Update: Congo helps sink Central African’s bid for Katanga

Only two days after launching an all-share bid to take over Katanga Mining (KAT-T), Central African Mining & Exploration Co.s (CFM-L) efforts seem to have been in vain after the bidders shares plummeted on news that one of its operating licences was revoked in the Democratic Republic of the Congo (DRC).

Central African issued a release on Aug. 31 that said a Congolese public prosecutor had issued a revocation order on a permit for area C19 but that its operations in the DRC had not been served any official documents.

The London Stock Exchanges Alternative Investment Market halted trading in the companys shares on Aug. 31 after more than 89 million shares changed hands on the rumour the day before.

Once trading resumed, and another 44 million shares were traded, the stock closed at 36.25 pence (about C77), a drop from about 48 pence (C$1.04) when Central African offered 17 shares for each share of Katanga on Aug. 29. That valued Katanga at roughly $1.5 billion or $17.80 per share.

The bid is now worth about $1.1 billion or C$13.09 per share. Katanga closed up 50, to $20.30 on 655,795 shares traded on Aug. 31. That puts Katangas market cap at around $1.7 billion.

Central African said the permit problems are part of a larger scheme to thwart its bid.

There is no legal basis for the removal of any of our licences in the DRC. This is clearly an attempt to destabilize Central African Mining and Explorations share price in relation to our offer for Katanga, said Central African CEO Andrew Groves, in a release.

Central African said it’s investigating bringing “international arbitration proceedings” against the DRC government.

Central African holds a 75% interest in three large copper concessions in Katanga state: 467, 469 and Mukondo. It purchased the interest by issuing shares to dodgy Zimbabwean businessman Billy Rautenbach, who headed Central African’s 25% partner, Congolese mining agency Gnrale des Carrires et des Mines (Gcamines) from 1998 to 2000.

Central African also owns a solvent extraction-electrowinning facility at Luita, Katanga.

Central African said it has the support of shareholders owning 32% of Katanga, in addition to the 22% in its pocket — but its hard to believe those shareholders would still be onside in light of recent events.

But Katanga couldnt formally acquire that 32% interest without triggering a poison pill that Katanga put through in July, a move that seems to be paying off. The shareholders rights plan allows the company to block stake-building by a hostile bidder by issuing new shares to different investors.

Central African is trying to get the poison pill removed. A vote is planned but not until an extraordinary general meeting, slated for Nov. 2.

Meanwhile, Katanga had assembled a committee to review Central Africans hostile bid.

“We advise shareholders to take no action until we provide them with a directors’ circular containing a comprehensive recommendation of the board,” said Arthur Ditto, chairman, president and CEO of Katanga, in a release.

If Central African wins the day, and follows Katangas plan to be an integrated copper-cobalt producer, Central African could become one of a handful of companies with a mine with a large resource base, a smelter and refinery — producing both refined copper and cobalt.

Central African would have annual production capacity of 250,000 tonnes copper by 2011 and around 20,000 tonnes cobalt annually but only if the bid succeeded.

Katanga is developing and refurbishing the Kamoto copper-cobalt mine complex in the DRC, considered one of the countrys prized mining assets. The first copper from Kamoto should be shipped in December. At full production, slated for 2011, the operation will produce 150,000 tonnes of refined copper and 8,000 tonnes of refined cobalt each year.

Katanga may still need to solicit another bid as development costs continue to mount in the DRC. Katanga has opened its electronic “data room” to such friendly takeover partners as mining titan Anglo American (AAUK-Q, AAL-L) and London-based Nikanor (NKR-L).

David Davidson, an analyst with Paradigm Capital in Toronto, says Katanga was hoping to get a loan — something in the range of $150-$250 million — to fund ongoing development of Kamoto but several banks got cold feet once Central African started hinting at a takeover bid in July.

(Katanga) needs funding pretty quickly, says Davidson. And its hard to get banks onside when youre in a takeover position. So theyre quite vulnerable.

Katanga has some support in the Congolese government.

In May, Victor Kasongo, the DRCs deputy mines minister, made public comments against Central African over its links with Rautenbach.

South African authorities were seeking Rautenbach’s extradition from Zimbabwe to answer charges of fraud at the South African operations of Korean car maker Hyundai.

Davidson sees and Swiss metals titan Xstrata (XTA-L) as a possible white knight, of which about 35% is held by another Swiss commodities trader, Glencore International.

Glencore also owns 25% of Nikanor, which is developing the KOV copper-cobalt mine in the DRC, as well as a refinery.

Another option is a little closer to home in Lundin Mining (LUN-T, LMC-X), owner of the giant Tenke Fungurume copper-cobalt deposit, in the DRC.

It wouldnt scare off someone like (Lundin chairman) Lukas Lundin, for instance. Lundins already got a very large foothold there with their interest in the Tenke project, which is just down the road, suggests Davidson.