TORONTO (miningweekly.com) – Shareholders in Katanga Mining have approved an increase in the authorised share capital of the company, effectively giving the go-ahead for a convertible loan from shareholder Glencore International.

The two companies confirmed later on Monday that the loan had been extended, and would be available immediately to Katanga and its subsidiaries in the Democratic Republic of Congo, after shareholders at a meeting in Toronto agreed to the increase in the firm's authorised share capital from 300-million to 5-billion shares.

"Given such difficult and unprecedented conditions in the capital and commodities markets, we appreciate that Glencore has stepped in to provide a lifeline of financial support enabling Katanga to continue in the near-term," said Katanga chairperson Hugh Stoyell.

The copper- and cobalt-miner announced on December 24 that 8,5% shareholder Glencore had agreed to underwrite a $100-million loan facility, as well as an amendment to an existing $165,3-million loan provided by Glencore.

Katanga is consolidating, rehabilitating and expanding the neighbouring Kamoto and KOV operations in the DRC, after merging with rival Nikanor last year, but investors have been wary of the stock because of uncertainty generated by the mining contract review in the African nation, and, most recently, cash flow has taken a big knock because of slumping metals prices.

The company, which had already scaled back its operations to cushion the effects of low metals prices, cautioned late last year that it required additional funding "on an urgent basis" to stay afloat.

However, survival comes at a price, as the company's stock will be severely diluted and Glencore could end up owning as much as 88% of Katanga if Glencore is the only lender in the facility when it is converted to equity.

Katanga will still need to raise another $250-million in debt or equity finance, or a combination of the two, during the first six months of this year and, once the company has raised the $250-million, the full amount of the $265,3-million facility will be mandatorily converted.

Glencore and Katanga will now have until February 9 to approach other investors to participate in the facility for up to three-quarters of the initial financing, which, if successful, would then leave Glencore with a stake of about 22% in Katanga after the conversion.

"The management team and board will continue to actively seek the participation of eligible investors by the second closing on the ninth of February," said Stoyell.

"These are challenging times for the company but we remain confident that existing shareholders and new investors will recognise the long-term value and prospects of our core asset base."

In a research note last week, RBC Capital Markets analyst Cailey Barker commented that, although the Glencore funding would rescue Katanga from financial distress, "the impact is highly dilutive and puts Katanga at risk of becoming majority owned by Glencore".

Nevertheless, he recommended that shareholders approve the increase in authorised share capital.

"We believe Katanga is at risk of administration in the absence of other funding," Barker added.

Shares in TSX-listed Katanga fell 10,6% on Monday, to C$0,38 apiece by 15:52 in Toronto.

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