UPDATE 2-Glencore set to take controlling Katanga stake

(Adds details, comment; in U.S. dollars unless noted)

By Cameron French

TORONTO, Jan 12 (Reuters) - Glencore International [GLEN.UL] is set to take a controlling stake in base metals producer Katanga Mining (KAT.TO), after Katanga's shareholders approved a stock issue on Monday that the company will use to secure a $265 million loan from Glencore

At a meeting in Toronto, shareholders voted in favor of a massive increase in the company's authorized share capital, which will allow Katanga to issue 953 million shares to back the convertible loans and could give Swiss-based Glencore as much as an 88 percent stake in the troubled company.

Katanga, which is based in London and trades in Toronto, said on Dec. 15 it "urgently" needed additional funds to continue operating and to ramp up production at its copper-cobalt mine, expected to be the largest copper mine in the Democratic Republic of Congo.

The company has been hurt by a plunge in metal prices, a freeze-up of credit markets, and a review of mining contracts in the DRC. Copper prices dropped 54 percent last year, while cobalt fell about 60 percent, prompting Katanga to suspend cobalt production late last year.

"In a market like this, it's just extremely hard to get clients generally to put money into any venture like that," said Haywood Securities analyst Kerry Smith.

BARGAIN FOR GLENCORE

One-time market darling Katanga saw its shares drop 98 percent last year, forcing it to consider the highly dilutive deal with Glencore, an employee-owned Swiss-based company whose most notable holding is a 35 percent stake in diversified miner Xstrata (XTA.L).

"For $250 million (Glencore) is going to basically control this company, which at one point in time was worth about C$3 billion," said Smith.

Under the deal, Glencore will underwrite a $100 million loan and amend an existing $150 million facility, totaling about $265 million when accrued interest is factored in. The loan will be converted to stock at 28 cents (34 Canadian cents) per share.

Shares of Katanga fell 10.6 percent to 38 Canadian cents on the Toronto Stock Exchange.

Glencore's share of the company could range from 26 percent to 88 percent, depending on the participation of other investors in the debt issue. But analysts said they expect Glencore to take most or all of the debt facility.

Katanga said it will also seek additional debt or equity financing of about $250 million before the end of June.

Katanga took over London-listed Nikanor last year for about $2.1 billion to consolidate the companies' copper and cobalt assets near the DRC town of Kolwezi, expanding its resources to nearly 240 million tonnes, grading 4.5 percent copper and 0.44 percent cobalt.

The company expects to one day produce more than 300,000 tonnes of copper and 30,000 tonnes of cobalt a year. Output is expected to be 70,000 tonnes of copper a year through 2010, rising to 150,000 tonnes by 2012, then ramping up to above 300,000 tonnes a year.