16,357
Current portion of finance lease liability 4,855 4,979 - - 9,834
157,282 19,979 815,825 37,786 1,030,872
As at December 31, 2012 6 months
or less 6 to 12 1 to 2 Over months years 2 years Total
Accounts payable and accrued
liabilities 126,935 - - - 126,935 Loan Facilities – related parties - - 791,632 - 791,632
Other non-current liabilities 0 Pas de Porte obligation - 15,000 15,000 30,500 60,500 Finance lease liability - - 10,205 8,703 18,908
Current portion of finance lease
liability 4,855 4,855 - - 9,710
131,790 19,855 816,837 39,203 1,007,685
Other risks
The Company is exposed to other risks during its course of business and these are discussed in
detail in the Company’s Annual Information Form which is available on SEDAR at
www.sedar.com and should be reviewed in conjunction with this document.
The financial information in this Management’s Discussion and Analysis has been prepared using
the same accounting policies and methods of computation as applied in the Company’s 2012 annual audited consolidated financial statements and no updates are required for the key
accounting judgments and estimates.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
30
19. Forward Looking Statements
Management’s discussion and analysis may contain forward-looking statements, including, but not limited to, the increase in copper and cobalt production levels, the anticipated decrease in
power disruption relating to the upgrade in power infrastructure, the matters relating to the Power
Project, the matters relating to the Senior Facility and other potential loan transactions with Glencore Xstrata or its subsidiaries, the mechanical completion of the Updated Phase 4
Expansion Project, the completion of the upgrade in power infrastructure, the commencement of
mining at the extension to the T17 Open Pit and the completion of the feasibility study for the
potential T17 underground mine. 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.
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. Such factors include,
among others, the actual results of current exploration activities; actual results and interpretation of current reclamation activities; conclusions of economic evaluations; changes in project
parameters as plans continue to be refined; future prices of copper and cobalt; possible variations
in ore grade or recovery rates; failure of plant, equipment or processes to operate as anticipated; accidents, labour disputes and other risks of the mining industry; delays in obtaining
governmental approvals or financing or in the completion of exploration, development or
construction activities, delays due to strikes or other work stoppage, both internal and external to
the Company as well as those factors disclosed in the Company's current annual information form and other publicly filed documents. 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.
20. Qualified Person
Tim Henderson, Technical Consultant to the Company, is the ‘Qualified Person’, as defined in
National Instrument 43-101, who approved the scientific and technical disclosure in this
Management’s Discussion and Analysis.