Camec selling the family silver through lack of copper and cobalt (Source: Mineweb)
A forensic examination of the factors contributing to the failure of Camec’s bid for Katanga Mining.
Author: Barry Sergeant
Posted: Tuesday , 18 Sep 2007
Following its failed bid for Katanga Mining (KAT.T, C$18.05), Central African Mining & Exploration Company (Camec, CFM.L, £0.25) has started selling its only real material asset, stock that it previously acquired in Katanga Mining. Camec had acquired 22% of Katanga Mining prior to launching an official bid for full control of the company at the end of last month.
The bid came crashing down within hours, following the appearance of a letter dated Wednesday, 29 August, 2007, and signed by Tshimanga Mukeba, attorney general of the Democratic Republic of the Congo (DRC). This informed Boss Mining and Mukondo Mining that relevant licences, as purportedly transferred by DRC parastatal Gécamines in February 2004, had been annulled and voided. Starting early in 2006, Boss, purportedly now 80% held by Camec, had been sold, in chunks, to Camec by Muller Conrad "Billy" Rautenbach, a fugitive from South African justice, and recently declared persona non grata in the DRC.
Haywood Securities, London, has confirmed that on Friday it sold 4m Katanga Mining shares on behalf of Camec, at C$18 per Katanga Mining share, raising roughly C$72m. The sale represents nearly a third of the 17m Katanga Mining shares held by Camec. According to market sources, the sale was made in order to repay $60m Camec raised from Credit Suisse.
On June 15 this year, Camec was granted a $60m facility by Credit Suisse, with the loans to be repaid in full on final maturity date, 18 June, 2009 . Almost immediately, Camec drew down $25m under the facility on 18 June, 2007, and the balance of $35m taken on July 13. According to market sources, however, the Credit Suisse facility was in fact put through on a "success" basis of Camec indeed acquiring all of Katanga Mining. But even if this was not the case, Credit Suisse would have had every reason to call the loan in, not least over worries in credit markets.
In any event, Camec is cash starved. While enthusiastically marketing itself as "an integrated exploration, mining and production company operating in Africa" Camec has battled to show up any real profits. Its financial statements for the year to 31 March, 2007, show a cash outflow from operating activities of £1m, before capital expenditure and financial investment (which typically characterises an expanding company.) To that end, Camec had raised £100m in an equity placement in May and June of 2006. Camec's fiscal 2007 cash outflow before the use of liquid resources and financing is reflected as £120m for the year. After financing inflows of £99m for the year, cash left in the bank on 31 March, 2007, was just £13m. As for profitability, nowhere in Camec's voluminous circular filed for the now-failed acquisition of Katanga Mining were any figures provided for copper or cobalt production. The majority of Camec's turnover was attributed to "trading" activities.
However, Credit Suisse may equally have become spooked by possible non-disclosures on the side of Camec. It is public knowledge that DRC authorities launched a review of mining licences and concessions earlier this year. Less well known is that Rautenbach's licences, which date back to 1998 to 2000, have been under investigation for some time. In a UN Security Council report dated 18 July, 2006, Rautenbach is listed as a "due diligence failure" in respect of Camec. Reason given: "Billy Rautenbach is a major shareholder of [Camec]. He is wanted by the authorities of South Africa for fraud and theft". The same reason is cited for the due diligence failure of Camec's purported acquisition of Rautenbach's Boss Mining.
The report noted that the DRC's Mining Cadastre lists 2,144 mining and quarrying concessions, and that "an undetermined number appear to be held by concessionaires affiliated with investors whose personal and professional integrity is doubtful. This lack of transparency provides hiding places for sanctioned individuals, financiers of embargo violators and for other individuals who simply do not meet the standards of the Code Minier".
These disclosures appear to have meant little, if anything, to investors, and stock promoters. Camec's stock price moved from around 10 pence a share early in 2006 to nearly 100 pence a share around the time of the release of the damning UN report, and then declined later in the year, mainly on a contraction in copper prices. But having clandestinely dealt with Rautenbach, to ostensibly acquire his DRC assets, Camec executives Phillipe Edmonds and Andrew Groves were well advanced in spinning professional investors.
The second page of Camec's 2006 annual report said Camec was "on track to produce 8,200 tonnes of cobalt in FY2006 to 2007 and that Camec aimed to "deliver 10,000 tonnes" of copper cathode in the 2007 financial year, and "reach template capacity of 100,000 tonnes by end-December 2008". As noted, Camec's annual financial statements for fiscal 2007 neither reflect nor record any production figures whatsoever for either cobalt or copper.
But the froth continued; on 12 July, 2007, four analysts at Credit Suisse released a report on Camec. Jeremy Gray, Ephrem Ravi, Eily Ong and Hannah Kirby signed off the report, which increased the "target price" for Camec from 120 to a mind-boggling 150 pence a share. In the fine print, the report disclosed that "the analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (CFM.L) within the past 12 months".
From a huge distance, the Credit Suisse analysts lauded Rautenbach: "Having George Forrest on the ground in DR Congo alongside Billy Rautenbach makes for a powerful combination". Forrest, of course, is a DRC veteran, the founder of an industrial conglomerate, and is without peer in his knowledge of the quality of copper and cobalt assets in southern Katanga Province. It is no mistake that Forrest is the single biggest shareholder in Katanga Mining, at just short of 25%. Of all the brownfields copper cobalt projects in the DRC, there is little question that Katanga Mining is king.
The Credit Suisse report also said, in the fine print, that "as of the end of the preceding month, Credit Suisse beneficially owned 1% or more of a class of common equity securities of (CFM.L)". As early as 22 May 2006, Credit Suisse held 40.7m shares in Camec, then equal to 4.1% of Camec's issued share capital. This increased to as much as 90m shares, in March 2007, and then decreased to 74m in June, before starting to rise again, to 84m shares on August 20.
While Credit Suisse disclosed that it provided investment banking services to Camec within the past 12 Months, and that Credit Suisse expected to receive or intends to seek investment banking related compensation from Camec within the next three months, nowhere did the analysts make any mention of the fundamental problems with the Rautenbach/Camec licences in the DRC. No mention was made either of the singular fact that Rautenbach had originally secured licences during the DRC's recent wars, which claimed more than 4m lives.
In short, the Credit Suisse analysts represented squadrons of investors, including professional ones, with a half-baked story, plugging instead the wholesale spin rendered by Camec. But one smoke-and-mirrors factor stands out above all others, in that Camec is yet to answer criticism over its failure to publish copper and cobalt production figures for fiscal 2007. What is apparent, again in certain fine print, is that during fiscal 2007, Camec "purchased services and assets" amounting to £19m "from companies" in which "Rautenbach and his family continue to have a controlling interest".
In other words, no matter what Camec had purchased from Rautenbach, Rautenbach continued to keep his fingers in the money pots via undisclosed management contracts, or the like, such as marketing agreements. The earlier transactions had seen Camec issue tens of millions of shares to Rautenbach, who sold down, but even on 31 March, 2007, continued to hold 91m Camec shares, then equal to 7.4% of the company's issued shares.
It was in February 2006 that Camec acquired Rautenbach's wholly owned International Metal Factors (controlling 75% of Congo Resources Joint Venture) for some $105m, comprising 172m new Camec shares (at 18 pence a share) and $50m in cash. On 27 July, 2006, Camec bought the balance of 25% in Congo Resources Joint Venture for cash of £14m, giving Camec, according to some analysts, "the sales, marketing and distribution rights to all products mined" on the Rautenbach/Camec concessions.
Really? What about Congo Cobalt Company (CoCoCo), which apparently owns and operates a cobalt processing plant in the town of Likasi, as well as various other processing plants and facilities located on the concessions owned by Boss? CoCoCo also "owns various mining equipment, including extraction equipment, diggers and lorries". Camec recently stated that its mining in the DRC "is contracted out" to CoCoCo, and that Camec is providing mining equipment to CoCoCo "on a commercial remuneration basis", implying that CoCoCo remains under exterior control. CoCoCo is, naturally, a Rautenbach entity.
Of note also is that Camec has attempted to create the impression that it has firm legal grounds in anticipating that its DRC concessions will be restored. On August 31, Camec noted that Boss's predecessor filed claims in an international arbitration, and that the arbitration "was settled by an agreement dated 25 February, 2004. However, in early 2006, an affidavit submitted to the British Virgin Islands High Court by Rautenbach ex-partner, Geneva-based lawyer James Anthony Tidmarsh, presented a different story.
In 2000, when Rautenbach was stripped of his DRC assets, he was allegedly offered an opportunity as a "sleeping partner" in Kababankola Mining Company (KMC), to which the Rautenbach assets were transferred. Rautenbach, however, refused and, indeed, launched an international arbitration action to challenge the withdrawal of his concessions.
In April 2002, Rautenbach withdrew the application following a settlement reached with the government of the DRC. But even then, the story is never as convincing as that presented by Camec. According to earlier UN Security Council reports, the DRC government relied on Gécamines as a means to ensure the continued support of the Zimbabwean army's support of the DRC government - the so-called Operation Sovereign Legitimacy (Osleg). Rautenbach had been named MD of Gécamines in November 1998, during a visit to Harare by the DRC's erstwhile president, Laurent-Désiré Kabila.
According to this deal, some of Gécamines' best cobalt-producing areas were transferred to a joint venture between Rautenbach's Ridgepoint Overseas Development and the Central Mining Group, a Congolese company controlled by Pierre-Victor Mpoyo, then DRC minister of state. Rautenbach also acted as MD of the joint venture, criticized by the UN as "a blatant conflict of interest". The UN had information that Kabila's decision to appoint Rautenbach - "a man with no mining experience but with close ties to the ruling ZANU-PF party in Zimbabwe" - was made at the request of Zimbabwe president Robert Mugabe.
According to the UN, Kabila replaced Rautenbach with Forrest in March 1999, reportedly after Rautenbach failed to pay the government's share of profits from the joint venture. Kabila accused Rautenbach of transferring profits to a shell company, as well as stockpiling cobalt in South Africa. The so-called Rautenbach DRC assets were then officially transferred, allegedly upon the instructions of Kabila, to John Bredenkamp's Tremalt, which established KMC. Upon the 25 February, 2004, agreement, the so-called Rautenbach assets were transferred back to Rautenbach, with the exception of 50% of Mukondo Mountain. Bredenkamp has always claimed that he received no compensation for the rest of the deal.
The history of the Rautenbach DRC assets has never been fully discounted by investors and analysts. In an otherwise fair and recent report, analysts Paul McTaggart and Shamim Mansoor of HSBC state that while it is "difficult to follow the machinations of DRC politics, the fact is that the transfer of the ownership of the C19 lease to Mr. Rautenbach has already been contested once and subsequently restored. Presuming that the subsequent acquisition of Boss Mining by CAMEC was completed with all in order, it seems to us that there is a reasonable likelihood of the C19 lease being retained by CAMEC". The analysts only mention C19. The so-called Rautenbach assets - under the Boss Mining umbrella - include the 50% stake in Mukondo, and concessions C 19 (23,000 hectares) (within which Mukondo Mountain sits, like an island), and C 21 ( 12,000 hectares).
Mukondo Mountain, possibly the world's richest cobalt deposit, is currently held, leaving aside recent declarations, 40% by Savannah Mining, 20% by Gécamines and 40% by Boss Mining. Bredenkamp sold his 40% stake in Mukondo Mountain to Savannah in July last year. The mine was immediately shut down, on the basis that the "Rautenbach way" of dealing with mining profits would have to be completely re-negotiated. The mine has remained shut to this day, starving Camec of profits from its single most potentially lucrative interest. The Credit Suisse report mentioned does not once refer to Mukondo Mountain; HSBC appears to lump it in as part of C19.
But back to the wars: Osleg, the mechanism whereby the Zimbabwe government was supposed to recoup the cost of its military intervention in the DRC through exploitation of a series of commercial concessions, mostly in the DRC mining sector, ended in disaster. By the time the Zimbabwe Defence Force eventually withdrew in 2003, it was patently clear that Zimbabwe's exchequer had benefited little, while senior political figures in ZANU-PF and senior Zimbabwe military officers had made vast fortunes. Rautenbach was one of the key conduits, as outlined by the UN in its series of Panel of Experts Reports on the Illegal Exploitation of Natural Resources and Other Forms of Wealth in the DRC. Rautenbach and others were players in an "elite network" of corrupt politicians, military commanders and shady businessmen that organised the transfer of billions of dollars of state assets to private companies with no compensation or direct revenue benefit accruing to the state treasuries of either the DRC or Zimbabwe.
Consider that against this background, Camec sought, and succeeded, no matter how briefly, in achieving a degree of legitimacy for the Rautenbach assets by their inclusion in a listing of the AIM division of the London Stock Exchange. But consider also, the ruthless hedge funds who sold out Katanga Mining shares to Camec, ahead of Camec's official bid for the rest of Katanga Mining.
On April 27 this year, Camec bought 1.6m Katanga Mining shares from P. Schoenfeld Asset Management LLC, for C$8m, and 11.9m Camec shares. On May 4, Camec bought 224,612 Katanga Mining shares from CASAM Pendragon Event Value Fund Limited, for 2.8m Camec shares; 5.6m Katanga Mining shares from North Sound Capital LLC, for $23.5m and 44.6m Camec shares; 1.1m Katanga Mining shares from Pendragon (Master) Fund Limited, for 14m Camec shares; 995,500 Katanga Mining shares from Amber Master Fund (Cayman) SPC, for 12.6m Camec shares; 131 130 Katanga Mining shares from The Matterhorn Resources and Energy Fund, for 1.7m Camec shares, and 229,170 Katanga Mining shares from The Wildhorn Master Fund, for 2.9m Camec shares.
With the first sell down of Camec's Katanga Mining shares, the family silver has been reclassified. Camec is scavenging, burning cash as its story continues to rot. Investors who paid 80 pence a share when Camec raised £100m in May and June 2006 are now staring a 25 pence a share price in the face. Just a few days ago, Camec traded at multi-month lows of 23.5 pence. But it is not just the hedge funds: earlier this month, Lehman Brothers International (Europe) disclosed a holding of 107m shares in Camec. As for Credit Suisse, it was on June 15 this year, when it granted the $60m loan to Camec that Camec granted Credit Suisse warrants to subscribe for 12m Camec shares at 55 pence per Camec share.
Ignoring the balance of Camec's motley collection of assets, its stock price is worth 11 pence a share, based on the remainder of shares Camec holds in Katanga Mining.
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Camec selling the family silver through lack of copper and cobalt (Source: Mineweb)