World’s Top Cobalt Producer Powering Up?

World’s Top Cobalt Producer Powering Up?

There was good news and bad news from major copper-cobalt producer Katanga Mining (TSX:KAT) last week.

On the good side, the miner achieved record tonnage from its operations in the Democratic Republic of the Congo (DRC). Katanga’s KTO underground mine put out 1.84 million metric tons (MT) of ore in 2012 — up 14 percent from 2011.

The company’s KOV open pit put out 3.7 million MT in 2012 — a full 47 percent higher than the previous year.

On the back of this output, Katanga milled a record 4.61 million MT on the year, producing an all-time high of 92,963 MT of copper metal and concentrate along with 2,129 MT of cobalt.

Then there’s the bad news. The company made little profit on its windfall production.

Katanga’s net attributable income for 2012 came in at $44.1 million, a 66-percent decline from the $130.8 million the company earned in 2011.

The reason? Higher operating costs. Overall cost of sales for the company jumped 40 percent in 2012, to $668.4 million. That’s up from $477.1 million the previous year.

Power costs weigh

Katanga cited a number of factors as contributing to its rising operating costs.

For instance, higher transportation costs resulted from higher ore production. The company also had to pay an additional $14.5 million in customs taxes and penalties on exported copper nodules, while mining and processing costs rose on “general inflationary increases in the cost of inputs.”

But increased production alone doesn’t explain the jump in costs. The main reason for the increase was electric power — or rather the lack of it.

The company’s most recent Management’s Discussion and Analysis document notes that a major reason for the drop in profits was “significant power disruptions” during the year.

Specifically, the company lost a total 1,609 production hours during the year due to general power disruptions in the DRC. That’s equal to about 67 days of lost production.

A Congolese thing

Companies like Katanga lack electric power due to the DRC’s strained infrastructure.

Much of the country’s power infrastructure was built during colonial times. Since gaining independence, the DRC has suffered from not having a comprehensive national energy policy, which means that little new generation capacity has been built.

Would-be DRC copper-cobalt producer Ivanplats (TSX:IVP) noted in a September 2012 NI 43-101 report on its Kamoa project that nearby power infrastructure is aged. Ivanplats reported that the closest hydroelectric plants to the project date back to 1928, while the most recent facilities were installed in 1953.

Some of the oldest turbines have ceased working altogether, according to the Ivanplats filing. At the Mwadingusha hydro plant, only three of six turbines are functional, which puts a crimp in the 71-MW nameplate capacity of the facility.

The lack of recent investment in generation has made the DRC one of the least electrified countries on the planet. Only 9 percent of the country’s 71 million people have access to power, according to estimates from the World Bank. That’s well below the Sub-Saharan African average of 31 percent.

At the same time, power demand has been rising over the last 10 years, in part because of copper mine start ups spurred by rising metals prices during this period. Congolese power demand has jumped 35 percent since 2004, to 145.4 kWh per capita in 2010.

The result has been strains for power consumers everywhere in the country. Power disruptions more than three hours in length are experienced over 180 days per year, according to the World Bank. The Bank estimates that power outages cost DRC firms the equivalent of 1.7 percent of GDP yearly.

The DRC’s electric power infrastructure could be a limiting factor for the cobalt market a whole as the country is by far the most critical nation for global cobalt supply; it put out 55 percent of the world’s mined product in 2012 as a by-product of copper.

Project expansions or new projects like that of Ivanplats will have to contend with a tight power market, which rasies questions about just how much the DRC can expand output.

Possible solutions

The good news is that the DRC’s dire power situation has attracted attention from the both the public and private sectors.

The World Bank is pursuing several projects to enhance power supply from the DRC’s high-potential hydroelectric resource base. Ironically, it’s estimated that the DRC contains some of the largest hydropower resources on the planet — perhaps as much as 100,000 MW of potential generation.

Part of the challenge in delivering more juice is the regulatory regime. The World Bank embarked on a project in 2011 to help overhaul the DRC’s national utility, SNEL. The firm has been hampered by an inefficient, overstaffed structure and an inefficient system for the collection of power payments. During the last decade, SNEL collected payment on only 50 percent of the power it produced and delivered to customers.

The Bank is also booting up a number of generation projects, such as the Inga III project in the east of the country. The project is expected to create as much as 4,500 MW of power capacity, of which a significant portion is earmarked for transmission to the copper-producing region.

Katanga Mining is looking to the World Bank’s power efforts as a possible solution to its electricity shortage. The company noted last week that refurbished transmission infrastructure commissioned in mid-December should increase the flow of electricity from the Inga project to its operations.

Katanga sees this new electricity “improving the reliability of supply to the company’s operations,” hopefully meaning fewer powerless days in 2013.

Paying your own way

The DRC’s miners are also looking to participate directly in building the country’s electric infrastructure.

In 2011, Ivanplats signed a memorandum of understanding (MOU) with state utility SNEL to refurbish the Koni and Mwadingusha power plants, located near the company’s Kamoa copper-cobalt project.

The deal calls for Ivanplats to loan money to SNEL to rehabilitate and expand electricity generation at these sites. In return, the company will get first rights on up to 100 MW of power, with the loan being repaid by deductions in monthly power bills over the coming years.

Ivanplats is advancing this option, and signed a pre-financing agreement on the project with SNEL last year.

Ivanplats is also looking beyond this project as its power needs are forecast to reach as much as 250 MW. The company signed a separate MOU with the DRC’s Ministry of Energy in order to investigate potential sites for greenfields power projects.

The company said it will conduct due diligence and a conceptual assessment on this project during 2012.

Katanga Mining is also looking to pay its own way in securing power supply. The company has said it will pay up to $283.6 million between now and 2015 in loans to SNEL for refurbishing electric infrastructure. Some of the funding for this project is being arranged through a loan from major miner Glencore International (LSE:GLEN).

 

Securities Disclosure: I, Dave Forest, do not hold equity interest in any companies mentioned in this article.