What do you do in a country that has a seemingly endless supply of coal and a population that doesn’t need it?
You ship the coal out, of course. But what if the country is landlocked, with inadequate rail infrastructure? No problem, just build a US$9.5-billion power plant next to the coalfield and transmit the energy out via power lines.
That’s the ambitious plan of entrepreneur Warren Newfield, co-chairman of Toronto Stock Exchange-listed CIC Energy Corp. in Toronto, which is in talks with contractors to construct a massive power station that channels power from the rich coalfields of Botswana to its energy-starved neighbour, South Africa.
This Mmamabula Energy Project, as it’s known, is just one example of the growing confidence in Botswana, which has been called the “blue chip of Africa.” Although Africa has problems with security, poverty and lack of infrastructure, Botswana stands above its peers in these areas. As Canada is to the U.S., Botswana, a former British protectorate, is a stable democracy that is fairly low-profile compared with its neighbour to the south.
Indeed, the CIA World Factbook calls Botswana “one of the most dynamic economies in Africa.” Standard & Poor’s Corp. and Moody’s Investors Service Inc. have both awarded it the highest sovereign credit ratings in Africa: A and A2, respectively.
Newfield, founder of CIC and CEO of Tau Capital Corp., a mining-investment and advisory company, certainly likes Botswana’s potential. “If you can’t bring the coal to market,” he asks, “can you bring the market to the coal?
Newfield hasn’t had a lot of time to market the Mmamabula project to investors because he’s in a hurry. His goal is to get power generation underway by 2012. However, he doesn’t need to do much selling, as he has already built a loyal following of investors who have profited from another company he co-founded, AfriOre Ltd., which was purchased for $500 million in January by London-based Lonmin PLC.
CIC’s 11.9 million outstanding shares, which were trading around $13 a share in mid-November, have a low trading volume, indicating the “buy and hold” philosophy of its investors, who are sticking it out despite a loss of more than $2.2 million in the nine months ended Aug. 31.
Shareholders include heavyweights JPMorgan Asset Manage-ment (U.K.) Ltd. , with 1.1 million shares; Canadian Pension Plan Investment Board; and Sceptre Investment Counsel Ltd.
British Virgin Islands-based CIC is not taking on the Mmamabula project alone. It has found a partner in London-based International Power PLC, which will operate the power station that is expected to be among the first in Africa with flue-gas desulphurization — the most advanced scrubbing technology available to remove sulphur dioxide, the emission that causes acid rain.
The Mmamabula venture recently got environmental approval from the Botswanan government, which is trying to diversify its economy. The country of 1.8 million depends on diamond exports for one-third of its GDP, according to the World Bank, and is the world’s largest exporter of gemstone diamonds. Its government owns 15% of De Beers SA.
Botswana’s coal deposits can provide energy well beyond its population’s needs. The country requires about 500 megawatts annually; the first phase of the Mmamabula project is expected to generate 2,100 MW to 2,500 MW a year. And energy-hungry South Africa, whose GDP is growing by 5% annually, is projected to require additional electricity capacity of approximately 1,700 MW a year until 2025.
The mineral deposits that will feed Mmamabula are expected to contain about 2.3 billion tonnes of coal in the “measured” and “indicated” categories, which means the size and depth of the resource have been estimated but not proven.
“We look for large assets. Our philosophy is go big or go home,” Newfield says of the massive coalfields, strategically located about 50 kilometres from the border of the economic powerhouse to the south.
The financial magnitude of the project, which will be 80% financed via debt, is unparalleled compared with other major infrastructure projects, such as Bombardier Inc.’s high-profile Gautrain rail project in South Africa, projected to cost a relatively modest US$3 billion.
Although initially budgeted at US$6.3 billion, CIC was forced to boost its projections because of skyrocketing global demand for new power plants, a flourishing construction market, spiralling commodity prices and the scarce supply of engineering services.
@page_break@South Africa, however, has not been constructing any power plants recently. This explains the pent-up demand from its leading electricity utility, Eskom Holdings Ltd., which has signed a memorandum of understanding with CIC to negotiate a definitive purchase agreement for a 40-year power supply contract.
“Botswana has fallen off the radar screen,” says analyst Mike Plaster of Salman Partners Inc. in Vancouver. And although there are many risks associated with the project, he says, political corruption or the threat of sudden tax hikes are not among them.
“Obviously, the risk is if there are any hiccups or delays,” Plaster says. He expects the plant to provide a return on equity in the mid-teens: “I don’t think it’s an unrealistic expectation.”
Botswana had a GDP of US$10.3 billion in 2006, according to the World Bank. And its GDP per capita is among the highest on the continent, according to a 2006 United Nations report.
Botswana falls short on life expectancy — which has been cut by the scourge of HIV and AIDS to age 35 for children born this year, down from 65 in 1990, according to the World Health Organization.
Although Botswana is known for its thriving tourism sector — with its wildlife preserves and game parks with adjacent posh resorts — it’s the revenue from commodities that should be used to diversify Botswana’s economy, according to a United Nations plan.
A metals refinery project is underway that will result in London Metal Exchange-grade exports of copper and nickel instead of the less refined “matte” stage of the metals. Botswana is also nurturing an infant diamond-cutting and polishing industry.
Not surprising, many foreign-listed companies active in Botswana are also engaged in mining, including Russia’s Norilsk Nickel Group, the world’s biggest nickel producer. Norilsk bought Canada’s LionOre Mining International Ltd. for $6.8 billion this year, including LionOre’s 85% stake in Botswana-based Tati Nickel Mining Co. Tati is forecast to mine about 14,000 tonnes of nickel, plus byproducts such as copper and gold, annually. This represents about 5% of Norilsk’s total annual global production of 265,000 tonnes.
In 2006, LionOre reported record net income of $428.5 million, realized on net mineral sales of about $968 million. In 2005, it reported a loss of $76.4 million.
Meanwhile, TSX-listed African Copper PLC will begin production in January at its Mowana mine, which has resources of about 57.9 million tonnes of 1% copper, which should produce about 580,505 tonnes of the metal. African Copper reported net income of $790,000, or 56¢ a share, for the third quarter ended Sept. 30. Net gain for the nine months was $530,000, or 40¢ a share. Shares in that company, which has poured more than $40 million into building the mine so far, were trading around $1.80 a share in mid-November. IE
Botswana: the blue chip of Africa
The landlocked African country presents many opportunities — without the risk of political corruption or sudden tax hikes
- By: Laura Bobak
- December 5, 2007 October 31, 2019
- 14:37