African Copper On The Ropes At Mowana

VANCOUVER — A massive value writedown for its brand new Mowana copper mine in Botswana, depressed copper prices, and a share price barely off the floor has put African Copper (ACU-T, AFNCF-O) in a tough spot: the company needs to raise US$15 million by the middle of January.

To raise such a large sum of money in a tight market, African Copper is calling an extraordinary shareholder meeting to ask for permission to issue 750 million shares. The issuance would increase shares outstanding by 511%.

The company says it needs the money to meet its immediate working capital needs. If it cannot raise the sum, it “is unlikely that the company will be able to meet its obligations and continue as a going concern,” according to a statement.

The details of the placement have not yet been decided, which means the price and exact number of shares is yet to be determined. African Copper says the minimum price at which shares will be issued is one pence, which is roughly equal to 2¢.

What got the company into this sorry predicament? Over the last two years, African Copper has spent $146 million developing the Mowana mine in Botswana, which produced its first copper concentrate in July and shipped its first load in October.

The company faced a slew of delays in getting Mowana to production and then initiating shipments, including late delivery of component parts and failures in new equipment, including major crusher components and mill bearings.

Now the mine is operational, but copper prices are way down and the delays have already reduced the 2008 production forecast to 1,500 tonnes of copper, half of what it was initially. In addition, the company’s shares are currently trading at just 1.5¢ and at the end of September the company had a working capital deficit of 600,000.

African Copper expects to begin receiving proceeds from copper concentrate sales imminently and it recently exercised and sold its copper put options, which generated proceeds of US$4.75 million. Those upsides, however, are dwarfed by the destruction of value for the company’s key asset.

At the end of the third quarter, the company wrote down the carrying value of the Mowana mine and its related plant and equipment by 50% or 41.6 million. The company did not have enough information to perform a full impairment review in time for the quarterly financials but plans to complete a full review as part of the year-end audit.

The writedown reduced African Copper’s net assets to less than half of its called up share capital. That requires the company to convene an extraordinary general meeting for shareholders to approve the board’s plans for addressing the situation.

Those plans capitalize on an improved understanding of the Mowana deposit developed through open-pit mining, as well as the operational flexibility offered by the size and grade of current stockpiles and by the 1.5 km of exposed ore in the pit. They also make use of the potential to open-pit mine newly identified mineralization in nearby areas. The company’s new plan for Mowana has seven steps.

First, the company plans to process ore from existing stockpiles in the near term, in order to reduce the mining rate. Second, mining that is ongoing will focus on the highest-grade segments of the exposed ore strike via smaller-scale interim pits. Each interim pit will be mined for 18 months and will carry a strip ratio of only 2:1. Combined, the small-scale pits will produce 1.3 million tonnes averaging 1.3% copper.

Third, African Copper plans to negotiate with the existing mining contractor for a temporary suspension of operations and thereafter, a reduction in the size of the mining fleet, both of which should reduce the mining cost per tonne. Fourth, African Copper had planned on developing a 300-tonne-per-day dense media separation (DMS) plant during the first quarter of 2009 to increase feed grade and production levels. Those plans are now postponed. Instead, the company wants to purchase or lease a 50- tonne-per-hour DMS facility to use during 2009 and 2010.

Fifth, African Copper will assess the potential to access low-cost mine feed from satellite pits. The outcrop exposure at the nearby Thakadu zone lends itself to a small-scale operation with limited overhead; the zone also carries significant silver credits. And the company plans to optimize the grade recovery circuit to maximize recovery, while also reducing general, administrative, and exploration costs.

African Copper also owns the 3,800-sq.-km Matsitama exploration concession. Within the mega property, the company has prospected 2,000 sq. km and identified 207 first priority areas of interest. Exploration activities have, however, been significantly curtailed because of the company’s financial position.