Switch to Botswana coal a master stroke

THREE major milestones this year have put AFR on track to capitalise in a growing southern African coal market within three years. By Anthony Barich - RESOURCESTOCKS*
Switch to Botswana coal a master stroke Switch to Botswana coal a master stroke Switch to Botswana coal a master stroke Switch to Botswana coal a master stroke Switch to Botswana coal a master stroke

Sese coal project and existing rail routes, courtesy of African Energy

Anthony Barich

African Energy Resources’ (ASX:AFR) switch from being a Zambia-focused uranium stock to a prospective Botswana coal producer/exporter has already proven a winner.

With South Africa opening up to independent power producers, Botswana’s growing power needs and southern Africa’s attractive quality coal for India, AFR appears to have timed things beautifully.

Its most recent major milestone was signing a joint development agreement for one or more power projects at its Sese integrated power project, discovered in May 2010, with global Saudi Arabian power developer ACWA Power International.

As part of that, the two companies signed a joint consortium agreement and on October 2, submitted a formidable bid for a 300MW coal-fired power-generation plant that the Botswana government has put out to tender. The bid is to build, own and operate the power plant at AFR’s Sese coal deposit, which should start producing in 2016.

All going well, AFR expects a positive result by mid-2014, and may even be short-listed for the tender by the end of 2013. The first six months of 2014 will then see the consortium focus on finishing off the final feasibility and environmental work on the Sese project and negotiating the power purchase agreement.

The consortium plans to get the project to financial close by the end of Q3 2014 then move immediately into the construction phase. That will allow it to bring the first unit onstream by the end of 2016.

This project is fast becoming important to Botswana, whose Morupule B power station was nearing completion as AFR managing director Frazer Tabeart spoke to RESOURCESTOCKS in early November.

“There is potential for demand in Botswana to grow more rapidly than the government had originally anticipated,” Tabeart said. “So 300-600MW is needed fairly quickly.”

It is this gap that AFR plans on delivering into. And with ACWA Power on board, Tabeart said his company had an impressive partner and a good project that had thick coal seams with a low strip ratio that doesn’t need a lot of processing.

“We have all the inputs we need (coal, water, limestone), and they’re all going to be relatively low-cost feed into to the power station,” Tabeart said.

“That, plus ACWA’s credibility and ability to raise relatively low-cost debt means we can offer a competitive tariff.”

Sese itself is impressive – a 2.5 billion tonne resource for a 300MW project that only needs 50 million tonnes, which means that once AFR has that project underway it can start sourcing other opportunities to use all that coal. To this end, AFR has already commenced discussions with other state power utilities in neighbouring countries.

The bonus here is that the markets are very close by – and growing – particularly in South Africa, which has a very large energy market, and one that is starting to open up to independent power producers.

“The likelihood that South Africa’s Eskom will be able to borrow further large sums required for power projects is diminishing as they are currently fully committed,” was Tabeart’s assessment.

“Therein lies the opportunity for independent power producers.

“While I’m sure preference will be given to those inside RSA, there is only so much coal there.

Botswana has lots of low-cost coal right on the border; it’s a low-risk investment as lenders are comfortable investing in Botswana, and it’s relatively close from a transmission perspective.”

AFR’s second milestone was acquiring the 1.3Bt Mmamantswe coal project in June 2013, with which the company attracted Sentient Group as a major shareholder, taking an $8.5 million stake in AFR – about 17.3%.

Tabeart said Sentient is a “very supportive” shareholder, with a similar vision to AFR of consolidation of Botswana’s coal-fields. This gives AFR more marketing clout with railways and power companies, in being able to provide larger, more secure business opportunities.

The company’s third milestone – being finalised as Tabeart spoke to RESOURCESTOCKS – was the acquisition of the Mmamabula West coal project from Asenjo Energy, specifically targeted on what AFR believes to be a standalone export project.

“We can produce export coal at Sese, but we would also be co-producing large volumes of middling and if you don’t get some cost recovery on it, your export project is financially compromised,” Tabeart said.

“Mmamantswe is predominantly a power fuel source rather than export fuel, so we’ve been looking for a project in Botswana that capable of delivering a stand-alone export product so that we’ve covered all aspects with our portfolio.”

Mmamabula West has a 2.4Bt total resource, of which 900Mt is indicated, within which 25sq.km has intrinsically better coal than the rest of the project, with good washing characteristics, lying in two seams about 5m thick, with the top one being about 105m below surface.

“We know with that we can selectively mine the lower 3.5-4m of each seam,” Tabeart said.

“Typically in Botswana the lower part of the seam is better quality than the upper part of the seam. If we target the best parts of the best seams, that could give us a very high yield – close to 80% – for an export-quality coal.”

So if all goes to plan, by mid-2014 AFR will have three distinct projects – Sese, the Mmamantswe project right on the South African border, and Mmamabula West, which the company believes is one of the best export projects in the country.

The only issue is that Botswana is a long way from the coast and getting the coal to a port at a price that makes it worth digging up is what AFR has been making good progress with, working with the Botswana government and rail companies to negotiate commercially sustainable rail tariffs.

“We’re seeing some real, positive signs that the rail companies may be willing to lower the tariffs, as long as we can guarantee the tonnages,” Tabeart said.

“We’re starting to collaborate with other potential coal producers in Botswana to put forward a realistic schedule of what export projects will be from 2-3 years’ time. There are two viable routes with existing rail and ports.

“We’ve been looking at the Northern Rail Corridor that goes through northeast Botswana into southern Zimbabwe into Mozambique, to the port of Maputo, where we did a successful export trial last year: a 1600t three-day train trip.

“I’m hoping we’ve picked the bottom of the market to acquire an export project at an attractive price; and that we can continue working with the railways while doing our feasibility studies so that in two years’ time, it’s a viable project for financing.”

*A version of this report, first published in the December 2013 edition of RESOURCESTOCKS magazine, was commissioned by African Energy Resources