creating a leading african copper & cobalt...

Annual Report 2007

Creating a Leading African Copper & Cobalt Company

Company Overview

Katanga Mining Limited is creating an industry leader in copper and cobalt. Its joint venture operations in the Democratic Republic of Congo are in production, and the company has the potential to become Africa’s largest copper producer and the world’s largest cobalt producer by 2011.

In January 2008, Katanga merged with Nikanor PLC, which has an adjacent copper-cobalt complex, to create a company with a US$3.8 billion market capitalization. A four-year phased ramp-up will see the company targeting production of over 300,000 tonnes of refined copper and over 30,000 tonnes of refined cobalt a year by 2011 from a major single-site operation.

01 Company Overview01 2007 Highlights02 President’s Letter06 Board of Directors

08 Progress Review08 Project Review12 Operations Review16 Social Responsibility Review19 Financial Review

21 MD&A21 Management’s Discussion and Analysis

34 Financial Statements34 Management’s Responsibility for

Financial Reporting35 Auditors’ Report36 Consolidated Financial Statements39 Notes to Consolidated Financial Statements

57 Shareholder Information

Katanga at a Glance

Luilu Metallurgical Plant/planned SX/EW Refinery

Musonoie-T17

Kolwezi Concentrator

KOV Open Pit Mine

Mashamba East

D e m o c r a t i cR e p u b l i c o f C o n g o

K a t a n g aP r o v i n c e

K o l w e z i

Katanga’s key assets include the Kamoto Underground Mine and KOV Open Pit Mine, providing both sulphide and oxide ores. The Kamoto Concentrator and Luilu Metallurgical Plant, together with a planned SX/EW Refinery, enable the production of refined copper and cobalt on-site.

Kamoto Underground Mine KOV Open Pit Mine Kamoto Concentrator

The Kamoto Underground Mine, Katanga’s primary sulphide ore source, has twin six and a half by six meter ramp declines, a service shaft and an 11,000 tonnes per day production shaft.

The KOV Open Pit Mine is considered to be the world’s highest grade significant copper resource. During its lifetime 38 million tonnes of ore have been mined at an average grade of 5.8 per cent copper and 0.5 per cent cobalt.

The Kamoto Concentrator consists of four milling and flotation sections constructed between 1969 and 1982, with a design capacity of 7.5 million tonnes of ore per year.

11,000Tonnes per day

5.8%Copper

7.5mTonnes per year

0 1 3 4 5km2

Key assets Other mines and plants

Tilwezembe 20km

Kamoto Underground Mine

Kamoto Concentrator

Kananga

Large-scale, low-cost and long-life producerKatanga’s mine complex is currently in production, with a phased ramp-up targeting over 300,000 tonnes of refined copper and over 30,000 tonnes of refined cobalt a year by 2011, giving the company the potential to be Africa’s largest copper producer and the world’s largest cobalt producer. Substantial high-grade resources indicate a potential mine life of 40+ years, with one of the world’s lowest production costs.

Proven management team and track recordKatanga’s Board and management team are comprised of industry veterans with a track record of successful project execution, proven local operating expertise and a history of running large-scale operations. The team brought the Kamoto site into production at the end of 2007 on schedule and on budget, and is continuing its phased approach for the development of the enlarged mine complex.

Globally significant integrated single-site operationKatanga’s integrated mine complex is considered to be the largest single-site project in the world producing both copper and cobalt. It contains both underground and open pit mines, providing both sulphide and oxide ores. A concentrator and metallurgical plant enable the production of refined copper and cobalt metal on-site. The complex is a mix of existing assets being progressively refurbished and a new state-of-the-art refinery which is under construction.

Genuine commitment to sustainable developmentA company of Katanga’s scale has the opportunity to make a significant impact in the Democratic Republic of Congo. Along with financial benefits in the form of royalties and taxes, a coordinated community investment program will produce positive change for communities surrounding the operations. Katanga’s aim is to help ensure that the social and economic benefits stemming from its project will last well beyond the life of the mine.

Luilu Metallurgical Plant Planned SX/EW Refinery Other mines and plants

The Luilu Metallurgical Plant has roasters, leaching circuits and electro-winning cells for copper and cobalt production. It has a potential capacity of 175,000 tonnes of copper and 8,000 tonnes of cobalt a year.

The planned greenfield SX/EW Refinery more than doubles Katanga’s capacity, with increased recoveries and higher grade metal production. Its design has two modules, each producing 80,000 tpy copper and 10,000 tpy cobalt.

In addition to its key assets, Katanga also has the Kolwezi Concentrator, the previously-mined Mashamba East open pit, and the cobalt-rich Musonoie-T17, Kananga and Tilwezembe deposits, with grades up to 0.87 per cent cobalt.

175,000Tonnes per year

80,000Tonnes per year

0.87%Cobalt

Our Strengths

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01Annual Report 2007 Katanga Mining LimitedC

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2007 Highlights

Successful transition to production: underground mining began in March, open-pit operations started in May, concentrate was produced in July and first copper cathodes were produced in December.

Phase I rehabilitation of the original Kamoto facilities materially completed, on schedule and on budget.

Merger with Nikanor PLC, which has an adjacent copper-cobalt concession in the Democratic Republic of Congo, announced in November and completed in January 2008.

Final stage of financing for the original project completed: US$150 million two-year loan facility with Glencore, including a 10 year off-take contract beginning in 2009.

Strong foundations built for a community investment program, including creation of a sustainable cooperative farm and improvements carried out to a local hospital.

Upgraded reserve and resource estimate announced. Post-merger, Measured & Indicated resources total 239 million tonnes at 4.45 per cent copper and 0.44 per cent cobalt.

Market capitalization more than doubled during the year, reflecting these achievements and strong commodity prices.

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KAT Performance Relative to TSX Diversified Metals & Mining Index

02 Katanga Mining Limited Annual Report 2007

President’s Letter

Copper production from our joint venture’s Luilu refinery began in December after 18 months of challenging work. This accomplishment met our primary goal for 2007. Furthermore, it was achieved within our US$175 million budget, another key objective.

Katanga’s market capitalization more than doubled during 2007, reflecting onsite accomplishments and strong commodity prices. The transition from developer to producer during the year encompassed several milestones. Production began at the Kamoto Underground Mine in March. Open-pit operations started in May, although production was limited until September when the heavy equipment required could be transported across the Lualaba River. In July, concentrate production from the Kamoto Concentrator began, while cold commissioning of the Luilu Metallurgical Plant started in November, and first copper cathode was produced mid-December.

Achieving production as scheduled within the Phase I budget of US$175 million was an important team accomplishment considering the condition of the site when the joint venture started managing it on July 3, 2006. The stage is now set for Phase II, which began in early 2008 as planned.

Merger with NikanorOn November 6, 2007, we announced an offer to acquire Nikanor PLC. The transaction, which closed January 11, consolidates mining operations in the Kolwezi district and will yield important synergies. These include reduced capital and operating costs as we remove duplication and collectively enhance metallurgical recoveries. The greater scale of our operations will also improve our capability to address external matters such as government relations and infrastructure.

Financing completedSecuring the third and final stage of financing for the Kamoto project was a key objective in 2007, but uncertainty created by a government-mandated review of joint ventures with State companies, as well as a hostile takeover attempt, meant we were unable to close a syndicated credit facility. However, by year-end we successfully secured a US$150 million convertible loan from Glencore. The facility includes copper and cobalt off-take rights beginning in 2009 that will provide superior marketing strength for our business.

“Katanga’s market capitalization more than doubled during 2007, reflecting onsite accomplishments and strong commodity prices.”


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Healthy resourcesAn upgraded reserve and resource estimate was announced early in the year. Proven and probable ore grades for both the Kamoto Underground Mine and the Musonoie-T17 open-pit mine increased materially as a result of additional information and refined plans. The merger brings an additional 126 million tonnes of high grade resources in the KOV deposit that will drive expansion over the next three years.

After year-end, we announced a transaction transferring the Mashamba West and Dikuluwe deposits to our joint venture partner Gécamines in return for either replacing the resource or paying US$825 million from its share of joint venture production. These two deposits were scheduled to be mined starting in 2023 and 2020 respectively, and more value may be created in the joint venture by replacing these resources with ores that can be mined earlier. Post-transaction, the joint ventures have a nominal 239 million tonnes of reserves and resources at average grades of 4.45 per cent copper and 0.44 per cent cobalt.

Operational progressBy year-end, refurbished facilities were operating satisfactorily, although below capacity as mining rates increase. Open pit and underground operations, while improving, are lagging behind the plan. The principal limitation is workforce productivity, and we see the development of employee skills and capabilities as a long-term challenge. However, ongoing initiatives to improve performance helped mining rates in the T17 open pit to exceed plan by year-end, and the required quantities of oxide ores are available. Costs in 2007 were capitalized, as mine and plant operations during the year were in their start-up phase.

Ongoing transformation of the DRCTransformation of the DRC into a country with representative government continued in 2007. Services are still minimal, and power and transportation infrastructure must improve dramatically to meet the needs of a large-scale mining project. Working closely with government agencies, we are steadily improving outcomes to meet our

needs; for example, we received authorization to clear customs and immigration in Kolwezi, thereby avoiding border crossing congestion at Kasumbalesa.

Having travelled to Lubumbashi and Kolwezi for 10 years, I see a clear difference today. Katanga now employs more than 4,000 Congolese nationals with a local payroll exceeding US$2.8 million per month. Resurgence of the mining industry has revived the regional economy, and more goods and services are available, including better air services and the opening of hotels and restaurants. Above all, I see growing confidence and more self-initiative among the Congolese people.

Community projects begunWe started several initiatives during 2007 to help improve services in Kolwezi. Working with community groups and non-governmental organizations, we delivered a number of projects for the benefit of our employees and the wider community in areas such as agriculture, sanitation and medical services. These included establishing a self-sustaining farm cooperative, clearing

Employees by a cascade mill in the Kamoto Concentrator

Lifting starter sheets in the Luilu Metallurgical Plant

Underground operations


thousands of meters of local drains and ditches, and making infrastructure improvements at the Mwangeji Hospital, all highlighted later in this report.

In 2008 we expect to accelerate progress in this area. The priorities are to restart the Mutoshi Institute, a training school for mineworkers, in conjunction with other mining companies and Gécamines; rehabilitate roads in Kolwezi; and continue to upgrade the Mwangeji Hospital.

President’s Letter continued

Progress against 2007’s goalsIn reviewing the goals set in last year’s Annual Report, I see achievement in most respects. Phase I of our capital program was materially completed on budget. We raised $150 million for project needs, though it took a different form than originally intended. About 700 people were added to the site organization during the year, and operational performance is improving.

A further goal was to improve the quality of life for our employees and the community. As you will read in this report, progress was made and we have plans for 2008 that should enhance conditions. The final goal I set was to increase Katanga’s market value. The market capitalization of the company at the end of December 2007 was 132 per cent greater than at the end of December 2006; an indication, I believe, of progress made onsite and the market’s appetite for natural resource companies.

In-d

epth About the DRC

At 2.34 million square kilometers, the Democratic Republic of Congo (DRC) is the third largest country in Africa. It has a population of 65.7 million people.

The DRC’s vast mineral wealth includes copper, cobalt, diamonds, gold, coltan and zinc. The country is estimated to contain 10 per cent of the world’s copper resources and 50 per cent of its cobalt resources, centered on the Katanga Province in the south east of the country.

Since independence from Belgium in 1960, the DRC has had a turbulent history. Following a five-year civil war, a transitional government was formed in July 2003 and elections in 2006 confirmed Joseph Kabila as President. The world’s largest UN peacekeeping force is in the country overseeing the shift to democracy.

Confidence in the DRC is growing among Western companies. The introduction of a new mining code in 2002 was an important element in attracting private sector investment, with over US$2.1 billion in capital raised for DRC mining projects in 2006/07. The country’s economy saw growth of 6.1 per cent in 2007.

“Our new enlarged Board will continue to serve all Katanga shareholders, guiding the company as we embark on the exciting road ahead.”


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Opportunities and challenges aheadIn 2008 we face new challenges, such as managing extensive greenfield construction in a country with limited infrastructure, while continuing to strengthen operating performance and increase current production. There are opportunities as well, such as beginning to mine at KOV earlier than planned and compressing the timeline for the Kamoto rehabilitation.

Your Board of Directors contended with many challenges this past year, from a creeping takeover attempt to a range of matters associated with the Nikanor bid, and I thank them for their dedication and guidance. Our new enlarged Board will continue to serve all Katanga shareholders, guiding the company as we embark on the exciting road ahead.

Goals for 2008As production grows and the capital program increases capacity during the year, we set the following goals for 2008:

Completing the greenfield feasibility study for the combined project by the third quarter.

Completing Phase II rehabilitation and expansion, thereby increasing capacity of the Kamoto Concentrator and Luilu Metallurgical Plant to 100,000 tonnes of copper cathode per year.

In parallel with this, developing the KOV pit for production and beginning construction of the associated greenfield whole-ore leaching and SX/EW facility.

Integrating provisions of the DCP joint venture agreement into the KCC joint venture agreement and having the mining/exploitation concessions issued directly to KCC by the government.

Ensuring that the effectiveness and capability of the on-site management team continues to grow and develop.

Continuing to increase Katanga’s enterprise value as a result of profitable production and efficient use of capital.

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Ore stockpile A farm cooperative was established Examining the mine plan

I also wish to extend my appreciation to our employees, whose efforts and performance enabled us to achieve our objectives in 2007. We welcome Nikanor’s employees to the Katanga family as well, and look forward to working together as one team on the ambitious program ahead.

We will stay focused on our operating objectives and expansion program during 2008 to deliver intended results as we have in the past.

Arthur H. DittoPresident, Chief Executive Officer and Director


Board of Directors

Chairman Hugh Stoyell (left) on a site tour

Katanga Mining Limited’s 10-person Board of Directors has broad experience in the mining sector and strong connections in the Democratic Republic of Congo. The Board is committed to corporate governance standards consistent with best practices in the natural resources sector.

Hugh StoyellIndependent Non-Executive ChairmanHugh Stoyell has more than 40 years of experience in the South African mining industry. His career includes 30 years in gold and chrome mining with Rand Mines Limited and 10 years with Duiker Mining Limited, retiring as the company’s Chairman and Managing Director in 2002. Most recently Mr Stoyell has acted as a consultant to various Black Economic Empowerment mining companies. He is currently a Non-Executive Director of Sentula Mining Limited as well as caretaker Chief Operating Officer of Siyanda Coal Limited.

Rafael BerberNon-Executive DirectorRafael Berber is Managing Partner of RP Capital Group, a London-based investment firm which he co-founded in July 2004. Mr. Berber formerly served as Vice Chairman of Global Capital Markets & Financing and Global Head of the Equity-Linked Products Group at Merrill Lynch, where he spent 16 years spearheading the development of the firm’s equity derivatives and emerging markets franchise.

Arthur H. DittoPresident, Chief Executive Officer and DirectorArthur Ditto has over 40 years of experience in the mining industry and has held the position of President, CEO and Director of Katanga Mining Limited since November 2005. Between 1993 and 2005, he served Kinross Gold Corporation in a variety of capacities, including President, Chief Operating Officer, Vice Chairman and Director. Prior to that, Mr Ditto was President and CEO of Plexus Resources and held various senior management and engineering positions in large copper producing operations with Anaconda/Arco.

George A. ForrestNon-Executive DirectorGeorge Forrest has been President of the Forrest Group, a private conglomerate of industrial enterprises, for over 20 years. The company was founded in 1922 in what is now the Democratic Republic of Congo and is one of the country’s largest industrial enterprises. Today the Forrest Group has operations located in Africa, Europe and the Middle East with businesses spanning civil engineering, mining, manufacturing and construction.

Malta D. Forrest Non-Executive DirectorMalta Forrest is the third generation of the Forrest family to be associated with the Forrest Group conglomerate of industrial enterprises. With extensive experience of operations in the Democratic Republic of Congo, his executive positions include Construction Manager and Deputy Managing Director of Enterprise Générale Malta Forrest SPRL.

Aristotelis Mistakidis Non-Executive DirectorAristotelis Mistakidis has been with Glencore International AG, a leading privately held, diversified natural resources company, since 1993. Mr Mistakidis is also currently Chairman of Mopani Copper Mines PLC and a director of Recyclex SA (formerly Metaleurop SA).

Jean-Claude Masangu Mulongo*Independent Non-Executive DirectorJean-Claude Masangu Mulongo is the Governor of the Central Bank of the Democratic Republic of Congo. Mr Masangu Mulongo has also represented the DRC in various roles including Governor for the DRC and second Vice President of the G24 at


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Members of the Board and executive team on a site tour in the Luilu Metallurgical Plant (left) and Kamoto Underground Mine (right)

the International Monetary Fund, and Deputy Governor for the DRC at the World Bank. Prior to the Central Bank, he spent the majority of his career with the Citibank Group in Kinshasa.

Stephen Oke*Independent Non-Executive DirectorStephen Oke has over 30 years of experience in the mining and metals industry. He is currently a non-executive director of International Ferro Metals Ltd. Mr Oke spent 12 years in various operational management positions for the UK’s National Coal Board, Anglovaal Ltd, BP Coal and Johannesburg Consolidated Investment Co Ltd. Subsequently he has held senior positions in the investment banking industry, specializing in the metals and mining sector. Mr Oke was a Director of Nikanor PLC from June 2007 until its merger with Katanga Mining Limited.

Terry Robinson*Independent Non-Executive DirectorTerry Robinson has 35 years of international business experience.

Board committeesThe Board currently has three committees – audit, compensation and corporate governance – the mandates of which are consistent with best practices.

The role of the Audit Committee is to monitor the quality, integrity, and legal and regulatory compliance, of the company’s financial statements and other financial information. It also oversees the qualifications and independence of the independent external auditor and the internal audit procedures.

The role of the Compensation Committee is to review and approve the remuneration packages of the executive and senior management team, review the compensation of the Board on at least an annual basis, and administer the company’s compensation plans.

The role of the Corporate Governance Committee is to review the company’s corporate governance practices and assess the functioning and effectiveness of the Board, its committees and individual Board members.

Joint venture representationIn addition to the Board of Directors of Katanga Mining Limited, the Boards of Katanga’s two joint ventures, Kamoto Copper Company (KCC) and DRC Copper and Cobalt Project (DCP) meet a number of times a year. These Boards include representatives from Katanga’s joint venture partner Gécamines, a DRC state-owned mining company.

He is an independent non-executive director of EVRAZ Group SA, the largest Russian vertically integrated steel producer. Mr Robinson’s career includes serving as Deputy Chairman of Chapada Diamonds plc, Chief Executive and then Chairman of The Albert Fisher Group Plc and Chief Executive of Halstead Services Ltd. He was a Director of Nikanor PLC from July 2006 until its merger with Katanga Mining Limited.

Robert Wardell*Independent Non-Executive DirectorRobert Wardell is Vice-President, Finance & Chief Financial Officer of Victory Nickel Inc. Prior to that he was an audit partner with Deloitte & Touche, LLP. He has over 37 years of public accounting experience including nine years with the accounting and auditing technical group of Deloitte & Touche and 11 years as an audit partner based in Toronto.

* Member of Audit Committee Member of Compensation Committee Member of Corporate Governance Committee


Project Review

Katanga completed the first phase of a complex brownfield project against a tight deadline, in a country with extremely limited infrastructure and services.

The Project team succeeded in handing over the assets to the Operations team on schedule and on budget, ensuring the joint venture could produce its first copper cathode by the end of 2007.

Much of the work in 2007 was characteristic of a major maintenance shutdown and refurbishment. In total, 34 kms of old electrical cable were removed and 81 kms of new cable installed; 71 new motor control centers were designed and installed; 383 new control and monitoring instruments were installed; over 950 tonnes of structural steel and plate work was completed; and 75 kms of new pipe was installed.

Skilled Project teamTo achieve the complex task at hand, a Project team was assembled and led by a team of 26 from Katanga who provided overall construction management. Engineering and procurement services were provided by Hatch, while construction was accomplished by Congolese and South African contractors. Civil and support work on site was carried out by Congolese contractors. The project team peaked at approximately 1,300

people, and a total of 2,229,000 work hours were spent in the reconstruction effort during the year. Approximately 60 per cent of the project manpower was provided by local labor.

Kamoto Underground MineThe rehabilitation needed to achieve Phase I production capacity at the Kamoto Underground Mine was fairly limited and much of the work was completed by site personnel. Primary pumping capacity was restored through a combination of new and rebuilt pumps and motors. Secondary pumping refurbishment continued throughout the year. Other work included restoring basic services such as dewatering and ventilation.

The new production fleet for Kamoto was ordered late in 2006. Equipment began arriving on site in the first quarter of 2007 and by mid-year the entire production fleet was operational.

“Much of the work in 2007 was characteristic of a major maintenance shutdown and refurbishment.”


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Kamoto ConcentratorThe Phase I program called for restoration of the Kamoto Concentrator sufficient to process a minimum of 50,000 tonnes of sulphide ore and 20,000 tonnes of oxide ore per month. A component of this year’s plan was to restore much of the piping and electrical infrastructure needed for Phase I operations and beyond. Nearly all water and air delivery pipes were replaced during the year, as were all required motor control centers.

The surface crusher, conveyor systems and stockpile reclaim areas were either rebuilt or replaced. Two of the Kamoto mills were thoroughly serviced and relined, and new lubrication systems were installed. Essentially all of the process piping and pumps were replaced. Tanks were rebuilt and rubber lined to ensure their long-term service.

In the flotation cells, underlying structural support required only minimal clean up and repainting, but the cells themselves all required substantial rebuilding. A total of 88 of the original flotation cells and

related infrastructure were removed and rebuilt, and all were rubber lined and new flotation mechanisms were installed.

To transfer concentrate and water from the Kamoto Concentrator to the Luilu Metallurgical Plant, the existing pipelines between the sites were removed and four new pipelines, totaling 28 kms, were installed. New tailings pumps and delivery pipelines were installed.

Luilu Metallurgical PlantThe Luilu Metallurgical Plant was in a very poor condition and required extensive refurbishment to restore it to a reliable operating state. Substantial repair or replacement of the infrastructure took place throughout the year, including the replacement of approximately 32,000 square meters of roofing, installation of all new sump pumps, replacement of lighting and upgrading of safety installations.

The concentrate receiving and storage areas were restored to near full capacity. The thickeners and other tanks, vacuum pumps and two of the four drum filters were rebuilt, and

essentially all of the piping was replaced. All of the conveyor components were removed and replaced as required.

Because of the lead time required to design and build new roasters, the decision was made to restore the existing roaster section to reliable short-term operating condition. Substantial effort went into stabilizing the building structure. New pumps were installed, the regrind mill was rebuilt, and the roaster shell was serviced and a new refractory lining was installed.

In the leaching area, three new oxide receiving tanks were built and other leach tanks and CCD tanks were repaired as required. The cobalt area required extensive replacement of pumps and piping and four new tanks were installed. One belt filter and two filter presses were installed, to replace existing drum filters. The remaining original tanks were repaired as required and returned to service.

A new control system was installed at the Kamoto Concentrator

Workers fiberglassing electro-winning tanks (far left) and flotation cells in operation following extensive refurbishment (above)

Lifting cathodes at the Luilu Metallurgical Plant


Work in the electro-winning section started with the cleanup, repair and relining of 54 cells. An additional 28 starter sheet cells were repaired and relined. New busbar fittings were designed and installed, and three new tanks were built and the distribution piping replaced. The existing lead anodes were cleaned and returned to service and new stainless steel cathodes were purchased for starter sheet production.

Kamoto Phase IIPhase II of the rehabilitation of the original Kamoto assets will be completed in 2008. A further mill and additional 58 flotation cells will be refurbished in the Kamoto Concentrator. In the Luilu Metallurgical Plant, leaching and electro-winning capacity will be doubled and a new roaster will be constructed. Preliminary engineering for Phase II began in October 2007, with site civil works for the new roaster beginning in November. Fabrication of the roaster unit began in the last quarter of the year.

Production capacity for the Kamoto assets will reach a nominal 150,000 tonnes of copper and 8,000 tonnes of cobalt in 2010 following completion of the four-phase rehabilitation. There is a progressive reduction in year to year capital spending for the added capacity, with the budget for 2008 set at US$136 million. Options for accelerating the later phases will be examined as part of the feasibility study due in Q3 2008.

Logistics expertiseDuring the course of the 18-month rehabilitation project, over 600 separate loads were shipped to site. The Project team substantially reduced the time taken to transport materials from Johannesburg: a journey that took over four weeks at the beginning of the year was reduced to as low as seven days, with an average of 12 days achieved.

Four full-time expeditors made frequent visits to manufacturers, ensuring scheduled deliveries were maintained for the smooth supply of materials. Through negotiation with the government, the joint venture was able to obtain authorization to clear customs in Kolwezi, thereby avoiding the severe border crossing congestion at Kasambala.

A weak bridge over the Lualaba River presented problems, as loads over 60 tonnes had to be broken down. The joint venture worked with other local mining companies and Gécamines to refurbish the Lualaba barge, an alternative that sped up the transit of large loads. While the majority of materials arrived by road, some larger items came via rail, demonstrating the availability of the rail network.

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Project Review continued

The waste stacker at KOV


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Combined projectIn parallel with the Phase II rehabilitation, Katanga will develop the KOV open pit and build a whole-ore leach and SX/EW facility. A phased approach will be taken to the construction of the plant, with two 80,000 tonne per year copper production modules planned.

There will be a steep growth curve for both copper and cobalt production through to 2011, with a target of over 300,000 tonnes of refined copper per annum and over 30,000 tonnes of refined cobalt per annum. A feasibility study will be prepared by Q3 2008 for the integration of the combined assets following the merger with Nikanor.

An outline plan for the combined mine complex has the Kamoto Concentrator and Luilu Metallurgical Plant processing sulphide ore only. Oxide ore and all cobalt production will be processed through the new SX/EW facility, which will produce higher grade refined metal with better recoveries. Initial synergies that can be realized during 2008 will be explored, such as processing ore from Tilwezembe through the Kamoto Concentrator.

Goals for 2008The goals for 2008 relate to continuing the Kamoto rehabilitation while planning and beginning work on the combined operation, with both brownfield and greenfield construction under way:

Completing the feasibility study on the combined project by the end of Q3.

Reviewing the enlarged operations to ensure early synergies are realized ahead of the feasibility study completion.

Beginning mining at KOV by the end of the year, ahead of the dewatering program completion.

Continuing Kamoto Phase II construction as planned, reviewing the possibility of accelerating later phases.

Beginning construction of the acid plant and the first module of the greenfield whole-ore leaching and SX/EW facility.

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“There will be a steep growth curve for both copper and cobalt production through to 2011.”


Operations Review

Katanga made the transition from rehabilitation to production in 2007, with the Operations team working with the Project team to ensure a smooth handover and commissioning of the joint venture’s assets. The focus then shifted to ensuring a successful ramp-up and ongoing operations across the site.

Kamoto Underground MineThe first round was blasted in March. In total, 175,000 tonnes of ore were mined during the year. There was a progressive ramp-up towards the end of the year, with 45,000 tonnes mined in December.

While all equipment was in place, the management team was not staffed as quickly as planned. By year-end, however, leadership was in place to direct the underground

workforce and establish discipline and planning. The team will be supported by a small group of experienced contract miners in 2008.

The target is to exceed 60,000 tonnes per month of ore by April and thereafter increasing to 90,000 tonnes by year end.

Musonoie-T17 Open Pit Mine Pre-stripping began on schedule in May at Musonoie-T17, which is mined under contract. The ore body was not as close to the surface as the available information had indicated, and significantly more pre-stripping was required. Once mining began, over 30,000 tonnes of ore was mined. In addition, stockpiles of oxide ore were treated.

The transition from clean-up and rehabilitation to production has been challenging, with a steep learning curve to establish the management team, infrastructure and procedures for successful operation of a complex site.

“The overall reliability and performance of the plant has exceeded expectations.”


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Kamoto ConcentratorThe total tonnage of sulphide concentrate produced was just under 12,000 tonnes. As a consequence of the late arrival of oxide ore from Musonoie-T17, oxide production did not begin until December. However, the overall reliability and performance of the plant has exceeded expectations.

Luilu Metallurgical PlantThe Luilu facility had limited operations in 2007, with cold commissioning beginning in late November and the first starter sheets stripped on December 17. The first commercial copper cathodes were produced on December 22. The physical quality of initial cathodes was variable as expected, but with good chemical quality overall. The

Luilu team will work over the early part of 2008 to ensure the consistency of the process, aiming to produce LME “A” grade copper, a higher quality than was historically produced at the facility. To achieve this, a change of system is planned from March onwards whereby copper will be plated directly onto a stainless steel cathode, rather than on copper starter sheets as originally conceived.

Operations team in placeFor a variety of reasons, both specific to candidates and as a result of the attempted hostile takeover in the summer, it took longer to fill management positions than anticipated. The team is now in place: Stuart Allen joined in September as Secretary General, responsible for HR and business improvement.

Adrian de Freitas, who has extensive experience in underground operations, joined just before the end of the year as Operations Director.

The merger with Nikanor also gave the opportunity to draw on an enlarged skills base to fill some remaining positions. Eamonn Browne is in charge of the open pits and Michael Watters leads the procurement function in Johannesburg to ensure spare parts and consumables are in place for reliable operation.

Accommodation needsTo accommodate the expatriate workforce, houses have been progressively refurbished, and 39 are now available. A construction camp

Flotation cells in the Kamoto Concentrator (far left) and employees in the Luilu Metallurgical Plant examine copper cathodes (above)

Blasting at the T17 open pit


Operations Review continued

of semi-permanent accommodation for the Project team workforce was expanded in phases during the course of the year. By the end of the year, up to 590 people could be accommodated with full catering facilities.

An accommodation block is under construction near the former Kolwezi golf club, which will provide 40 single units, including rooms for visitors and a restaurant. Progress on the new block has been delayed but

should be completed in early 2008. The addition of a 100-person “village” from Nikanor means that sufficient accommodation will be available for the envisaged expatriate workforce by the end of the first quarter in 2008, and the use of hotel and boarding-house style accommodations will be phased out.

Workforce developmentWhen the joint venture took over the site in July 2006 it inherited a workforce of approximately 1,500 individuals, mainly ex-Gécamines workers. New hires during 2007 have taken this to over 2,400, with an additional 1,600 joining as a result of the Nikanor merger. There is a “lost generation” of workers who as a result of the decline of the mining industry in the DRC did not benefit from either formal education or on-the-job training. Substantial training investment is required to improve their skill base.

Safety cultureWhen the joint venture took over the Kamoto site there was little focus on safety, thus it was imperative to establish a safety culture. A dedicated safety team was formed and regular inspections carried out. A particular focus was placed on ensuring employees wear Personal Protective Equipment (PPE) at all times.

There were, unfortunately, two deaths during the year: one of an experienced employee seconded to a contractor, and the other a sub-contractor. The causes of both were fully investigated and there is confidence that improvements have been made, with greater training and supervision in key areas. There were no lost time accidents recorded in December.

An external audit was recently completed to evaluate progress and assess continuing risks, liabilities and compliance gaps. The site is implementing a company-wide safety system that will comply with ISO standards. A number of employees have received offsite training at NOHSA in South Africa, and the system will be rolled out onsite during 2008.

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“The Katanga Operations team has worked with its counterparts at Nikanor to ensure the smooth implementation of the merger.”

The construction camp built to house workers Underground operations began in March Copper production began in December

Goals for 2008The overriding goal for 2008 is to establish the benchmark for successful operations in the DRC. This includes:

Further developing a culture of safety and respect for the environment throughout the operations.

Making a strong focus on production and cost goals a way of life for the entire workforce, including a clear link between performance and recognition.

Demonstrating the capability of the mining operations to dependably meet expected production and cost performance.

Rapidly improving the systems and support functions assisting the management team, and selectively recruiting in order to ensure a critical mass of management.

Reinforcing an image of upstanding behavior to drive the continued consolidation of a business environment meeting international standards.

Strengthening cooperation with the DRC at a local, provincial, and national level.

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Nearly 200,000 hours of training were conducted in 2007. The proposed restart of the Mutoshi Institute, a former training school for mine workers, by a group of local mining companies in conjunction with Gécamines will play an important role in meeting future training needs. There is also a plan to identify Congolese workers for a management development program to eventually replace much of the expatriate workforce.

EnvironmentEnvironmental emissions were at a low level in 2007 due to the transition to production. No significant environmental infraction or incident was reported during the year. Environmental baseline data continues to be collected and progress was made with water (surface and ground), soil, noise and air studies.

These will inform the Environmental and Social Impact Assessment and will be compiled in 2008 into long-term management plans.

Integration with NikanorSince the merger was announced in November, the Katanga Operations team has worked with its counterparts at Nikanor to ensure the smooth implementation of the merger on the ground. A management team was swiftly put in place after the merger was completed, and then toured each of the Katanga and Nikanor sites to enable employees to ask questions.


Social Responsibility Review

Social responsibility has a very clear meaning to Katanga: supporting the social infrastructure to create a platform that ensures long-term, sustainable improvements in the day-to-day lives of those surrounding the company’s operations.

Clear progress was made in all areas of Katanga’s social responsibility strategy and activities during 2007. This is particularly noteworthy in the context of an environment still suffering from high unemployment, artisanal mining activity and weak general infrastructure. The following is a progress report on initiatives undertaken during the year.

Governance improvedIn 2007, Katanga improved the governance structure used to guide decisions and ensure compliance with corporate standards. Three important measures were completed:

A Sustainable Development Policy was approved by the Board of

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Directors, from which a broad range of policies and procedures was developed.Performance criteria became a standard provision in all social development projects. In addition, it became mandatory to direct all payments into recognized bank accounts, and cash payment of contracts was eliminated.International codes and standards became standard reference for Katanga’s policies and procedures including, by way of example, the Voluntary Principles for Security and Human Rights in all security training and management plans.

Ongoing consultationIn April 2007, consultation with a far-reaching audience including government authorities, traditional chiefs, non-governmental organizations (NGOs), community groups and other mining companies was undertaken through a number of community-based engagement sessions. Katanga’s meetings were conducted in both French and Swahili to ensure full comprehension of the discussions.

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Feedback from local stakeholders attending these meetings was consistent regardless of location: “We want our children to be educated”, “We want you to hire locally” and “We need better healthcare”. This feedback, which aligned closely with Katanga’s own thinking, formed the basis for a number of initiatives during the year, as outlined below.

To ensure that communication channels remain open with local stakeholders, an ongoing consultation and grievance process was established and is managed by a dedicated management team. Katanga believes that continual communication with local stakeholders will help ensure that issues and concerns are addressed before they become problems.

Community investmentKatanga’s level of commitment to the community can be measured by progress made in four areas of social development:

HealthcareInfrastructure improvements at the Mwangeji Hospital were completed during 2007, including repairs to the

“To ensure that communication channels remain open with local stakeholders, an ongoing consultation and grievance process was established.”


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Goals for 2008In addition to expanding efforts in governance and transparency, priorities include:

In collaboration with other mining companies in the area, rehabilitating the Mutoshi Training Institute and upgrading instructional capacity.

Further upgrading the delivery of community medical services through both the Mwangeji Hospital and the community clinic network.

Initiating a malaria vector control program in the general Kolwezi area.

Sponsoring the start of the GAVI Alliance community inoculation program.

Completing improvements to roads in the town of Kolwezi.

Expanding support to upgrading local educational capacity.

Producing a public progress report summarizing activities for the year.

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perimeter security wall and the construction of two new sanitation blocks that restored toilet and shower capacity to the hospital. The facility was also the benefactor of a collaborative effort between Katanga and Project CURE, a US-based non-profit group, for a shipment of donated medical supplies and equipment due to arrive in early 2008. The value of these two projects exceeded US$650,000.

Work also began with Crusader Health, an independent medical services provider, to rehabilitate and manage a new hospital and three clinic facilities in local communities surrounding the mine. In addition to contributing to the capital costs for facility rehabilitation, medical expenses for employees and their dependents are paid for by the company, totalling approximately US$3 million per year. InfrastructureA broad range of projects was completed in 2007, yielding improvements to local roads and sanitation. Initiatives included the restoration of the national road between Kanina and Kapata, which

Harvesting the first crop at the Mukweji Farm and (far left) refurbishing the farmhouse

employed 100 artisanal miners; rebuilding of a section of road between Kolwezi and Nguba; and the clearing of approximately 3,000 metres of drains and ditches in Manika, reducing health and sanitation issues associated with standing water.

To assist with needed upgrades to local power distribution capacity, the company donated a large transformer to the Congolese power authority. Expenditure for infrastructure improvement initiatives throughout 2007 totalled approximately US$2.75 million.

Capacity-buildingLocal economic expansion in Kolwezi requires diversification. To support this process, Katanga initiated the revitalization of a 30-hectare farm with the goal of creating a self-sustaining and independent cooperative. The farm is now producing a commercial crop of vegetables being sold throughout Kolwezi. Farm produce is also being purchased by the catering companies providing services to Katanga’s construction camp. Katanga provided the initial capital required by this

Former artisanal miners were employed to clear drains and ditches


initiative and continues to offer ongoing project management support. A second agricultural project has been established in conjunction with ARDERI, a local NGO.

EducationDuring 2007, negotiations were initiated with Gécamines to assume control and responsibility for the Mutoshi Training Institute. Katanga’s goal, in collaboration with other local mining companies, is to rehabilitate this facility and restore educational and instructional

capacity to a level that ensures a future generation of well-trained employees for the mining industry throughout the country.

Integration with Nikanor programsThe merger of Katanga and Nikanor provides the opportunity to optimize spending and consolidate efforts. Benefits to local stakeholders will be derived from the greater opportunities that now exist for partnerships with NGOs, multilateral and donor agencies, and government.

Managing artisanal miningArtisanal and small-scale mining is common in the DRC, and there are estimated to be around 20,000 artisanal miners in the Kolwezi area alone.

Katanga is developing a strategy to manage the issue. The company contributed financially to and participated in an International Finance Corporation sponsored program which was facilitated by the US-based NGO, Pact. The outcome of this research program is guiding company plans to manage the artisanal mining issue over its concession.

A focus is finding sustainable alternative employment opportunities through Katanga’s community investment program. A 30 hectare farm near Kolwezi, which had become overgrown, is being re-cultivated in cooperation with local communities and people who previously worked as artisanal miners.

One of the workers at the farm is 33-year-old Tshegeka Nwegi, who had worked as an artisanal miner for seven years. “Life as a digger was difficult,” he said. “My life is totally different now. Now I know I will have enough money each month to feed my family and pay school fees.”

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Social Responsibility Review continued

“The merger of Katanga and Nikanor provides the opportunity to optimize spending and consolidate efforts.”

The next chapterThe balance between government responsibility and good corporate citizenship has been a fine one over the course of this year. The majority of government capacity within the DRC has been dedicated to high-level reconstruction efforts, leaving few resources to focus on meaningful “micro-initiatives” that will rapidly improve day-to-day life. Katanga believes that the direction, funding and rebuilding of the country’s social infrastructure is the responsibility of government, but as a socially responsible company it will continue to provide support in these areas.

From a broader perspective, Katanga’s greatest contribution to the local population and general economy is through an efficient and profitable mining operation that generates taxes and royalties. At year-end, the company employed more than 2,400 employees from the local community. Earnings through employment, plus the recognized economic multiplier that accompanies these earnings, means Katanga’s presence injects in excess of US$8 million a month into the local economy.


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Financial Review

Katanga began 2008 with a healthy balance sheet and is now generating operational cash flow. The US$175 million Phase I refurbishment program was delivered on budget and copper production began on schedule in December 2007, with the first sales recorded early in the new year.

Following the completion of the merger with Nikanor in January 2008, Katanga had approximately US$500 million in cash. The company has a low debt level, with US$125 million in corporate debentures and a US$150 million convertible loan.

Marketing agent appointedIn May 2007 Katanga appointed LN Metals International Ltd as sole agent for 2008 for the marketing of copper and cobalt from its Kamoto operations. LN Metals is assisting the company in establishing a worldwide customer base for its initial copper cathode and cobalt metal production to enable it to maximize the profitability of its 2008 production. Production during 2008 is expected to be 30,500 tonnes of copper cathode and 1,600 tonnes of cobalt metal.

Financing in placeDuring 2007 Katanga had planned to arrange the final stage of its three-stage financing. Three lead arrangers were mandated in March. However, ongoing uncertainty generated by the mining license review in the Democratic Republic of Congo and the hostile takeover attempt over the summer meant that alternative arrangements were required.

In November, Katanga entered into a US$150 million two-year loan facility with Glencore Finance (Bermuda) Limited. The loan bears interest at LIBOR plus four per cent per annum payable upon maturity. It is convertible in whole or in part at the option of Glencore into up to 9,157,509 common shares at any time during the first year and only on repayment of the Facility during the second year.

Additionally, Katanga and Glencore agreed to a 10 year off-take contract starting in 2009 under which Glencore will buy 100 per cent of Katanga’s annual copper and cobalt production at market terms. The agreement provides for payment by Glencore of 90 per cent of the expected sales value upon loading at

In Katanga’s final pre-production year, the company secured the last stage of its financing for the original Kamoto project and entered into off-take agreements for 2008 and for 2009 onwards.

“Katanga began 2008 with a healthy balance sheet and is now generating operational cash flow.”


the mine gate, with the balance payable upon delivery of the metal at the discharge port. This significantly reduces working capital requirements. Following the merger with Nikanor, Glencore’s off-take agreement was extended for the life of all Katanga’s mines on the same terms.

Future financing requirementsFollowing the merger with Nikanor, the company plans to develop a combined mine complex using a phased expansion approach, which will allow a greater portion of capital expenditure to be funded from internally produced cash flows.

Financing requirements are anticipated to be up to US$500 million, to be funded by a loan facility for drawdown in the second half of 2009. The requirements will be reduced by early cash flow from production, which will be more significant if copper and cobalt prices remain at their current levels. The final amount of financing required will be determined by a feasibility study on the expanded mine complex to be published in the third quarter of 2008.

Goals for 2008Capital expenditure for 2008 will be funded from existing cash reserves, with additional financing not anticipated before mid-2009. Goals for the year relate to marketing the first commercial production and establishing future funding requirements:

Generating operational cash flow through successful marketing of metal.

Refining additional funding requirements as part of the feasibility study.

Agreeing terms with a group of lenders for a debt facility for drawdown in the second half of 2009.

Integrating Katanga and Nikanor finance teams and systems.

Implementing the Management Information System business platform.

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Financial Review continued

Underground mining at Kamoto


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The following discussion and analysis is management’s assessment of the results of operations and financial condition of Katanga Mining Limited (“Katanga” or the “Company”) and should be read in conjunction with its 2007 audited consolidated financial statements. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. All dollar amounts unless otherwise indicated are in United States dollars. This information has been prepared as of March 20, 2008. Katanga’s common shares, warrants and notes trade on the TSX Exchange under the symbols “KAT” “KAT.WT” and “KAT.NT” respectively. Its most recent filings are available on the System for Electronic Document Analysis and Retrieval (“SEDAR”) and can be accessed through the internet at www.sedar.com.

1. Company OverviewKatanga is incorporated under the laws of Bermuda and is engaged in the acquisition and development of mineral properties.

In 2004 Kinross Forrest Limited (“KFL”) (which later became a subsidiary of the Company) entered into a joint venture with La Generale des Carrieres et des Mines (“Gécamines”) and set up a project company called Kamoto Copper Company SARL (“KCC”) (75% KFL and 25% Gécamines). Katanga, through KCC, is engaged in copper and cobalt mining and related activities, including the refurbishment and rehabilitation of the Kamoto/Dima mining complex in the Democratic Republic of Congo (the “Kamoto Project”) and the extraction and processing of copper and cobalt metals. The Kamoto Project includes exploration and mining properties, the Kamoto concentrator, the Luilu metallurgical plant, the Kamoto underground mine and various oxide open pit resources in the Kolwezi district of the Democratic Republic of Congo.

In January 2008, the Company completed the acquisition of Nikanor Plc (“Nikanor”). Nikanor has 75% ownership of a project company called DRC Copper and Cobalt Project S.A.R.L (“DCP”) with the other 25% held by Gécamines. DCP’s operations include mining properties, a concentrator and various oxide open pit resources, the largest of which is the KOV pit. The acquisition brings together the adjacent properties in the Democratic Republic of Congo, owned by Katanga and Nikanor, which were previously part of the same complex, to create a major single-site copper and cobalt operation.

2. Highlights and Outlook Highlights for 2007 and the start of 2008

Construction team build up began onsite in January 2007 and the last of the major infrastructure contracts were awarded.

An updated reserves and resources statement was released in February 2007. Proven and probable ore grades for the Kamoto underground mine increased significantly. Total reserves and resources are 161.9 million tonnes of ore with an average copper grade of 3.50% and an average cobalt grade of 0.38%.

The underground mine became operational and blasting began on March 21, 2007.

Concentrator commissioning began on schedule in mid-July. In total, one sulphide and one oxide mill and 88 flotation cells were operational in phase one.

The seven kilometer concentrate delivery pipeline to the metallurgical plant was completed in July.

The Company has entered into a marketing agreement with LN Metals International Ltd (“LN”) that entitles it to a marketing fee for all copper and cobalt production in 2008.

Glencore International AG (“Glencore”) and the Company have signed an off-take agreement whereby, commencing January 1, 2009, all copper and cobalt produced will be sold to Glencore based on market terms.

Extensive improvements were implemented to health and safety standards and operating procedures.

Community Development activities that commenced in the year for the local area include agriculture, enterprise creation, health, sanitation and infrastructure programs.

Arthur Ditto was appointed as Chairman of the Company’s Board of Directors on July 3, 2007 following the resignation of Robert Buchan as the Company’s Non-executive Chairman.

Blasting began at the end of September at the Musonoie-T17 open pit mine and the first ore was extracted.

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Management’s Discussion and Analysis


Management’s Discussion and Analysis continued

In July 2007, Central African Mining & Exploration Company plc (“CAMEC”) advised Katanga that it intended to make a takeover offer for the Company. In response, Katanga established an Independent Committee of the Board of Directors to review all strategic alternatives available to the Company to achieve maximum value for shareholders. CAMEC’s offer was made formally on August 29 and withdrawn on September 6.

A US$150 million two-year convertible debt facility was arranged with Glencore on November 5, 2007.

A special meeting of shareholders held on November 2 approved an increase in Katanga’s share capital to provide the Company with the flexibility for future equity financings or acquisitions.

On November 6, 2007 Katanga announced the acquisition of Nikanor, which has an adjacent copper-cobalt concession in the DRC. The acquisition was completed on January 11, 2008 and the consideration for the Nikanor shares comprised of 0.613 new common shares of the Company and $2.16 in the form of a cash return to each Nikanor shareholder from Nikanor’s existing cash resources.

Cold commissioning at the Luilu Metallurgical Plant began in late November and the first starter sheets were stripped on December 17. The first commercial copper cathodes were produced on December 22, 2007 and shipped in January 2008.

On February 8, 2008, the Company announced that Gécamines and Kamoto Copper Company signed an agreement that sets out compensation, security and payment in exchange for the release to Gécamines of the portion of the KCC concession that represents the Mashamba West and Dikuluwe deposits. The agreement provides that the deposits either be replaced or that the Company is fairly compensated for their economic value. These deposits were not scheduled to start producing oxide ores until 2020 and 2023, respectively.

OutlookProduction for 2008 is forecast to be 30,500 tonnes of copper cathode and 1,600 tonnes of cobalt metal, generating Katanga’s first operational cash flow.

Kamoto’s Phase II rehabilitation is commencing as planned and the Company is reviewing the possibility of accelerating later phases. A further mill and additional 58 flotation cells will be refurbished in the Kamoto Concentrator. In the Luilu Metallurgical Plant, leaching and electro-winning capacity will be doubled and a new roaster will be constructed.

In parallel with the Phase II rehabilitation, Katanga will develop the KOV open pit and build a whole-ore leach and SX/EW facility. Construction of the acid plant and the first of two 80 thousand tonne per year modules of the SX/EW facility will begin during 2008.

Completion of the feasibility study on the enlarged project due to the acquisition of Nikanor is expected by the end of September 2008.

A full integration of the Nikanor assets is expected to be completed during 2008. A four year phased ramp-up is planned with a forecast production of over 300,000 tonnes of refined copper and over 30,000 tonnes of refined cobalt by 2011.

The acquisition will bring together the adjacent properties in the DRC owned by Katanga and Nikanor, which were previously part of the same Mine Complex, to create a major single-site copper and cobalt operation.

Additional funding requirements as part of the feasibility study will be calculated and terms agreed with a group of lenders for a debt facility for drawdown in the first half of 2009.

We will continue to evolve a culture of safety and respect for the environment throughout the Company’s operations to ensure consistent performance at the level expected of world-class operators.

Continued expansion of the skills and operational knowledge of the work force is seen as a major challenge going forward. Nearly 200,000 hours of training were carried out in 2007. The proposed restart in 2008 of the Mutoshi Institute, a former training school for mine workers, will play an important role in meeting future training needs.

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3. Selected Annual Financial Information

2007 2006 2005

Year ended December 31, Interest income $4,711,633 $2,934,638 $269Other administrative expenses $10,457,132 $5,283,495 $6,961Stock-based compensation $5,171,296 $1,622,852 $nilForeign exchange loss (gain) $18,369,974 $(900,821) $nilInterest expense $18,996,049 $1,551,868 $nilNet loss $47,853,868 $4,721,236 $6,692

Loss per share $0.61 $0.08 $nil

As at December 31, Cash and cash equivalents $100,713,650 $196,985,623 $944,737Current assets $128,513,138 $201,688,958 $945,599Mineral interests and other assets $320,308,963 $48,390,822 $2,643,932Total assets $448,822,101 $250,079,780 $3,589,531Current liabilities $67,144,833 $9,648,929 $1,088,584Long-term debt $267,529,994 $93,496,963 $nilTotal liabilities $334,674,827 $103,145,892 $1,088,584

Shareholders’ equity $114,147,274 $146,933,888 $2,500,947

Results of the operations for the years ended 2007 and 2006The net loss for the year 2007 was $47,853,868 (2006 – $4,721,236) and represents the losses incurred in completing phase I of the feasibility study. Work on phase I commenced in the third quarter of 2006 before which the Company had no material operating costs as expenditure related to the feasibility study costs only.

Interest Income was earned on non-utilized funds.

The expenses for 2007 totaled $33,998,402 (2006 – $6,005,526). These included: o general administrative expenses of $10,457,132 (2006 – $5,283,495) representing the costs to maintain the head office function in

London and maintain the Company’s TSX listing in Canada; o stock-based compensation of $5,171,296 (2006 – $1,622,852); and o foreign exchange losses of $18,369,974 (2006 – gain of $900,821) of which $19,964,100 (2006 – $nil) were unrealised losses created by

the translation into US$ of the CDN$ denominated debentures. Any unrealised losses or gains on the debentures will be realized on their maturity on November 30, 2013.

The interest expense in 2007 related wholly to the debentures payable and totaled $18,996,049. The interest on the convertible debt is being capitalized and will not be charged to operations until commercial production commences in 2008.

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4. Selected Quarterly InformationFiscal 2007

As at and for the Three Months Ended

December 31, September 30, June 30, March 31, 2007 2007 2007 2007

Three Months EndedInterest income $98,449 $736,466 $1,574,883 $2,301,836Administrative expenses $7,828,541 $10,909,914 $11,401,683 $3,858,265Interest expense $4,950,630 $6,140,937 $4,085,434 $3,819,048Net loss $12,035,475 $16,391,456 $13,991,498 $5,435,439

Loss per share $0.15 $0.21 $0.18 $0.07

As atCash and cash equivalents $100,713,650 $37,868,422 $100,618,724 $166,040,849Current assets $128,513,138 $54,295,480 $110,758,993 $170,688,044Mineral interests and other assets $320,308,963 $223,198,315 $143,904,867 $78,344,826Total assets $448,822,101 $277,493,795 $254,663,860 $249,032,870Current liabilities $67,144,833 $39,811,417 $16,457,561 $12,131,031Long-term debt $267,529,994 $116,347,157 $107,953,162 $94,219,118Total liabilities $346,674,827 $156,158,574 $124,410,723 $106,350,149

Shareholders’ equity $114,147,274 $121,335,221 $130,253,137 $142,682,721

Fiscal 2006

As at and for the Three Months Ended

December 31, September 30, June 30, March 31, 2006 2006 2006 2006

Three Months Ended Interest income $2,046,612 $888,026 $ nil $ nilAdministrative expenses $2,468,275 $3,537,251 $ nil $ nilInterest expense $1,551,868 $ nil $ nil $ nilNet loss $2,072,011 $2,649,225 $ nil $ nil

Loss per share $0.02 $0.03 $ nil $ nil

As atCash and cash equivalents $196,985,623 $122,729,429 $131,463,901 $423,560Current assets $201,688,958 $126,164,641 $131,565,963 $424,422Mineral interests and other assets $48,390,822 $18,959,585 $12,200,954 $4,803,239Total assets $250,079,780 $145,124,226 $143,766,917 $5,227,661Current liabilities $9,648,929 $3,978,148 $2,093,417 $895,600Debentures payable $93,496,963 $ nil $ nil $ nilTotal liabilities $103,145,892 $3,978,148 $2,093,417 $895,600

Shareholders’ equity $146,933,888 $141,146,078 $141,673,500 $4,332,061

Three months ended December 31, 2007 and 2006In the fourth quarter ended December 31, 2006 implementation of Phase I of the feasibility commenced. The expenses for this period are therefore in relation to the development of the mine but are not at the same magnitude as the expenses for the quarter ended December 31, 2007 as activity has increased considerably.

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Expenses for the three months ended December 31, 2007 were $7,828,541 (2006 – $2,468,275). These included: o exchange losses incurred of $2,028,840 (2006 – gain of $231,062) which were caused by the strengthening of the CND$ against the

US$ in the quarter. The debentures payable are denominated in CND$ which gave rise to unrealised exchange losses totaling $1,825,181;

o stock-based compensation for the three months ended December 31, 2007 of $552,821 was lower for the quarter as the share price decreased in the fourth quarter (CND $1.36) which resulted in a reduction of $375,448 in the recorded fair value of the Restricted Stock Units (RSU’s). The RSU’s are valued using the Company’s quoted share price;

o professional fees for the quarter were $936,341 an increase from previous quarters due to the expenses incurred in defending the Company from the uninvited take-over approach from CAMEC PLC.

All of the interest expense relates to the debentures payable and totaled $4,950,630 (2006 – $1,551,868) for the quarter. The debenture was issued in November 2006.

Interest income of $98,449 was earned in the three months ended December 31, 2007 (2006 – $2,046,612) on the cash balances not yet spent on the rehabilitation of the Kamoto Joint Venture Assets. The majority of the interest income earned in the fourth quarter of 2007 was offset against mineral interests as the cash was held by KCC the operating company which has not yet commenced commercial operations. In 2006, the cash was held by Katanga Mining Limited.

The above resulted in a net loss for the quarter ended December 31, 2007 of $12,035,475 after income taxes (2006 – $2,072,011).

Quarterly TrendsThe focus of the Company has been the development of the mine site and therefore the most notable trend has been the increase in expenditures incurred on mineral interests. Expenditures commenced in the quarter ended March 31, 2006 and totaled $4,803,239. The corresponding expenditures capitalized in the quarter ended December 31, 2007 were $97,110,648.

5. Cash Flows Three Months Ended Year Ended

Cash Flows from: December 31, December 31, December 31, December 31, 2007 2006 2007 2006

Operating activities $(13,784,929) $(196,915) $(23,852,124) $(1,117,964)Financing activities $150,000,000 $96,390,902 $156,239,114 $229,858,546Investing Activities $(72,821,727) $(22,168,019) $(228,406,149) $(32,929,922)

2007 and 2006The net operating cash costs for the year ended 2007 were $23,852,124 (2006 – $1,117,964). The majority of the operating expenses were non-cash (as noted in the selected annual financial information). $16,083,730 of operating cash used relates to the build-up of inventory (2006 – $176,583). The remainder relates to the cash costs of head office offset by a realized foreign exchange gain of $1,594,126 (2006 – $670,595).

On May 2, 2006, the Company received aggregate gross proceeds of CDN$ 152,250,000 upon the issuance of a total of 21,000,000 subscription receipts which entitled the holder to acquire one Katanga common share without further consideration. The net proceeds of the issue of these subscription receipts was US $129,407,842. On November 20, 2006 the Company received net proceeds of $94,524,416 upon the issuance of 115,000 unsecured subordinated notes and common share purchase warrants. The additional source of funds in financing activities in 2006 relates to the exercise of warrants and $3,708,675 in capital contributions which were used to fund the feasibility study.

In 2007, $1,210,624 was received upon the exercise of 216,677 options and $5,028,490 upon the exercise of 633,600 warrants. $150,000,000 was received from Glencore upon issuance of convertible debt.

The investing activities for 2006 and 2007 relate mainly to the completion of phase I of the rehabilitation of the site in preparation for commercial production in 2008.

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Three months ended December 31, 2007 and 2006For the three months ended December 31, 2007, non-cash items in operating expenses included unrealized foreign exchange losses on the debentures of $1,825,181 (2006 – $nil) and $3,772,208 (2006 – $1,551,868) for debenture interest which was paid in January 2008.

For the three months ended December 31, 2007, inventory (in operating activities) increased by $5,883,566 (2006 – $176,583) as a result of the build-up of spares in preparation for commercial production in 2008.

The remainder of the cash expenditures in operating activities relates to head office expenditures.

The financing activities in the three months ended December 31, 2007 relate to the issuance of convertible debt to Glencore. The amount for the three months ended December 31, 2006 relates to the issuance of the unsecured subordinated notes and associated warrants.

Investing activities in the three months ended December 31, 2006 relate to costs incurred on the start of Phase I of the rehabilitation project. For 2007, investing activities relate to similar costs incurred but at a much higher level due to the increase in activity as the Company neared production.

6. Discussion of Financial Position and Liquidity December 31, December 31, 2007 2006

$ $

AssetsCash and cash equivalents 100,713,650 196,985,623Other current assets 27,799,488 4,703,335Property, plant and equipment 298,262,527 41,847,436Other non-current assets 22,046,436 6,543,386

448,822,101 250,079,780

LiabilitiesCurrent liabilities 67,144,833 9,648,929Convertible debt 149,517,502 –Debentures payable 118,012,492 93,496,963

334,674,827 103,145,892

Shareholders’ equity 114,147,274 146,933,888

Cash and Cash Equivalents/LiquidityCash and cash equivalents decreased by $96,271,973 during the year ended December 31, 2007. This is primarily due to the expenditures incurred to complete Phase I of the Kamoto Project. All cash is held in interest bearing accounts and none has been invested in asset-backed commercial paper.

In terms of liquidity, the expected completion of the Phase I capital program reduced the Company’s cash resources during the fourth quarter of 2007 and as a result the Company raised $150,000,000 from Glencore in the form of a convertible debt obligation.

Other Current AssetsThe increase in other current assets totaled $23,096,153 during 2007 of which $16,083,730 can be attributed to the build-up of inventory of spares in preparation for commercial production. The remaining increase is due to the amount prepaid, mainly to suppliers, for goods and services yet to be supplied to site as most suppliers require some form of payment in advance for the supply of goods to the DRC.

Other Non-current AssetsOther non-current assets increased by $15,503,050 primarily as a result of the Nikanor acquisition costs ($18,925,646) offset by the change in accounting policy for the deferral of financing costs ($4,023,386).

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Property, Plant and EquipmentThe increase in property, plant and equipment during the year ended December 31, 2007 of $256,415,091 is primarily related to additions to the Kamoto Joint Venture Assets (investing activities) and the acquisition of property, plant and equipment to support the operation. Commercial production is expected to commence in the second quarter of 2008.

Current LiabilitiesThe increase in current liabilities of $57,495,904 during the year ended December 31, 2007, is due to an increase in creditors at the mine-site, an accrual of $18,403,541 for the acquisition costs of Nikanor and the accrual of debenture interest which is no longer being added to the principal balance outstanding as of July 1, 2007, and is now being accrued for under current liabilities of $8,766,213 (the interest accrued from July 1, 2007, to December 31, 2007, was paid in January 2008).

Debentures PayableThe increase in debentures payable of $24,515,529 during the year comprises interest added to the principal outstanding prior to July 1, 2007 of $8,331,681, transition adjustments for new accounting standards for deferred financing costs of $(3,915,708) and unrealized foreign exchange translation losses of $20,099,556.

Convertible DebtOn November 5, 2007, the Company’s subsidiary KCC finalized a loan facility with Glencore. The key terms of the debt facility are a 2 year term, interest rate of Libor plus 4%, first year’s interest added to the loan principal at the end of the first year, full amount repayable at the end of the 2 year term, mandatory prepayment on change of control, subordination agreement making the loan senior ranking to other indebtedness and the loan is guaranteed by the Company.

On October 31, 2007, the Company signed a conversion agreement with Glencore. The agreement gives Glencore the right to convert the full loan, at any time in the first and second year, as long as the loan is outstanding, into 9,157,509, common shares of the Company. The loan is repayable at any time and if it is repaid, in part or in full, by the Company in the first year, Glencore has the option to purchase common shares of the Company at the price of $16.38 each equal to the amount of the principal repaid at any time ending on November 4, 2008. In the second year if the loan is repaid early, in part or in full, Glencore has the same right but must exercise it within 21 days.

The equity component of the convertible debt has been valued by determining the carrying amount of the financial liability by discounting the stream of future payments of interest and principal at the prevailing market rate for a similar liability that does not have the associated equity component (LIBOR plus 5%). The carrying amount of the equity instrument was then determined by deducting the carrying amount of the financial liability from the amount of the compound instrument as a whole. On issuance of the debt the estimated fair value of $2,716,249 attributed to the equity component was classified in shareholders’ equity on the consolidated balance sheet.

The convertible debt facility is being accreted to its face value over the term of the loan with a corresponding interest expense charge over the term of the debt. Up to December 31, 2007 $226,354 of this interest has been capitalized to mineral interests.

Off-Balance Sheet ArrangementsAs at December 31, 2007, the Company had no off-balance sheet arrangements.

7. Contractual Obligations and CommitmentsThe Company’s outstanding debentures are due November 30, 2013. Interest on the debentures is payable semi-annually in arrears with equal installments on January 1 and July 1 of each year, with interest payable from the closing date to June 30, 2007 capitalized and payable on maturity and cash interest payments commencing January 1, 2008.

The Company is obligated under the terms of an operating lease for minimum annual property rental payments of $1,039,798 for a period of five years, commencing September 19, 2006, with an option to renew for a further five years.

The Company estimates its capital expenditures for the redevelopment of the Kamoto Project to be $499 million (inclusive of costs already incurred) over the next three years ending December 31, 2010. The project is being developed in four phases with each phase designed to increase the level of production capacity. The initial phase, which brought the assets into initial production in December 2007, cost $175 million (exclusive of interest and other costs capitalized prior to commencement of commercial production). Phases II, III and IV are estimated to be $136 million, $124 million and $64 million (excluding capitalized interest and other costs), respectively. Each of these last three phases is expected to last one year beginning in January 2008. The Company has also entered into an engineering contract with a



vendor for the design of two 400 tonne per day industrial copper concentrate roasters. The initial roaster to be built is part of Phase II of the redevelopment plan and the second roaster to be built is part of Phase III. The contract for the design of these roasters is for $3.8 million.

As a result of the acquisition of Nikanor, a revised feasibility report is being prepared that takes into account the requirements of the combined companies and it is expected that this will significantly impact the amount and timing of the capital expenditures referred to above.

The Company has entered into a marketing agreement with LN that entitles it to a marketing fee for all of the copper and cobalt production in 2008. Whereby, commencing January 1, 2009, Glencore and the Company have signed an off-take agreement under which all copper and cobalt produced will be sold to Glencore based on market terms.

The following table summarizes the Company’s contractual and other obligations, as at December 31, 2007.

Total Less than 1 year 1-3 years 4-5 years After 5 years Payments due by period ($ million)

Property operating lease 3.9 1.0 2.9 – –Redevelopment expenditure commitments 37.0 37.0 – – –Debentures payable(1) 228.5 16.8 48.3 32.2 131.2Long-term debt(1) 174.9 – 174.9 – –

(1) The total payable includes all interest costs to the date of repayment.

8. Changes in Accounting PoliciesFinancial instruments, comprehensive income and hedgesOn January 1, 2007, the Company adopted the following new accounting standards that were issued by the Canadian Institute of Chartered Accountants:

Handbook Section 1530, “Comprehensive Income”, Section 3251, “Equity”, Section 3855, “Financial Instruments – Recognition and Measurement”, and Section 3865, “Hedges”. The Company adopted these standards retrospectively; accordingly comparative amounts for prior periods have not been restated.

As a result of the adoption of the new standards, the Company has measured its accounts payable and accrued liabilities and debentures payable at amortized cost and they are classified as other financial liabilities. Upon adoption of Section 3855, the Company is using the effective interest method of amortization for transaction costs fees and discounts incurred relating to the debentures payable. The liability was re-measured upon implementation at the present value of future payments discounted at the effective interest rate in the instrument. Upon transition to the new standard, the Company recorded an adjustment that eliminated the deferred financing cost asset, decreased debentures payable by $4,023,386 and increased opening deficit by $107,678.

Accounting changesIn July 2006, the Accounting Standards Board (“AcSB”) issued a replacement of The Canadian Institute of Chartered Accountants’ Handbook (“CICA Handbook”) Section 1506, Accounting Changes. The new standard allows for voluntary changes in accounting policy only when they result in the financial statements providing reliable and more relevant information, requires changes in accounting policy to be applied retrospectively unless doing so is impracticable, requires prior period errors to be corrected retrospectively and calls for enhanced disclosures about the effects of changes in accounting policies, estimates and errors on the financial statements. The impact that the adoption of Section 1506 will have on the Company’s results of operations and financial condition will depend on the nature of future accounting changes.

Capital Disclosures and Financial Instruments – Disclosures and PresentationOn December 1, 2006, the CICA issued three new accounting standards: Handbook Section 1535, Capital Disclosures, Handbook Section 3862, Financial Instruments – Disclosures, and Handbook Section 3863, Financial Instruments – Presentation. These standards are effective for interim and annual consolidated financial statements for the Company’s reporting period beginning on October 1, 2007. Section 1535 specifies the disclosure of (i) an entity’s objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non-compliance.


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The new Sections 3862 and 3863 replace Handbook Section 3861, Financial Instruments — Disclosure and Presentation, revising and enhancing its disclosure requirements, and carrying forward unchanged its presentation requirements. These new sections place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks.

The Company is currently assessing the impact of these new accounting standards on its consolidated financial statements.

9. Critical Accounting EstimatesCritical accounting estimates used in the preparation of the financial statements include Katanga’s estimate of recoverable value on its investment in the redevelopment of the Kamoto Joint Venture Assets, fair value estimates for stock options and warrants, the fair value of the Glencore convertible debt, the residual value of the equity portion of the Glencore convertible debt, and estimated lives of depreciable assets. These estimates involve considerable judgment and are, or could be, affected by significant factors that are out of Katanga’s control.

Katanga’s recorded value of its mineral interests associated with the redevelopment of the Kamoto Joint Venture Assets is based on historical costs that are expected to be recovered in the future. Katanga’s recoverability evaluation is based on market conditions for minerals, underlying mineral resources associated with the properties and future costs that may be required for ultimate realization through mining operations or by sale. Katanga is in an industry that is exposed to a number of risks and uncertainties, including political risk, exploration risk, development risk, commodity price risk, operating risk, ownership risk, funding risk, currency risk and environmental risk. Bearing these risks in mind, Katanga has assumed reasonable world commodity prices will be achievable, as will costs used in studies for projected construction and mining operations. All of these assumptions are potentially subject to significant change, which are out of Katanga’s control, however such changes are not determinable. Accordingly, there is always the potential for a material adjustment to the value assigned to these assets.

The fair value of the stock options and warrants is calculated using an option pricing model that takes into account the exercise price, the expected life of the option/warrant, expected volatility of the underlying shares, expected dividend yield and the risk free interest rate for the term of the option.

10. Outstanding Share DataSummary of Outstanding Securitiesa) Authorized: 1,000 common shares, par value $12.00 each, and 300,000,000 common shares, par value $0.10 each.b) Issued:

Number of Shares

Opening – December 31, 2005 20,163,475Exercise of warrants 1,747,500Issued for cash 21,000,000Exercise of options 125,000Common share adjustment 1Shares issued to acquire KFL 35,001,500

Balance – December 31, 2006 78,037,476Exercise of options 216,667Exercise of warrants 633,600

Balance – December 31, 2007 78,887,743Performance shares issued to former Nikanor employees 33,189Shares issued to acquire Nikanor 127,168,221

Balance –March 20, 2007 206,089,153

The Company has a Stock Option Plan which is consistent with the policies of the Toronto Stock Exchange (the “TSX”).



11. Other InformationMaterial TransactionsThere were no material transactions during the period, other than as described herein.

Use of Financial InstrumentsKatanga has not entered into any specialized financial agreements to minimize its investment risk, currency risk or commodity risk. The principal financial instrument affecting Katanga’s financial condition and results of operation is currently its cash and cash equivalents and the debentures payable.

Related Party TransactionsKamoto Operating Limited (“KOL”), a company incorporated pursuant to the laws of the DRC, has been appointed to act as the operator of the Kamoto project pursuant to the Kamoto Joint Venture Agreement and an operating agreement (“Operating Agreement”) between KOL and the Company’s subsidiary, KCC, executed on November 2, 2005. Current shareholders and directors of the Company are owners of KOL. The Operating Agreement establishes the terms and conditions pursuant to which KOL as operator will provide services to KCC in the planning and conduct of exploration, development, mining, processing and related operations with respect to the Kamoto Joint Venture Assets, including a management fee to be provided to KOL. During the year ended December 31, 2007, management fees totaling $7,326,518 (2006 – $875,707) were incurred and accrued to KOL. These fees have been capitalized to mineral interests.

The Company has the option to acquire KOL (“KOL Call Option”). The purchase price payable if the KOL Call Option is exercised will be determined by an independent investment bank agreed to between the parties as the fair market value to the KOL shareholders, as at the date of the valuation, based on an agreed cash flow model. The consideration will be paid in cash or shares of the Company at the option of the KOL shareholders.

During the year ended December 31, 2007, the Company engaged an entity owned by one of its directors for the sourcing and provision of goods and services (including construction and other resources), mining of one of its open pit ore bodies and the construction of a tailings dam. The total paid for these services was $20,324,997 (2006 – $1,560,591) and as at December 31, 2007, $3,409,915 was included in accounts payable and accrued liabilities for these services (2006 – $nil).

KOL, on behalf of KCC, entered into an agreement for the mining of one of its open pit ore bodies with an entity owned by one of its directors. The pre-stripping commenced in April 2007, and mining is expected to continue through 2011. A mobilization fee of $2,520,000 was paid during the year ended December 31, 2006. The fee will be charged to income upon commencement of commercial production of the ore body.

12. Health, Safety, Community and EnvironmentThe Company recognises the critical importance of providing employees with a safe and healthy work environment. The Company is actively implementing policies, standards, training, audit protocols and health, safety and environmental (“HSE”) reporting system across its operation. This includes emergency response preparedness and training as well as job task analysis and relevant training.

An extensive Environmental & Social Impact Assessment (“ESIA”) is underway and final report together with Environmental & Social Management plans will be published in mid 2008, following further public consultation and stakeholder engagement. Environmental baseline data collection includes air, noise, surface water and groundwater measurements.

The Company actively supports community consultation and liaison through regular dialogue with surrounding communities. Feedback from this communication is continually integrated into the Company’s social and community development plans.

During 2007, a broad range of community development programs were completed covering medical and health, infrastructure, capacity building and education initiatives. Specific contributions included facility improvements to the local hospital and community clinic network in Kolwezi, restoration of the national road between Kanina and Kapata, rebuilding of a section of the road between Kolwezi and Nguba and the clearing of nearly 3,000 meters of clogged drains and ditches, thereby reducing health risks that are associated with standing water.

13. Recent DevelopmentsAcquisition of Nikanor PLCOn January 11, 2008, the Company acquired 94.10% of the outstanding common shares of Nikanor PLC (“Nikanor”). On February 29, 2008, the Company acquired the balance of the outstanding common shares of Nikanor through a statutory compulsory acquisition procedure.


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Consideration for the shares acquired comprised:a) The issue by the Company of 0.613 new common shares for each Nikanor share acquired (the “Offer”). This resulted in the issuance of

127,168,221 common shares with an aggregate fair value of $2,009,258,000. The value ascribed to each Katanga share was determined using the average quoted market value of the Katanga shares two days before and two days after the announcement of the transaction (CDN$15.80); and

b) The payment of $2.16 in cash to each Nikanor shareholder contemporaneously with the closing of the Offer (the “Cash Return”). The Cash Return was paid from Nikanor’s existing cash resources and totaled $446,148,000.

The acquisition is being accounted for as an asset acquisition of the KOV high grade copper and cobalt body. Further information on the accounting treatment and the pro forma effects of the acquisition can be found in the Business Acquisition report that is filed on SEDAR.

Summary of AcquisitionThe acquisition will bring together the adjacent properties in the DRC owned by Katanga and Nikanor, which were previously part of the same mine complex, to create a major single-site operation.

Substantial high-grade resources of both copper and cobalt will create an exceptional foundation for a large-scale, low-cost and long-life operation.

Based on work completed to date, the Company intends to develop a unified mine complex with annual output in excess of 300,000 tonnes of copper and 30,000 tonnes of cobalt by 2011. It is believed that the combined operations will be the largest single-site project in the world producing both copper and cobalt.

The acquisition is expected to deliver significant value enhancement for shareholders of both companies resulting from capital savings, lower unit operating costs and increased production.

More cost effective operations are expected to increase revenue to the DRC government. The coordination of the Company’s infrastructure spend and corporate social responsibility activities will also be more effective in producing positive change for the communities surrounding the operations.

The Company will follow Katanga and Nikanor’s existing strategies of financing their projects through a mixture of debt and equity. The level of additional financing required will be determined as part of a combined business plan, but it is expected that production from Katanga and a phased approach to capital expenditure will result in a lower and delayed requirement for additional financing than for Nikanor on a standalone basis.

Contract ReviewOn February 11, 2008, KCC received a letter from the Minister of Mines of the DRC outlining a number of points that require further discussion as a consequence of the review by the DRC Government of the mining rights which both KCC and DCP hold.

The points to be addressed are: the submission of feasibility studies by the joint ventures; Gécamines’ role in the management of the joint ventures; the submission of schedules of achievements for social projects; and the re-examination of royalty payments for lease facilities. In addition, with respect to DCP, the status of the plant lease and payments to Gécamines are to be clarified. Other documentation matters need to be addressed with respect to both joint venture contracts.

The Company has formally responded to the Minister of Mines and is in active discussions with the government of the DRC.

Mashamba West and Dikuluwe DepositsOn February 8, 2008, the Company announced that Gécamines and KCC have signed an agreement that sets out compensation, security and payment in exchange for the release to Gécamines of the portion of the KCC concession that represents the Mashamba West and Dikuluwe deposits. These deposits were not scheduled to start producing oxide ores until 2020 and 2023, respectively.

The agreement provides for Gécamines to replace these deposits by July 1, 2015, with other deposits having a total tonnage of 3,992,185 tonnes of copper and 205,629 tonnes of cobalt according to Canadian Securities Administration rules (National Instrument 43-101), or pay over time, beginning July 1, 2012, a total of US$825 million from Gécamines’ entitlement to royalties and dividends from KCC. The parties have agreed to fix the equivalent value of the deposits released by reference to a feasibility study prepared in 2006. The agreement set this amount at US$825 million, subject to a joint review by the parties.

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At July 1, 2012, the parties will calculate the proportion of the reserves replaced by Gécamines at that date. Dividends and royalties payable to Gécamines by KCC from this date will be paid into an escrow account to secure future payments by Gécamines. As at July 1, 2015, the parties shall recalculate the amount of reserves transferred to KCC. In the event Gécamines has not completely replaced the deposits, the balance of the amount due shall be paid in cash from that in escrow. Any remaining payments due will be met from Gécamines’ future revenues from KCC, until full payment has been made.

To assist Gécamines in finding replacement deposits, KCC and Gécamines shall conduct jointly managed exploration to be funded initially by KCC and reimbursed by Gécamines out of its revenues from KCC.

In addition to the agreement reached with Gécamines above, the parties agreed to complete a definitive agreement within the next 90 days addressing transfer of the exploitation permits and mining rights over an agreed area, to encompass the approximate current concession area, from Gécamines to KCC.

In exchange for this transfer, which will result in KCC holding the assets directly, KCC will pay to Gécamines as compensation US$35 per tonne of remaining copper reserves identified in the feasibility study. This amount, which is approximately US$135 million, will be paid over time on a basis to be agreed in the definitive agreement and will be based on the cash flows available to KCC. The agreement will also address various other matters relating to the joint venture, including the management of the exploration program.

Disclosure ControlsThe Company’s certifying officers have designed a system of disclosure controls and procedures to provide reasonable assurance that material information relating to the Company is made known to them with respect to financial and operational activities. The certifying officers have evaluated the effectiveness of the disclosure controls and procedures as of December 31, 2007 and have concluded that these disclosure controls and procedures are effective at the reasonable assurance level. The management of the Company was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The result of the inherent limitations in all control systems means no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Risk FactorsKatanga is in the development stage and is subject to the risks and challenges similar to other companies in a comparable stage of development. The risks include, but are not limited to, limited operating history, speculative nature of mineral exploration and development activities, operating hazards and risks, mining risks and insurance, foreign operations, environmental and other regulatory requirements, competition, stage of development, fluctuations in commodity prices, currency risk, conflicts of interest, reliance on key individuals and enforcement of civil liabilities.

The mining concession on which the Company is currently operating and developing is located in the DRC. As a result the Company is subject to certain risks, including possible political or economic instability in the DRC, which may result in the impairment, loss of the mineral concession or renegotiation of the joint venture contract with Gécamines. Any changes in laws or regulations or shifts in political attitudes are beyond the control of the Company and may adversely affect its business. In relation to the DRC Commission appointed by the DRC Government to review mining agreements, the Company expects there to be no material adverse affect but no assurance can be given as to the outcome of any future discussions or negotiations between KCC, DCP and the DRC Government or that KCC’s and DCP’s security of tenure and ability to secure additional financing in the future may not be adversely affected so as to have a material adverse effect on its business, operating results and financial position.

There are risks specific to Katanga, including: the fluctuations in metal prices as Katanga does not at present hedge metal prices; the provision of power to the project; improvement in the rail and roads is not guaranteed and may impact the delivery of materials into the site and the ability to timely sell the metal production; Katanga’s ability to raise funds as required; Katanga’s operations and activities are subject to environmental risks; Katanga is subject to international operations and regulatory risks, specifically the political stability of the Democratic Republic of Congo; and HIV/AIDS and other infectious diseases may have a negative effect on the work force and increase medical costs.

The Company’s risk factors are discussed in detail in the Company’s AIF which are available on SEDAR at www.sedar.com and should be reviewed in conjunction with this document.


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Forward Looking StatementsThis annual report may contain forward-looking statements, including predictions, projections and forecasts. Forward-looking statements include, but are not limited to, statements with respect to exploration results, the future price of copper, the estimation of mineral reserves and resources, the realization of mineral reserve and resource estimates, the timing and amount of estimated future production, costs of production, anticipated budgets and exploration expenditures, capital expenditures, costs and timing of the development of new deposits, the success of exploration activities generally, permitting time lines, currency fluctuations, requirements for additional capital, government regulation of exploration and mining operations, environmental risks, unanticipated reclamation expenses, title disputes or claims, limitations on insurance coverage and the timing and possible outcome of any pending litigation. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or describes a “goal”, or variation of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved.

Forward-looking statements involve known and unknown risks, future events, conditions, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any future results, prediction, projection, forecast, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among others, the actual results of current exploration activities; actual results and interpretation of current reclamation activities; conclusions of economic evaluations; changes in project parameters as plans continue to be refined; future prices of copper and cobalt; possible variations in ore grade or recovery rates; failure of plant, equipment or processes to operate as anticipated; accidents, labour disputes and other risks of the mining industry; delays in obtaining governmental approvals or financing or in the completion of exploration, development or construction activities, as well as those factors disclosed in the company’s publicly filed documents. Although Katanga has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements.


Management Responsibility for Financial ReportingKatanga Mining Limited(A Development Stage Entity)

The accompanying consolidated financial statements of Katanga Mining Limited were prepared by management in accordance with Canadian generally accepted accounting principles. Management acknowledges responsibility for the preparation and presentation of the consolidated financial statements, including responsibility for significant accounting judgments and estimates and the choice of accounting principles and methods that are appropriate to the Company’s circumstances. The significant accounting policies of the Company are summarized in note 3 to the consolidated financial statements.

Management has established a system of internal control over the financial reporting process, which is designed to provide reasonable assurance that relevant and reliable information is produced.

PricewaterhouseCoopers LLP, the Company’s independent auditors, conduct an audit of the consolidated financial statements in accordance with Canadian generally accepted auditing standards and provide an independent professional opinion thereon. Their audit includes an examination, on a test basis, of evidence supporting the amounts and disclosures in the financial statements. As well, they make an assessment of the accounting principles used and significant estimates made by management and they evaluate the overall financial statements presentation.

The Board of Directors is responsible for reviewing and approving the consolidated financial statements and for ensuring that management fulfills its financial reporting responsibilities. An Audit Committee which is comprised of independent non-executive directors, assists the Board of Directors in fulfilling this responsibility. The Audit Committee meets with management as well as with the independent auditors to review the internal controls over the financial reporting process, the consolidated financial statements and the auditors’ report. The Audit Committee also reviews the Annual Report to ensure that the financial information reported therein is consistent with the information presented in the consolidated financial statements. The Audit Committee reports its findings to the Board of Directors for its consideration in approving the consolidated financial statements for issuance to the shareholders.

Management recognizes its responsibility for conducting the Company’s affairs in compliance with established financial standards, and applicable laws and regulations, and for maintaining proper standards of conduct for its activities.

Arthur H. Ditto Stephen M. JonesPresident and Chief Executive Officer Senior Vice President and Chief Financial Officer March 18, 2008


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Auditors’ Report

To the Shareholders of Katanga Mining Limited

We have audited the consolidated balance sheets of Katanga Mining Limited as at December 31, 2007 and 2006 and the consolidated statements of operations and comprehensive loss and deficit and of cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2007 and 2006 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.

Chartered Accountants, Licensed Public AccountantsToronto, Ontario

March 18, 2008


The accompanying notes constitute an integral part of these consolidated financial statements.

Consolidated Financial StatementsKatanga Mining Limited(A Development Stage Entity)

Consolidated Balance Sheets(Expressed in United States Dollars)

December 31, 2007 2006

AssetsCurrent Cash and cash equivalents $100,713,650 $196,985,623 Inventory of supplies 16,260,313 176,583 Prepaid expenses and other current assets 11,539,175 4,526,752

128,513,138 201,688,958

Property, plant and equipment (Note 4) 298,262,527 41,847,436Mobilization charge (Note 9) 2,520,000 2,520,000Future income tax asset (Note 11) 600,790 –Deferred financing costs (Note 3) – 4,023,386Deferred acquisition costs 18,925,646 –

$448,822,101 $250,079,780

LiabilitiesCurrent Accounts payable and accrued liabilities $43,450,128 $8,813,568 Restricted stock units (Note 8) 5,291,164 835,361 Accrued acquisition costs 18,403,541 –

67,144,833 9,648,929

Long-term Convertible debt (Note 6) 149,517,502 – Debentures payable (Note 5) 118,012,492 93,496,963

334,674,827 103,145,892

Shareholders’ EquityCapital stock (Note 7) 7,900,675 7,815,648Warrants (Note 7) 5,808,538 6,736,405Contributed surplus (Note 7) 150,424,341 137,122,818Equity component of convertible debt (Note 6) 2,716,249 –Deficit (52,702,529) (4,740,983)

114,147,274 146,933,888

$448,822,101 $250,079,780

Nature of Operations – Note 1; Commitments – Note 10; Acquisition of Nikanor Plc – Note 15

Approved by the Board of Directors

Signed by Signed byArthur H. Ditto (Director) Robert G. Wardell (Director)


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For the Years Ended December 31, 2007 2006

Expenses General and administrative $8,538,835 $4,045,781 Professional fees and consulting 1,918,297 1,237,714 Stock based compensation 5,171,296 1,622,852 Foreign exchange loss (gain) (Note 5) 18,369,974 (900,821)

Loss for the year before the following: (33,998,402) (6,005,526)Debenture interest (18,996,049) (1,551,868)Interest income 4,711,633 2,934,638

Loss for the year before income taxes: (48,282,818) (4,622,756)Recovery of (provision for) income taxes (Note 11) 428,950 (98,480)

Net loss and comprehensive loss for the year (47,853,868) (4,721,236)DEFICIT, beginning of year (4,740,983) (19,747)Transition adjustment (Note 3) (107,678) –

DEFICIT, end of year $(52,702,529) $(4,740,983)

Basic and diluted loss per common share $(0.61) $(0.08)Weighted average number of common shares outstanding 78,447,108 60,677,494

Katanga Mining Limited(A Development Stage Entity)

Consolidated Statements of Operations and Comprehensive Loss and Deficit(Expressed in United States Dollars)



Katanga Mining Limited(A Development Stage Entity)

Consolidated Statements of Cash Flows(Expressed in United States Dollars)

For the Years Ended December 31, 2007 2006

Cash and Cash Equivalents provided by (used in): Operating activities Net loss for the year $(47,853,868) $(4,721,236)Items not affecting cash: Stock based compensation 3,123,630 2,458,213 Debenture interest 17,598,534 1,551,868 Unrealized foreign exchange loss (gain) (Note 5) 19,964,100 (230,226) Future income taxes (Note 11) (600,790) –Changes in non cash working capital: Inventory (16,083,730) (176,583)

(23,852,124) (1,117,964)

Investing Activities Additions to property, plant and equipment (227,884,044) (30,669,922)Acquisition costs (522,105) –Mobilization charge – (2,520,000)Repayment from related party – 260,000

(228,406,149) (32,929,922)

Financing Activities Capital contributions – 3,708,675Proceeds from convertible debt (Note 6) 150,000,000 –Net cash acquired in RTO transaction (Note 2) – 1,846,478Net proceeds from Unit Offering (Note 5) – 94,524,416Issue of common shares, net of issue costs 6,239,114 129,778,977

156,239,114 229,858,546

(Decrease) Increase in Cash and Cash Equivalents (96,019,159) 195,810,660Cash and cash equivalents, beginning of year 196,985,623 944,737Effect of exchange rate changes on cash held in foreign currencies (252,814) 230,226

Cash and cash equivalents, end of year $100,713,650 $196,985,623

Supplementary Cash Flow Information Cash interest paid $1,505,191 $– Cash income taxes paid $216,188 $–


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Notes to Consolidated Financial StatementsKatanga Mining Limited(A Development Stage Entity)

Years Ended December 31, 2007 and 2006

(Expressed in United States Dollars)

1. Description of Business and Nature of OperationsKatanga Mining Limited (“Katanga” or the “Company”) is incorporated under the laws of Bermuda.

Katanga, through Kamoto Copper Company SARL (“KCC”), is engaged in copper and cobalt mining and related activities, including the refurbishment and rehabilitation of the Kamoto/Dima mining complex in the Democratic Republic of Congo (the “Kamoto Project”) and the extraction and processing of copper and cobalt metals. The Kamoto Project includes exploration and mining properties, the Kamoto concentrator, the Luilu metallurgical plant, the Kamoto underground mine and various oxide open pit resources in the Kolwezi district of the Democratic Republic of Congo (“DRC”).

In January 2008, the Company completed the acquisition of Nikanor Plc (“Nikanor”) (Note 14) whose operations include mining properties, a concentrator and various oxide open pit resources, the largest of which is the KOV pit. The acquisition brings together the adjacent properties in the DRC owned by Katanga and Nikanor to create a major single-site copper and cobalt operation.

The operating cash flow and profitability of the Company will be affected by various factors, including the amount of copper and cobalt produced and sold, the market prices for copper and cobalt, operating costs, interest rates, environmental costs and the level of exploration activity and other discretionary costs and activities. The Company is exposed to fluctuations in foreign currency exchange rates, political risks and varying levels of taxation. The Company seeks to manage risks associated with its business, however many of the factors affecting these risks are beyond the Company’s control.

2. Reverse Takeover AccountingOn December 12, 2005, Katanga acquired a 23.33% ownership in Kinross Forrest Limited (“KFL”) for $4,711,232.

Pursuant to an option agreement dated July 29, 2005, as amended by agreements dated November 9, 2005 and March 15, 2006 (the “Option Agreement”) KFL granted an option to Katanga to purchase the 76.67% of the outstanding shares of KFL it did not already own, in exchange for 35,001,500 common shares of Katanga and a cash payment of $800,000 (the “RTO Transaction”). The option was exercised and the share exchange occurred on June 27, 2006. The RTO Transaction resulted in the former shareholders of KFL, other than Katanga, owning 67.01% of Katanga. Accordingly, the exchange of shares has been accounted for as an acquisition of Katanga by KFL, referred to as a “reverse takeover” (“RTO”). The agreement closed on June 27, 2006. Application of RTO accounting results in the following:

a) KFL is deemed to be the acquirer for accounting purposes; its assets and liabilities are included in the consolidated balance sheet at their carrying values.

b) The consolidated balance sheet combines the Katanga assets and liabilities acquired as follows:

Fair value of assets and liabilities of Katanga at June 27, 2006

Cash $1,846,478 Prepaid expenses and other current assets 10,000 Initial investment in KFL 4,711,232 Investment in KFL with respect to feasibility study costs 6,369,369 Accounts payable and accrued liabilities (661,674)

$12,275,405

The fair value of Katanga’s assets and liabilities other than the investment in KFL with respect to feasibility study costs approximates their net book value. No value has been allocated to the investment in KFL with respect to feasibility study costs as the actual feasibility expenditures made by KFL are already included in mineral interests.



Notes to Consolidated Financial Statements continuedYears Ended December 31, 2007 and 2006

3. Summary of Significant Accounting PoliciesBasis of PresentationThe consolidated financial statements are presented in United States dollars and are prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). The consolidated financial statements consolidate the assets, liabilities and results of all entities in which the Company holds a controlling financial interest. The effects of all transactions between controlled entities are eliminated.

The consolidated financial statements include the Company’s wholly-owned subsidiaries and its 75% interest in KCC.

Foreign Currency TranslationThe functional currency of the Company is the US dollar. The Company’s foreign operations are classified as integrated for foreign currency translation purposes. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates in effect at the balance sheet date. Non monetary items are translated at historical rates. Revenues and expenses are translated at the average exchange rate during the year with the exception of depreciation and amortization which is translated at the historical rate recorded for property, plant and equipment. Exchange gains and losses arising on the translation of monetary assets and liabilities are included in the determination of income for the current period.

Use of EstimatesIn preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Significant areas where management’s judgment is applied include the carrying value of mineral properties and future income taxes, fair value estimates for stock options, warrants and restricted stock units, and estimated lives of depreciable assets. While management believes that these estimates and assumptions are reasonable, actual results could vary significantly from these estimates.

Cash and Cash EquivalentsCash and cash equivalents include cash on hand, balances with banks and short-term deposits with original maturities of three months or less.

Property, Plant and EquipmentMineral InterestsAll direct costs relating to the mineral interests which meet the generally accepted criteria for deferral are capitalized as incurred. These criteria include having a clearly defined process with identifiable associated costs, establishment of technical feasibility, an intention to process and sell the recovered minerals to a clearly defined market, and adequate resources exist or are expected to be available to complete the project to commercial production.

Carrying values of mineral interests as reported on the balance sheet do not necessarily reflect the actual present or future value. Recovery of carrying values is dependent upon the future commercial success of operations.

Upon establishment of commercial production, carrying values of mineral interests will be amortized over the estimated life of the mines, using the units of production method, based upon the current estimated recoverable reserves and resources.

Other Property, Plant, Equipment and AmortizationOther property, plant and equipment is recorded at cost and amortized using the following rates and methods:

Access roads 1 – 5 years Straight lineComputer equipment 3 years Straight lineComputer software 1 year Straight lineFurniture and fixtures 5 – 10 years Straight lineHousing 10 years Straight lineTools 7 years Straight lineAutomobiles 4 – 7 years Straight lineLeasehold improvements – Straight line, over the term of the underlying lease

41Annual Report 2007 Katanga Mining Limited


Inventory of suppliesInventory of supplies, which consists of consumable materials, is stated at the lower of cost and net realizable value. Consumable materials are capitalized to mineral interests as they are utilized when they are expected to provide future economic benefit to the Company.

Stock-based CompensationThe Company recognizes the fair value of stock-based compensation over the vesting period of the options and restricted stock units. The fair value of the options granted is calculated using an option pricing model that takes into account the exercise price, expected life of the option, expected volatility of the underlying shares, expected dividend yield, and the risk free interest rate for the term of the option. The fair value of the restricted stock units is based on the market value of the underlying stock at the date of grant and is revalued based on the market value at the balance sheet date.

Income TaxesIncome taxes are calculated using the asset and liability method of tax accounting. Under this method, current income taxes are recognized for the estimated income taxes payable for the current period. Future income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and on unclaimed losses carried forward and are measured using the substantively enacted tax rates that will be in effect when the differences are expected to reverse or losses are expected to be utilized. A valuation allowance is recognized to the extent that the recoverability of future income tax assets is not considered more likely than not.

Impairment of Long Lived AssetsLong lived assets to be held and used by the Company are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If changes in circumstances indicate that the carrying amount of an asset that an entity expects to hold and use may not be recoverable, undiscounted future cash flows expected to result from the use of the asset and its disposition are estimated and compared with the carrying values of those assets.

Where the undiscounted future cash flows are less than the carrying amount of the asset, the assets are written down to their estimated fair values. Management has not identified circumstances indicating possible impairment of the Company’s long lived assets as at December 31, 2007 or 2006.

Loss Per Common ShareBasic loss per common share is computed by dividing the loss for the year by the weighted average number of common shares outstanding during the year, including contingently issuable shares which are included when the conditions necessary for issuance have been met. Diluted loss per share is calculated in a similar manner, except that the weighted average number of common shares outstanding is increased to include potentially issuable common shares from the assumed exercise of common share purchase options, warrants and on the conversion of debt, if dilutive. The number of additional shares included in the calculation is based on the treasury stock method for options, warrants and the conversion of debt. Currently, the effect of potential issuances of shares under options, warrants and the conversion of debt would be anti dilutive, and accordingly basic and diluted loss per common share are the same.

Asset Retirement ObligationsThe fair value of liabilities for asset retirement obligations will be recognized in the period in which they are incurred. Currently there are no asset retirement obligations as the Company had not yet started commercial operations as of December 31, 2007. However, as the development of any project progresses, the Company will assess whether an asset retirement obligation liability (“ARO”) has arisen. At the point where such a liability arises, the financial statement adjustment required will be to increase the projects carrying value and ARO obligation by the discounted value of the total liability. Thereafter, the Company will be required to record a charge to income each year to accrete the discounted ARO obligation amount to the final expected liability.

Deferred Acquisition CostsCosts incurred prior to December 31, 2007 relating to the acquisition of Nikanor have been deferred and shown on the consolidated balance sheet as deferred acquisition costs until the acquisition date, January 11, 2008, at which point they have been considered as part of the cost of acquisition of Nikanor (see Note 14).

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3. Summary of Significant Accounting Policies (continued)New Accounting Policiesa) Financial instruments, comprehensive income and hedgesOn January 1, 2007, the Company adopted the following new accounting standards that were issued by the Canadian Institute of Chartered Accountants:

Handbook Section 1530, “Comprehensive Income”, Section 3251, “Equity”, Section 3855, “Financial Instruments – Recognition and Measurement”, and Section 3865, “Hedges”. The Company adopted these standards retrospectively; accordingly comparative amounts for prior periods have not been restated.

As a result of the adoption of the new standards, the Company has measured its accounts payable and accrued liabilities and debentures payable at amortized cost and they are classified as other financial liabilities. Upon adoption of Section 3855, the Company is using the effective interest method of amortization for transaction costs fees and discounts incurred relating to the debentures payable (see Note 5). The liability was re-measured upon implementation at the present value of future payments discounted at the effective interest rate in the instrument. Upon transition to the new standard, the Company recorded an adjustment that eliminated the deferred financing cost asset, decreased debentures payable by $4,023,386 and increased opening deficit by $107,678. b) Accounting changesIn July 2006, the Accounting Standards Board (“AcSB”) issued a replacement of The Canadian Institute of Chartered Accountants’ Handbook (“CICA Handbook”) Section 1506, “Accounting Changes”. The new standard allows for voluntary changes in accounting policy only when they result in the financial statements providing reliable and more relevant information, requires changes in accounting policy to be applied retrospectively unless doing so is impracticable, requires prior period errors to be corrected retrospectively and calls for enhanced disclosures about the effects of changes in accounting policies, estimates and errors on the financial statements. The impact that the adoption of Section 1506 will have on the Company’s results of operations and financial condition will depend on the nature of future accounting changes.

c) Capital Disclosures and Financial Instruments – Disclosures and PresentationOn December 1, 2006, the CICA issued three new accounting standards: Handbook Section 1535, “Capital Disclosures”, Handbook Section 3862, “Financial Instruments – Disclosures”, and Handbook Section 3863, “Financial Instruments – Presentation”. These standards are effective for interim and annual consolidated financial statements for the Company’s reporting period beginning on January 1, 2008.

Section 1535 specifies the disclosure of (i) an entity’s objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non-compliance.

The new Sections 3862 and 3863 replace Handbook Section 3861, “Financial Instruments — Disclosure and Presentation”, revising and enhancing its disclosure requirements, and carrying forward unchanged its presentation requirements. These new sections place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks.

The Company is currently assessing the impact of these new accounting standards on its consolidated financial statements.

2006 FiguresCertain of the 2006 figures have been reclassified to conform with current year financial statement presentation.



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4. Property, Plant and EquipmentMineral Interests December 31, December 31, 2007 2006

Feasibility study costs $6,242,607 $6,242,607Development costs 272,021,605 24,472,290Property acquisition costs 4,711,232 4,711,232

$282,975,444 $35,426,129

In February 2004, KFL entered into a joint venture agreement (the “Kamoto Joint Venture Agreement”) with La Générale des Carrières et des Mines (“Gécamines”), the state owned and operated mining enterprise of the DRC to rehabilitate the Kamoto Joint Venture assets, which include exploration and mining properties, the Kamoto concentrator, the Luilu metallurgical plant, the Kamoto underground mine and various oxide open pit resources in the Kolwezi district of the DRC (the “Kamoto Joint Venture Assets”).

KFL and Gécamines are utilizing a DRC incorporated and organized company, KCC, owned 75% by KFL and 25% by Gécamines, to hold, redevelop, rehabilitate and operate the Kamoto Joint Venture Assets. KCC has a six person board, four members of which are nominees of KFL. Under the terms of the Kamoto Joint Venture, Gécamines has granted to KCC exclusive rights to take possession of and use all of the real and personal property constituting the Kamoto Joint Venture Assets. KFL must contribute the technical expertise and the necessary capital for the redevelopment of the Kamoto Joint Venture Assets.

Other Property, Plant and Equipment Accumulated December 31, December 31, Cost Amortization 2007 2006

Access roads $595,148 $595,148 $ – $472,706Computer equipment 2,378,162 366,252 2,011,910 542,801Computer software 88,318 67,905 20,413 22,676Furniture and fixtures 1,104,262 189,868 914,394 565,304Housing 2,128,948 5,888 2,123,060 41,228Tools 2,511,400 333,604 2,177,796 1,319,788Vehicles 6,113,562 1,204,643 4,908,919 2,436,750Leasehold improvements 1,114,050 120,123 993,927 1,020,054Assets in transit 2,136,664 – 2,136,664 –

$18,170,514 $2,883,431 $15,287,083 $6,421,307

Total property, plant and equipment $298,262,527 $41,847,436

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5. Debentures PayableOn November 20, 2006, the Company closed a debenture offering of 115,000 units (“Units”) for an aggregate of CDN$115,000,000. Each Unit consists of a CDN$1,000 unsecured subordinated note (“Notes”) and 40 common share purchase warrants (“Warrants”). Each Warrant entitles the holder to purchase one common share of the Company anytime within five years from the closing date at CDN$8.50 per share. The Units do not trade and were separated into Notes and Warrants immediately upon issuance which trade separately. The Notes bear interest at the rate of 14% per annum, payable semi annually in arrears in equal installments on January 1 and July 1 of each year, with interest payable from the closing date to June 30, 2007 added to the principal and cash interest payments commencing January 1, 2008. The Company may redeem the Notes, in whole or in part, at any time after November 20, 2009.

The Company is using the net proceeds of the offering to continue the refurbishment and development of the Kamoto Joint Venture Assets in the Democratic Republic of Congo and for general corporate purposes including working capital. The Notes mature on November 20, 2013.

The resulting 4,600,000 warrants were fair valued using the Black Scholes valuation model at CDN$7,728,000 ($6,736,405) using the following underlying assumptions: dividend yield 0%, expected volatility (based on pricing of warrants at time of debenture issue) 30%, risk free rate of return 4.26% and expected life of 5 years. The fair value of each warrant issued was CDN$1.68.

The debentures payable balance is comprised of the following: December 31, December 31, 2007 2006

Debentures payable, beginning of year $93,496,963 $ –Changes during the year: 2006 upon issuance – 91,945,095 Interest capitalized from closing date and payable upon maturity 8,331,681 1,551,868 Transition adjustment – deferred financing costs (Note 3) (4,023,386) – Transition adjustment – interest (Note 3) 107,678 – Foreign exchange translation loss (1), (2) 20,099,556 –

Debentures payable, end of year $118,012,492 $93,496,963

(1) The foreign exchange translation loss is unrealized and represents the revaluation of the CDN dollar denominated debentures to US dollars. The foreign exchange translation amount

will change annually in accordance with the relevant movement of the CDN dollar to the US dollar. The foreign exchange translation gain or loss will be realized upon maturity of

the debentures on November 20, 2013.

(2) The unrealized foreign exchange loss in the year ended December 31, 2007 of $18,369,974 in the consolidated statement of operations and comprehensive loss and deficit and

$19,964,100 in the consolidated statement of cash flows (shown as an item not affecting cash) includes a $20,099,556 foreign exchange translation loss on the debentures.

6. Convertible DebtThe convertible debt is comprised of the following: December 31, December 31, 2007 2006

Glencore International AG debt facility – principal amount $150,000,000 $ –Equity component of convertible debt (1) (2,716,249) –Capitalized interest 2,007,397 –Accretion (2) 226,354 –

$149,517,502 $ –

(1) The equity component of the convertible debt has been valued by determining the carrying amount of the financial liability by discounting the stream of future payments of interest

and principal at the prevailing market rate for a similar liability that does not have the associated equity component (LIBOR plus 5%). The carrying amount of the equity instrument

was then determined by deducting the carrying amount of the financial liability from the amount of the compound instrument as a whole. On issuance of the debt the estimated fair

value of $2,716,249 attributed to the equity component was classified in shareholders’ equity on the consolidated balance sheet.

(2) The convertible debt is being accreted to its face value over the term of the loan with a corresponding interest expense charge over the term of the debt. Up to December 31, 2007,

$226,354 of this interest has been capitalized to mineral interests.



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On November 5, 2007, the Company’s subsidiary KCC finalized a debt facility with Glencore International AG (“Glencore”). The key terms of the debt facility are a 2 year term, interest rate of LIBOR plus 4%, first year’s interest added to the loan principal at the end of the first year, full amount repayable at the end of the 2 year term, mandatory prepayment on change of control, subordination agreement making the loan senior ranking to other indebtedness and the loan is guaranteed by the Company.

On October 31, 2007 the Company signed a conversion agreement with Glencore. The agreement gives Glencore the right to convert the full loan, at any time in the first and second year, as long as the loan is outstanding, into 9,157,509, common shares of the Company. The loan is repayable at any time and if it is repaid, in part or in full, by the Company in the first year, Glencore has the option to purchase common shares of the Company at the price of $16.38 each equal to the amount of the principal repaid at any time ending on November 4, 2008. In the second year if the loan is repaid early, in part or in full, Glencore has the same right but must exercise it within 21 days.

7. Capital Stock and Contributed Surplus(a) Authorized1,000 common shares, par value $12.00 each300,000,000 common shares, par value $0.10 each

On November 2, 2007, shareholders approved an increase in the authorized share capital of the Company to 1,000 common shares with a par value of $12.00 (2006 – 1,000 common shares) and 300,000,000 common shares with a par value of $0.10 (2006 – 100,000,000 common shares).

(b) Common Shares Issued Number of Capital Contributed shares stock surplus Total

Balance at December 31, 2005 (1) 10,000 $10,000 $2,510,694 $2,520,694Additional contributions of capital during the year (2) – – 3,858,675 3,858,675Shares issued in RTO Transaction (3) 35,001,500 3,500,150 2,405,886 5,906,036Shares issued in private placement (4) 21,000,000 2,100,000 127,307,842 129,407,842Reclassification to reflect par value of shares outstanding (5) 20,922,796 2,095,180 (2,095,180) –Warrants exercised during the year 1,103,180 110,318 260,817 371,135Options vested during the year – – 2,874,084 2,874,084

Balance at December 31, 2006 78,037,476 $7,815,648 $137,122,818 $144,938,466Options exercised during the year 216,667 21,667 1,188,956 1,210,623Warrants exercised during the year 633,600 63,360 5,892,997 5,956,357Options vested during the year – – 6,219,570 6,219,570

Balance at December 31, 2007 78,887,743 $7,900,675 $150,424,341 $158,325,016

(1) The capital stock and contributed surplus amounts at December 31, 2005 are the amounts reported by KFL, the continuing entity under reverse takeover accounting described in

Note 2. KFL issued 10,000 common shares with a par value of $1 per share in 2004. Contributed surplus of $2,510,694 arose as a result of cash advances to KFL by Katanga.

Pursuant to the terms of the Option Agreement, Katanga advanced funds to KFL to fund the feasibility study and other mineral property expenditures on the Kamoto Joint Venture

Assets.

(2) Additional cash advances between January 1, 2006 and June 27, 2006 (the date of the RTO Transaction) were made to KFL by Katanga to fund the completion of the feasibility

study.

(3) The value ascribed to the 35,001,500 common shares issued in the RTO Transaction is the fair value of Katanga’s net assets (excluding advances to KFL to fund feasibility costs

referred to in (1) and (2) above) on June 27, 2006, the date of the RTO Transaction, as described more fully in Note 2.

(4) Following completion of the RTO Transaction, the Company received net proceeds in the amount of $129,407,842, previously held in escrow upon the issuance of 21,000,000

subscription receipts in May 2006 at a price of $7.25 per receipt. Each subscription receipt entitled the holder to acquire one common share without payment of further consideration.

Total costs of issue for this private placement amounted to $6,246,908.

(5) The stated value of the Company’s capital stock has been increased and contributed surplus decreased by an equivalent amount to present capital stock at the actual par value of the

common shares outstanding on June 27, 2006, the date of the RTO Transaction. This reflects 1,000 shares, par value of $12 each and the remaining shares, par value $0.10 each.



7. Capital Stock And Contributed Surplus (Continued)(c) WarrantsThe following table reflects the continuity of warrants during 2006:

Exercised/ Outstanding Issued Expired Outstanding Exercise December 31, during the during the December 31, Expiry date price (1) 2005 year year 2006

October 6, 2006 CDN$0.35 1,837,500 – (1,837,500) –October 18, 2006 CDN$1.45 – 560,000 (560,000) –November 20, 2011 CDN$8.50 – 4,600,000 – 4,600,000

1,837,500 5,160,000 (2,397,500) 4,600,000

The following table reflects the continuity of warrants during 2007:

Exercised/ Outstanding Issued Expired Outstanding Exercise December 31, during the during the December 31, Expiry date price (1) 2006 year year 2007

November 20, 2011 (1) CDN$8.50 4,600,000 – (633,600) 3,966,400

(1) The fair market value originally assigned to outstanding warrants was CDN$7,728,000 ($6,736,405). CDN$1,064,448 ($927,867) was transferred from warrants to capital stock and

contributed surplus with respect to warrants exercised during the year.

(d) Stock OptionsThe following table reflects the continuity of stock options for the years presented: Weighted Number of Exercise Stock Options Price per Share(1)

Balance outstanding at December 31, 2004 and 2005 – $ nilGranted during the year 2,315,000 6.75Exercised during the year (125,000) 4.10

Outstanding at December 31, 2006 2,190,000 $6.90Granted during the year 1,275,000 14.58Cancelled during the year (100,000) 7.30Exercised during the year (216,667) 6.06

Outstanding at December 31, 2007 3,148,333 $10.06

(1) Denominated in Canadian dollars.



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During the year ended December 31, 2007, 1,275,000 (2006 – 2,315,000) options were granted with exercise prices ranging from $6.61 to $20.10 (2006 – $4.10 to $7.40). The value assigned to these options was calculated using the Black Scholes valuation model with the following assumptions: dividend yield 0%, expected volatility 60% to 84%, risk free rate of return 3.5% to 4.4% and expected maturity of 5 years. The weighted average grant date fair value of each option was $8.09 (2006 – $4.00). The total fair value assigned to these options was $10,320,218 (2006 – $9,256,418). These options vest at a rate of 33.33% in each of 2008, 2009 and 2010, respectively (2006 – 33.33% in each of 2007, 2008 and 2009).

The following table summarizes the stock options outstanding at December 31, 2007:

Exercise Price Exercisable Outstanding per Share (1) Expiry Date Options Options (2)

$4.10 January 17, 2011 30,000 – $7.40 April 19, 2011 216,666 566,667 $6.15 July 6, 2011 100,000 200,000 $6.00 July 9, 2011 61,667 123,333 $7.30 December 17, 2011 191,667 383,333 $7.20 December 31, 2011 – 50,000 $6.61 January 7, 2012 – 50,000 $6.66 January 29, 2012 – 25,000 $12.81 April 1, 2012 – 175,000 $15.97 May 6, 2012 – 25,000 $16.29 May 9, 2012 – 100,000 $17.50 June 3, 2012 – 25,000 $18.09 July 1, 2012 – 50,000 $20.10 August 31, 2012 – 100,000 $17.93 September 25 ,2012 – 50,000 $16.28 October 12, 2012 – 50,000 $14.61 December 5, 2012 – 575,000

600,000 2,548,333

(1) Denominated in Canadian dollars.

(2) The aggregate fair value of these unvested options not yet charged to operations is CDN$9,880,116.

8. Restricted Stock UnitsDuring the year ended December 31, 2007, 396,272 Restricted Stock Units (“RSUs”) were granted to the Company’s directors, senior officers, employees, consultants and consultant companies (2006 – 365,000 RSUs). Each unit entitles the holder to one share of the Company’s common stock upon vesting. The RSUs vest at a rate of 33.33 % in each of 2008, 2009 and 2010, respectively. Upon vesting, the Company is obligated to provide a trustee with the necessary funds to enable the trustee to acquire the Company’s common stock in the marketplace for the benefit of the holder. The holders of the RSUs have no rights of ownership associated with common shares until the RSU’s have vested and the common shares have been transferred to the participant. Included on the Company’s December 31, 2007 balance sheet is a payable of $5,291,164 (CDN$5,190,469) related to the issuance of 740,434 RSUs (December 31, 2006 – $835,361 related to the issuance of 365,000 RSUs).

On December 15, 2006, 104,600 RSUs were granted to officers of the Company, entitling the holder to one share of the Company’s common stock upon vesting. The vesting terms were subject to a milestone based performance clause, the Board of Directors deemed that the clause had been satisfied and the associated expense has been recognized in these financial statements. A further 3,772 were granted in 2007 under similar terms to an officer of the Company and these have also vested and been expensed in these financial statements.



9. Related Party TransactionsRelated party transactions not otherwise disclosed in these consolidated financial statements include:

Kamoto Operating Limited (“KOL”), a company incorporated pursuant to the laws of the DRC, has been appointed to act as the operator of the Kamoto project pursuant to the Kamoto Joint Venture Agreement and an operating agreement (“Operating Agreement”) between KOL and the Company’s subsidiary, KCC, executed on November 2, 2005. Current shareholders and directors of the Company are owners of KOL. The Operating Agreement establishes the terms and conditions pursuant to which KOL as operator will provide services to KCC in the planning and conduct of exploration, development, mining, processing and related operations with respect to the Kamoto Joint Venture Assets, including a management fee to be provided to KOL. During the year ended December 31, 2007, management fees totaling $7,326,518 (2006 – $875,707) were incurred and accrued to KOL. These fees have been capitalized to mineral interests.

The Company has the option to acquire KOL (“KOL Call Option”). The purchase price payable if the KOL Call Option is exercised will be determined by an independent investment bank agreed to between the parties as the fair market value to the KOL shareholders, as at the date of the valuation, based on an agreed cash flow model. The consideration will be paid in cash or shares of the Company at the option of the KOL shareholders.

During the year ended December 31, 2007, the Company engaged an entity owned by one of its directors for the sourcing and provision of goods and services (including construction and other resources), mining of one of its open pit ore bodies and the construction of a tailings dam. The total paid for these services was $20,324,997 (2006 – $1,560,591) and as at December 31, 2007 $3,409,915 was included in accounts payable and accrued liabilities (2006 – $nil). KOL, on behalf of KCC, entered into an agreement for the mining of one of its open pit ore bodies with an entity owned by one of its directors. The pre-stripping commenced in April 2007 and mining is expected to continue through 2011. A mobilization fee of $2,520,000 was paid during the year ended December 31, 2006. The fee will be charged to income upon commencement of commercial production of the ore body.

10. CommitmentsThe Company is obligated under the terms of an operating lease for minimum annual property rental payments of $1,039,798 for a period of five years, commencing September 19, 2006, with an option to renew for a further five years.

The Company estimates its capital expenditures for the redevelopment of the Kamoto Project to be $499 million (inclusive of costs already incurred) over the next three years ending December 31, 2010. The project is being developed in four phases with each phase designed to increase the level of production capacity. The initial phase, which brought the assets into initial production in December 2007, cost $175 million (exclusive of interest and other costs capitalized prior to commencement of commercial production). Phases II, III and IV are estimated to be $136 million, $124 million and $64 million (excluding capitalized interest and other costs), respectively. Each of these last three phases is expected to last one year beginning in January 2008. The Company has also entered into an engineering contract with a vendor for the design of two 400 tonne per day industrial copper concentrate roasters. The initial roaster to be built is part of Phase II of the redevelopment plan and the second roaster to be built is part of Phase III. The contract for the design of these roasters is for $3.8 million.

As a result of the acquisition of Nikanor (see Note 14) a revised feasibility report is being prepared that takes into account the requirements of the combined companies and it is expected that this will significantly impact the amount and timing of the capital expenditures referred to above.

The Company has entered into a marketing agreement with LN Metals International Ltd that entitles it to a marketing fee for all of the copper and cobalt production in 2008. Glencore and the Company have signed an off-take agreement whereby, commencing January 1, 2009, all copper and cobalt produced will be sold to Glencore based on market terms.



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11. Income TaxesThe following table reconciles the expected income tax recovery at the statutory income tax rate to the amounts recognized in the statements of operations for the years ended December 31, 2007 and 2006:

2007 2006

Loss before income taxes reflected in the statements of operations $(48,282,818) $(4,622,756)

Expected income tax recovery at Canadian statutory rates $15,508,441 $1,577,285Effect of differences in foreign tax rates 3,707,112 13,525Effect of change in temporary differences not recognized (7,636,492) 326,496Permanent differences (6,556,028) (590,367)Adjustment in respect of prior years (19,287) –Current year losses not recognized (4,574,796) (1,425,419)

Recovery of (provision for) income taxes $428,950 $(98,480)

The following table reflects the future income tax assets at December 31, 2007 and 2006:

2007 2006

Future Income Tax Assets Non capital losses carried forward $4,126,811 $1,443,392 Other temporary differences 9,107,344 (5,789)

13,234,155 1,437,603 Less: Valuation allowance (12,633,365) (1,437,603)

Net future income tax asset $600,790 $ –

The net future income tax asset of $600,790 represents United Kingdom tax relief on RSU costs that arises when the RSUs vest. The Company has recorded a valuation allowance in respect of non-capital losses and other tax assets in the amount of $12,633,365 as at December 31, 2007 (December 31, 2006 – $1,437,603) as it is not considered to be more likely than not that the benefit associated with these losses and other tax assets will be realized prior to their expiry.

The acquisition of Nikanor (see Note 14) is not anticipated to materially impact the future income tax asset position in countries that the Company operates in other than Canada. Under current Canadian income tax legislation, the Company’s Canadian future tax assets that arose from previously reported capital loss carry forwards expired upon the completion of the transaction. Non capital losses carried forward do not expire, but utilisation is restricted to offset against future profits from the business which generated the loss.

As at December 31, 2007, the Company had non capital losses available for future use, expiring as follows:

2008 $72,127 2009 64,280 2010 75,488 2013 and thereafter 16,324,058

$16,535,953



12. Segmented InformationThe Company is engaged in mining, exploration and development and has assets and operations in Canada, the United Kingdom and the Democratic Republic of Congo, as described below:

As at December 31, 2007 Democratic Republic of Canada United Kingdom Congo Total

Cash and cash equivalents $9,905,074 $89,680,220 $1,128,356 $100,713,650Other assets 19,755,268 5,477,443 322,875,740 348,108,451

Total Assets $29,660,342 $95,157,663 $324,004,096 $448,822,101

For the Year Ended December 31, 2007

Net income (loss) $(61,282,021) $14,128,153 $(700,000) $(47,853,868)Interest income $4,711,633 $ – $ – $4,711,633Debenture interest $(18,996,049) $ – $ – $(18,996,049)Recovery of income taxes $ – $428,950 $ – $428,950

As at December 31, 2006 Democratic Republic of Canada United Kingdom Congo Total

Cash and cash equivalents $3,312,139 $193,110,302 $563,182 $196,985,623Other assets 4,223,774 4,568,826 44,301,557 53,094,157

Total Assets $7,535,913 $197,679,128 $44,864,739 $250,079,780

For the Year Ended December 31, 2006

Net loss $(4,221,768) $(499,468) $ – $(4,721,236)Interest income $2,934,638 $ – $ – $2,934,638Debenture interest $(1,551,868) $ – $ – $(1,551,868)Provision for income taxes $ – $(98,480) $ – $(98,480)

13. Financial InstrumentsAt December 31, 2007 and 2006, the Company’s financial instruments consisted of cash and cash equivalents, prepaid expenses and other sundry assets, accounts payable and accrued liabilities and long-term debt. The Company estimates that the fair value of these financial instruments approximate the carrying values at December 31, 2007 and 2006.

14. Subsequent EventsAcquisition of Nikanor PLCIn January 2008, the Company acquired Nikanor Plc as explained in Note 15.

Contract ReviewOn February 11, 2008, KCC received a letter from the Minister of Mines for the DRC notifying KCC of the DRC Government’s position as a consequence of the review by the DRC Government of the mining rights which KCC hold.



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The letter from the Minister included a statement of terms upon which the Government proposes discussions be based upon to balance the partnership between the DRC and KCC. KCC has formally responded to the Minister of Mines and is seeking further discussions with the Minister of Mines.

The mining concession on which the Company is currently operating and developing is located in the DRC. As a result the Company is subject to certain risks, including possible political or economic instability in the DRC, which may result in the impairment, loss of the mineral concession or renegotiation of the joint venture contract with Gécamines. Any changes in laws or regulations or shifts in political attitudes are beyond the control of the Company and may adversely affect its business. In relation to the DRC Commission appointed by the DRC Government to review mining agreements the Company expects there to be no material adverse affect but no assurance can be given as to the outcome of any future discussions or negotiations between KCC and the DRC Government or that KCC’s security of tenure and ability to secure additional financing in the future may not be adversely affected so as to have a material adverse effect on its business, operating results and financial position.

Mashamba West and Dikuluwe DepositsOn February 8, 2008, the Company announced that Gécamines and KCC have signed an agreement that sets out compensation, security and payment in exchange for the release to Gécamines of the portion of the KCC concession that represents the Mashamba West and Dikuluwe deposits. These deposits were not scheduled to start producing oxide ores until 2020 and 2023, respectively.

The agreement provides for Gécamines to replace these deposits by July 1, 2015 with other deposits having a total tonnage of 3,992,185 tonnes of copper and 205,629 tonnes of cobalt according to Canadian Securities Administration rules (National Instrument 43-101), or pay over time, beginning July 1, 2012, a total of $825 million from Gécamines’ entitlement to royalties and dividends from KCC. The parties have agreed to fix the equivalent value of the deposits released by reference to a feasibility study prepared in 2006. The agreement set this amount at $825 million, subject to a joint review by the parties. At July 1, 2012, the parties will calculate the proportion of the reserves replaced by Gécamines at that date. Dividends and royalties payable to Gécamines by KCC from this date will be paid into an escrow account to secure future payments by Gécamines. As at July 1, 2015, the parties shall recalculate the amount of reserves transferred to KCC. In the event Gécamines has not completely replaced the deposits, the balance of the amount due shall be paid in cash. Any cash thus remaining due shall be paid to KCC using the funds in the escrow account, and any remaining payments due will be met from Gécamines’ future revenues from KCC, until full payment has been made.

To assist Gécamines in finding replacement deposits, KCC and Gécamines shall conduct jointly managed exploration to be funded initially by KCC and reimbursed by Gécamines out of its revenues from KCC.

In addition to the agreement reached with Gécamines above, the parties agreed to complete a definitive agreement by May 7, 2008 addressing transfer of the exploitation permits and mining rights over an agreed area, to encompass the approximate current concession area, from Gécamines to KCC.

In exchange for this transfer, which will result in KCC holding the assets directly, KCC will pay to Gécamines as compensation $35 per tonne of remaining copper reserves identified in the feasibility study. This amount, which is approximately $135 million, will be paid over time on a basis to be agreed in the definitive agreement and will be based on the cash flows available to KCC. The agreement will also address various other matters relating to the joint venture, including the management of the exploration program.

15. Acquisition of Nikanor PLCOn January 11, 2008 the Company acquired 94.10% of the outstanding common shares of Nikanor PLC (“Nikanor”). On February 29, 2008, the Company acquired the balance of the outstanding common shares of Nikanor through a statutory compulsory acquisition procedure.

The pro forma balance sheet information below is intended to give the reader of these consolidated financial statements an overview of the accounting treatment to be adopted for the acquisition of Nikanor and to show the impact of the transaction on the Company’s financial position.



15. Acquisition of Nikanor PLC (Continued)The pro forma balance sheet of Katanga as at December 31, 2007 gives effect to the acquisition as if it had taken place as at December 31, 2007: Katanga Mining Nikanor PLC Pro Forma Consolidated Limited Adjustments Unaudited Unaudited $000 $000 $000 $000

ASSETS Current Cash and cash equivalents 100,714 852,808 (446,148) (a) 507,374Inventories 16,260 39,441 76,675 (b) 132,376Other financial assets – 122 122Accounts receivable – 18,342 18,342Prepaid expenses and othercurrent assets 11,539 133,193 144,732

128,513 1,043,906 (369,473) 802,946 Property, plant and equipment 298,262 171,142 1,212,131 (b) 2,229,846 519,485 (c) 28,826 (d) Other financial assets – 173 173Mobilisation charge 2,520 – 2,520Future income tax assets 601 905 1,506Deferred acquisition costs 18,926 – (18,926) (d) –

448,822 1,216,126 1,372,043 3,036,991

LIABILITIES Current Accounts payable and accruedliabilities 43,450 43,881 87,331Restricted stock units 5,291 – 5,291Accrued acquisition costs 18,404 – 9,900 (d) 28,304

67,145 43,881 9,900 120,926 Future income tax liability – – 519,485 (c) 519,485Asset retirement obligation – 2,410 2,410Derivative financial instruments – 3,235 3,235Convertible debt 149,518 – 149,518Debentures payable 118,012 – 118,012

334,675 49,526 529,385 913,586

SHAREHOLDERS’ EQUITY Capital stock 7,901 2,066 10,651 (b) 20,618Warrants 5,809 – 5,809Contributed surplus 150,424 1,189,158 (446,148) (a) 2,146,965 1,253,531 (b) Equity component of convertibledebt 2,716 – 2,716Deficit (52,703) (24,624) 24,624 (b) (52,703)

114,147 1,166,600 842,658 2,123,405

448,822 1,216,126 1,372,043 3,036,991



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Pro Forma adjustments:a) The payment of $2.16 per share, ($446,148,000) in cash to each Nikanor shareholder.b) The issue by the Company of 0.613 new common shares for each Nikanor share outstanding. This resulted in the issuance of 127,168,221

common shares of the Company with an aggregate fair value of $2,009,258,000. The value ascribed to each Katanga share was determined using the average quoted market value of the Katanga shares two days before and two days after the announcement of the transaction ($15.80).

The fair value of the assets purchased from Nikanor is estimated at December 31, 2007 to be:

Asset/Liability Fair Value $’000 (1)

Cash and cash equivalents (after the distribution in a)) 406,660Inventories (after fair value increase from book value of $76,675) 116,116Accounts receivable 18,342Prepaid expenses and other current assets 133,193Property, plant and equipment: other 171,142Property, plant and equipment: KOV other 1,731,616Future income tax asset 905Future income tax liability (519,485)Accounts payable and accrued liabilities (43,881)Asset retirement obligation (2,410)Net derivative instruments (2,940)

Total 2,009,258

(1) For purposes of the allocation of the purchase consideration to the Nikanor assets and liabilities acquired, the fair value of all assets and liabilities other than property, plant and

equipment, finished goods inventory and the future income tax liability was considered to be equal to their respective book values.

These are preliminary estimates of the fair value and will likely differ from the final allocation and the differences may be material. The Company will finalise the fair value allocation within 12 months of the closing of the transaction..The effect of the pro forma adjustments on the pro forma balance sheet can be summarised as follows: Effect on Effect on net assets shareholders’ equity $000 $000

Cash distribution(B) (446,148) (446,148)Increase in share capital due to share issue(A) 12,717Increase in contributed surplus(B) 1,996,541Fair value attributable to KOV (net of tax) 1,212,131 Fair value increase in Nikanor concentrate inventories 76,675 Elimination of Nikanor share capital(A) (2,066)Elimination of Nikanor contributed surplus(B) (743,010)Elimination of Nikanor deficit 24,624

Total 842,658 842,658

(A) Net impact on share capital is $10,651,000

(B) Net impact on contributed surplus is $807,383,000

c) The emerging issues committee issued abstract – EIC-110 “Accounting for acquired future tax benefits in certain purchase transactions that are not business combinations”. To comply with this guidance, the Company has accounted for the future income tax liability on the difference between the fair value of the KOV open pit and its basis for tax purposes.

d) The Company has estimated that the costs associated with the acquisition will be approximately $28,826,000. Of this amount, $18,926,000 was shown as deferred acquisition costs on the balance sheet of Katanga at December 31, 2007. Further costs of approximately $9,900,000 were incurred subsequent to December 31, 2007. These costs comprise incremental third party costs directly related to the acquisition of Nikanor which upon closing will be included in the purchase price allocated to the net assets acquired.


Notes


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Notes

Board of Directors

Hugh Stoyell Independent Non-Executive Chairman

Rafael Berber Non-Executive Director

Arthur H. Ditto President, Chief Executive Officer and Director

George A. Forrest Non-Executive Director

Malta D. Forrest Non-Executive Director

Aristotelis Mistakidis Non-Executive Director

Jean-Claude Masangu Mulongo Independent Non-Executive Director

Stephen Oke Independent Non-Executive Director

Terry Robinson Independent Non-Executive Director

Robert Wardell Independent Non-Executive Director

Management Team Arthur H. Ditto President, Chief Executive Officer and Director

Nic Clift General Manager, Kamoto Operating Limited

Anu Dhir Vice President, Corporate Development

Richard Dye Senior Vice President, Technical Services

Stephen M. Jones Senior Vice President & Chief Financial Officer

Brett A. Richards Vice President, Human Resources

Allan D. Schoening Senior Vice President, Corporate Affairs

Corporate Office15 Golden SquareLondon W1F 9JGUnited Kingdom

Tel: +44 (0)20 7440 5800Fax: +44 (0)20 7440 5801Email: [email protected]

www.katangamining.com

Transfer Agent and RegistrarEquity Transfer & Trust Company200 University Ave., Suite 400Toronto, Ontario, Canada M5H 4H1Tel: +1 416 361 0152Fax: +1 416 361 0470

AuditorsPricewaterhouseCoopers LLPToronto, Ontario, Canada

Share Capital InformationListed on the Toronto Stock Exchange: KAT, KAT-NT, KAT-WT

As at March 20, 2008: Exercise price

(millions) (CDN$)Current shares in issue 206.089153Current warrants in issue 3.966400 8.50Current stock options in issue 5.101567 12.10*Current performance

shares in issue 0.207987 0.00

215.365107Convertible loan stock 9.157509

Fully diluted shares in issue 224.522616

*Weighted average

Share Trading Information

CDN$ per share2007 High Low Average Volume

Close (millions)Q1 13.20 6.34 8.31 21.4Q2 18.75 11.26 15.77 27.0Q3 28.07 16.82 20.98 24.7Q4 17.99 11.03 15.63 41.7

Annual General MeetingWednesday, May 7, 2008 at 4:30 pmSheraton Centre Toronto, 123 Queen Street West, Toronto, Ontario, Canada M5H 2M9

Shareholder Information

Katanga Mining Limited15 Golden SquareLondon W1F 9JGUnited KingdomTel: +44 (0)20 7440 5800Fax: +44 (0)20 7440 5801Email: [email protected]

TSX: KAT

www.katangamining.com

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