Diversified miner Glencore’s Katanga Mining subsidiary has settled its legal dispute with Democratic Republic of Congo (DRC) State-owned trading and mining company La Générale des Carrières et des Mines (Gécamines).
The dispute arose as a result of a capital deficiency at Katanga’s 75%-owned DRC operating subsidiary Kamoto Copper Company (KCC).
Glencore has agreed to write off $5.6-billion of debt, converting it into new KCC equity, to safeguard the joint venture between Katanga and Gécamines in the DRC, which is set to become the world’s largest producer of battery materials.
KCC is expected to produce 34 000 t of cobalt and 300 000 t of copper in 2019.
The debt-for-equity swap will plug a capital shortfall at KCC and end the dispute with Gécamines.
This follows after Gécamines initiated legal action in April to dissolve KCC and take control of its mining licences, claiming that Glencore had failed to reduce billions of dollars of intercompany loans, which reduced KCC’s ability to pay dividends.
Katanga and Gécamines’ shareholdings in KCC remain unchanged at 75% and 25% respectively.
The agreement will see KCC’s debt decrease from more than $9-billion to $3.4-billion.
Additionally, Katanga has agreed to make a one-off payment to Gécamines of $150-million that relates to historical commercial disputes, as well as $41-million to cover expenses incurred as part of an exploration programme.
Gécamines will also be freed of an obligation to repay $57-million in contractor costs and to replace or provide financial compensation for mineral reserves valued at $285-million.
In return, Gécamines will end its legal action.
Goldman Sachs commented that the settlement is a positive for Glencore. “The net cash outflow for Glencore is less than $200-million. Additionally, our thinking initially on a potential resolution had been that Glencore may have to write off the entire $9-billion intercompany loan which had been extended to KCC.”
Goldman added that the agreement allows Glencore to recoup about $3.5-billion of its intercompany loan – albeit at a slower pace.
The agreement removes the risk of the asset being taken away from the company given it had been in violation of the capital deficiency clause.
“As such, this should be taken positively by the market especially given that the shares had been underperforming peers despite a material rally in the commodity price basket of Glencore,” Goldman stated.
BMO Capital Markets weighed in, stating that the impact on its forecasts (and likely consensus forecasts) will be negligible given that Katanga is fully consolidated by Glencore. “There will be a slight increase in minorities, but we do not model inter-company debt repayment cash flows to the level that the restructuring will be noticeable at the group level.”
“This settlement has its positives and negatives; it cements Katanga and Glencore’s ownership in the DRC operations, whereas the market might have been expecting a worse outcome; on the negative side, this situation came about because Gécamines itself refused to finance the refurbishment of the operations, which pushed KCC into the negative equity situation," BMO added.
Additionally, Gécamines has been able to profit from that situation. Countering this, the settlement should ensure that this situation can not arise again, meaning that Kantanga/Glencore’s interests are protected going forward.
Comment from Credit Suisse was that while $5.6-billion seems a lot to effectively write off to hold on to the asset, this is not cash Glencore has directly put into the asset; much of it corresponds to debt held at the asset when Glencore purchased it and also capitalised interest to the tune of $3.6-billion.
The agency states since purchasing, has put closer to $3.5-billion to $4-billion into the asset, of which $3.4-billion will still be owed to them after this deal. This suggests that the direct write-off impact is more limited (less than $400-million).
"The market should be pleased that the future of one of the company's key growth assets has been secured."