Katanga and Nikanor to form African copper powerhouse

Katanga Mining (KAT-T) and Nikanor (NKR-L) plan to create Africas biggest copper producer and the worlds biggest cobalt producer by 2011.

The two companies will pull of the feat by consummating a $2.1 billion deal that will see the smaller Katanga acquire Nikanor at a discount, and maintain the Katanga name.

Both companies have their key projects near the town of Kolwezi in the southeastern copperbelt of the Democratic Republic of the Congo (DRC).

Were putting together something that was essentially in this form for most of its historic production, Arthur Ditto, Katangas president and chief executive said in a conference call. It just makes eminent sense in that way.

Ditto is slated to lead the combined company.

The deal which should close in the first quarter of 2008 — will see Nikanor shareholders get 0.613 of a new Katanga share and $2.16 cash for each of their Nikanor shares and will leave Nikanor shareholders with 60% of the new company and Katanga shareholders with the remaining 40%. The combined company will have a market capitalization of roughly $3.3 billion.

News of the deal had Katangas share price climbing to the tune of 38%, thus narrowing what was a 23% discount based on the Nov. 5 closing prices of the two companies.

The discount was down to 5% at press time as the offer would be worth US$12.29 for each Nikanor share.

In Toronto after the proposed deal was announced, Katanga shares gained 39% or $4.55 to $16.30 on 5.1 million shares traded, while Nikanor shares were up 5.4% to US$12.94.

While he cautions that its still too early for specific numbers Ditto estimates that combining the companies will bring savings of roughly $700 million in operating costs, capital expenditure and through improved metals recoveries.

The new company will target the production of roughly 400,000 tonnes of copper and 40,000 tonnes of cobalt per year by 2011 numbers that would make the mine the world fourth largest behind Escondida, Codelco Norte and Grasberg.

Ditto says 78% of Nikanor shareholders — including Swiss-based Glencore — and 48% of Katanga shareholders have agreed to the deal.

While the new company be initially be listed in Toronto, it will seek a primary listing in London, Ditto says.

As for political risk in the DRC risk that became the focus of investors on Nov. 5 after a government report was leaked saying some 38 mining contracts in the country could be renegotiated Ditto says Katangas and Nikanors licences are secure and pointed to comments in the press release from the minister of mines as evidence.

With 10% of the world’s copper reserves but less than 1% of its production Mines Minister Martin Kabwelulu said the merger would address the shortfall and showed the confidence of the business community in the future of mining in the DRC. He said the government fully supports the merger.