Katanga and Nikanor to form African copper giant

Katanga Mining (KAT-T, KATFF-O) and Nikanor (nkr-l) are planning a merger that would create Africa’s biggest copper producer and become the world’s biggest cobalt producer by 2011.

The $2.1-billion cash-and-stock deal will see the smaller Katanga acquire Nikanor at a discount.

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

“We’re putting together something that was essentially in this form for most of its historic production,” Arthur Ditto, Katanga’s 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, which will retain the Katanga Mining name.

The deal will see 0.613 of a new Katanga share and $2.16 in cash exchanged for each Nikanor share, and will leave Nikanor shareholders with 60% of the new company and Katanga shareholders with the remainder. The combined company will have a market capitalization of roughly $3.3 billion. The merger should close in the first quarter of 2008.

News of the deal had Katanga’s share price climbing by 38%, narrowing what had been a 23% discount based on the Nov. 5 closing prices of the two companies.

That discount was down to 5% at presstime, as the offer was worth US$12.29 for each Nikanor share.

In Toronto, on news of the deal, Katanga shares gained 39% or $4.55 to $16.30 on 5.1 million shares traded; Nikanor shares were up 5.4% to US$12.94.

While he cautioned that it’s still too early for hard numbers, Ditto estimated that combining the companies would bring savings of roughly $700 million in operating and capital costs, and through improved metals recoveries.

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

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

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

As for political risk in the DRC — which became the focus of investors on the recent leak of a government report that said some 38 mining contracts in the country could be renegotiated — Ditto said Katanga’s and Nikanor’s licences are secure and pointed to comments made by DRC Mines Minister Martin Kabwelulu as evidence.

Kabwelulu, quoted in Katanga’s press release, said the government supports the merger, which would help develop the DRC’s mining sector. The country hosts 10% of the world’s copper reserves, but accounts for less than 1% of copper production.

The Nikanor-Katanga merger news comes about two months after Central African Exploration and Mining Co. (Camec) (ceamf-o, cfm-l) withdrew its all-share offer for Katanga after Camec’s stock price tanked on news that the DRC government had revoked several of its mining licences.