Katanga seen as prized asset in global hot spot Congo; Attracts...

Katanga seen as prized asset in global hot spot Congo; Attracts Takeover Offer
Peter Koven
Financial Post

10 July 2007

Source courtesy 2007 National Post

With an improved political environment and an unprecedented run-up in metal prices, the Democratic Republic of Congo has become one of the hot spots of global mining, and Toronto-traded Katanga Mining Ltd. is one of the prized assets.

In the past decade, Arthur Ditto, Katanga chief executive, was one of the rare people who believed in mining in the Congo.

As the country suffered through political unrest and a devastating civil war, Mr. Ditto got Katanga Mining, which is based in London, off the ground, not knowing if the environment would ever improve enough to make a mining operation feasible.

"By the time we got government approvals, conditions had started to evolve there so that we could do something in the public security markets. And that's how we decided to proceed with financing the business and getting it set up to go," Mr. Ditto said in an interview yesterday.

The company has received a $1.6-billion takeover offer from London-based Central African Mining & Exploration Co. PLC, which operates in the Congo.

Parts of the country remain violent, and political risk is considered high. But with base-metal producers in developed countries rapidly disappearing, it is seen as an increasingly viable option.

"The copper resources in the Congo are second to none," said Haywood Securities analyst Kerry Smith. "If you wanted to build a big copper company from nothing, that's where you'd go."

Industry experts said yesterday the Katanga offer could start a wave of consolidation of mining companies in Central Africa. Others mentioned include Anvil Mining Ltd. and Equinox Minerals Ltd. Shares of both companies have been on a tear in recent months.

"There are a lot of high-quality deposits held by very small companies that are ripe for the picking," said George Topping, an analyst at Blackmont Capital.

The all-stock offer for Katanga was not a surprise, as CAMEC built up a 22% stake in the company in recent months. It also has an irrevocable lock-up agreement to obtain another 6%.

Industry experts said it makes sense to put the two miners together, as it would dramatically improve the production profile and lead to a better valuation from the market. Also, fixed costs for items like transportation and security are very high in the Congo. Combining the companies could reduce those costs.

The offer values Katanga at $20.89 a share, but Katanga closed nearly $4 above that level yesterday and analysts said rival bids are possible. However, they would be difficult since CAMEC already has a head start. Also, Katanga is not thought to be big enough to interest international giants like BHP Billiton PLC.

"If CAMEC wants to be difficult about it, they can certainly make it difficult for someone else to take the company," Mr. Topping said.

The wild card that will influence the bidding process is George Forrest, Katanga vice-chairman. Mr. Forrest holds a 24% stake in the company, and has not made any public statement about what he wants to do with it. CAMEC did not disclose whether it has spoken with him.

"My read on it would be that Forrest is a Congolese guy," Mr. Smith said. "If CAMEC says its vision is to merge with Katanga and make a bigger Congo-focused company, something like that might appeal to him. It's a patriotic thing."