Citizens ascend Black Gold mountain

Mbongeni Mguni | Friday May 2, 2014 12:04

 

Mmegi: Take our readers briefly through the history of Shumba and how it came to exist as a business concept.

Phumaphi: The company was incorporated in 2011, with Thapelo and I as the first directors. Two other board members came a few months later and the rest came in the last year or so. When we started, we appreciated the amount of coal in Botswana and looked at how we could position ourselves to exploit these resources.

We did not have any assets and so we set up and began reviewing target projects of which we assessed more than 30, using both public and private information. When we found an asset worth acquiring, we agreed to purchase it from Asenjo Energy for P7.5 million and in December 2011, this became the Sechaba project. Asenjo had been in the country for a while, but had been put off by the perceived weak market due to the lack of an export rail route.

Botswana has a great future in the medium to long term, but in the short-term these are not the best of times for coal companies given the global downturn in the natural resources sector and the resulting current depressed prices of global seaborne thermal coal.

Mokhathi: In Botswana, for us, rail was not the big objective; ours was power generation from coal and regional coal exports. What was a constraint for others was an opportunity for us to buy into the market.

Mmegi: What are Shumba’s holdings and its major timelines?

Mokhathi: When we took over the project, we had 964 million tonnes on 247 square kilometres. We have now increased that to about 1.1 billion tonnes through drilling and further studies. We have moved to 260 million tonnes of Measured and Indicated resources from 100 million tonnes when we took over. The Measured and Indicated resources are important as mining one conducts his feasibility studies these can be turned into mineable reserves.

Phumaphi: Morupule B needs about 2.8 million tonnes of coal per annum and over 30 years will use about 90 million tonnes of coal. Even if we do a small power station of 300 MW, by the time we reach 260 million tonnes, it would be 100 to 200 years later. The resource is very large and our focus should just be to get that into production in the shortest possible time.

Major milestones, both corporate and on the ground, have included the acquisition of Sechaba, a positive scoping study three months later, a positive water pre-feasibility study, approval by the Department of Environmental Affairs for our environmental scoping study, an increase in resources especially to the Measured and Indicated category. We have also concluded a transmission study showing cheaper transmission costs into the region. Now we are working on our mine feasibility studies, finalising the Environmental Impact Assessment, finalising water studies as well as power station selection and design studies. We intend to commence production with a small open cast mine which will then allow us to underground mine the balance of the resources using a decline.

Mmegi: Your timeline to production?

Phumaphi: We are looking at 2016/17 for the mine. The key thing about production is offtake. Just because you can get the project to a stage where it can produce, does not mean it will get into production. This is a challenge for all energy companies in the country. Coal in Botswana is cheap and mineable but miners have not been able to develop a market for their coal outside of BPC Power stations.

Our strategy has been electricity production and regional exports of coal. The biggest stumbling block for the country has been that everyone is saying ‘let’s focus on the railway line for international exports’. The question is how competitive our coal is looking at the coalfields being far from the ports and the requirement for a large rail investment of between US$12 and US$15 billion. For us, we believe our number one priority is to open a mine and focus on the huge power deficit in the region, which is not going away even in the long term.

Mmegi: What are the major barriers for citizen entry into mineral production?

Phumaphi: Mainly these are to do with relevant experience and access to funding. Experience in mineral exploration is very different from operational experience. Batswana have a lot of involvement in the exploitation stage of mining, but little at exploration stage. People here know how to mine, but there is a serious gap in experience on the other side of actually looking for the minerals. Actual exploration has traditionally been done by foreign companies, although this may change in future given that more local exploration geologists are being trained in the field.

Also, we need to know where to access funding. Although mining has long been done in Botswana, the local capital markets are not really geared to financing exploration; they are more towards companies in production. It is very difficult to source local capital for exploration. In our early stages, we received some funding from some retail investors here, but most of the funding for our operations came from foreign investors in places like the United Kingdom, Mauritius and Europe.

Mokhathi: When we started, we managed to raise US$500,000 without a project, just from investor confidence in our expertise and in the country’s investment climate and resources. That helped us move quicker to assess projects and review them while others with no funding would have had to apply for a licence then look for funding. When you come with the necessary experience together with funding, things move a lot faster.

Phumaphi: Coal prospecting licences are no longer simply applied for; they are now issued on a tender basis. Before, you could go with P5,000 and apply for a licence. Now because of the new system, the tender document alone costs P10,000 and the tender submission related costs could amount to P100,000. The companies who take part in these tenders thus are mainly large major foreign companies.

One thing that international investors get that many people locally don’t, is that the management is everything. Investors are not putting their money in the project itself but in the potential of the management to create value for their money and identify value-adding opportunities. Those people who backed us in the first phases have had an eight-fold return on their investment. They came in at high risk but now with our assets, there’s a lot of value that has been created.

Certain Batswana are very competent geologists, could do exploration and are asking where they will secure the funding from. They have had to bring in foreign partners and in fact, most of the projects that are now mines started in this manner. There are local people who knew where the deposits are but they have had to bring in others to explore due to financial constraints.

That’s the only way Batswana will be developed and it’s a tough one. I can understand government’s decision to neutralise speculation by introducing tendering, but it could have been better to apply the Mines and Minerals Act and all its requirements. Instead of introducing a tender to eliminate speculative licence holding, they could have enforced the existing law strictly to monitor the work being done on the ground.

Mmegi: Please a brief on the citizen holding within the company?

Phumaphi: We remain a majority citizen owned company. Throughout the different phases that we have gone through, we have continued to raise funds locally and internationally and that has led to us having broad-based citizen participation through 200 retail private investors and also more than eight local pension funds, including the Botswana Public Officers Pension Fund. The involvement of pension funds means that a successful Shumba Coal benefits citizens ranging from government workers to employees of large private sector organisations.

Our focus has always been to raise money locally and if we need to, supplement it internationally.

Mokhathi: The reason for this is that we feel there’s an understanding of the economic development needs for coal in Botswana. We believe in Botswana participation in the project and at company level, we have allocated 10 percent shareholding for local management. Even if we become more diluted as we continue raising capital, there’s 10 percent guaranteed to be in local hands.

Phumaphi: Most of the junior miners here are more than 95 percent foreign owned meaning that whenever there’s a transaction, the actual people benefitting are mostly outside the country. Recently a mining junior was bought for over US$100 million and only two percent was locally held, thus a very small portion of the value created by the project divestment remained in the country.

We cannot fault foreign investors for taking advantage of these opportunities because they carry the risk with their money and currently many companies are 75 percent or so down from what they were a few years ago. So it is not always rosy.

Coal is now a strategic commodity for the future of Botswana. It is important not just for the private sector, but also government. Earlier this year we saw the government budget allocating P300 million for the BPC’s transmission project to the North West of Botswana. This will allow for local power to service Maun and surrounding mines, and also enable local coal energy projects to easily transmit through to Namibia, Zambia and Zimbabwe. The BPOPF, whose trustees are civil servants, has also allocated 15 percent to strategic investments which include private equity and infrastructure and thus we should some of these funds find a home in mining projects, power generation, power transmission and rail. Botswana Railways is also doing its part by investing in 260 wagons for coal. The drive is not just private sector but government as well.

Mmegi: And citizen interests with Shumba Coal as a company?

Phumaphi: There is myself and a team of people that I work with. We use local consultants where possible for activities such as drilling, environmental work and other areas.

An exploration company needs to limit its overheads. You need to be resilient and last it out when times get tough. Thus we may not have a large number of permanent staff but the amount of people we give work to is quite significant. We also have people being trained in the office.

Mokhathi: Once the company goes beyond the studies, and into the development stage, we will be restructuring and taking more people on board.  The pinnacle will be when we are in production with an operating mine and this is something we are really pushing hard for.

Mmegi: What is your advice to authorities in terms of the efforts over the years to advance entry for citizens in mining?

Phumaphi: Authorities are generally doing the right things in investing funds to develop the coal industry. What is key for citizen involvement is an empowerment policy and a deliberate programme to give citizen’s access. Also, the issue of funding; in South Africa, the Industrial Development Corporation is pivotal in the involvement of citizens in mining, but the Botswana Development Corporation does not have a single investment in mining. They need to back up competent citizens with funding for exploration. South Africa has close to 2,000 operating mines, while Botswana has only about 10. South Africa is, however, not 200 times bigger in landmass than Botswana so why do they have so many mines per square kilometre in comparison to Botswana? Historically they have invested significantly in exploring their land well and as a result everywhere in South Africa, someone has drilled a hole with a report available.

In Botswana, we have very limited information and there needs to be much more exploration work done to maximise on mine development. Government needs to empower its citizens to drill more holes in the ground.

Mokhathi: Government has been quite commendable in terms of creating an enabling environment for mining to happen. There needs to be a more consolidated effort to exploration so that it is not driven by foreigners alone. We need to look at what government can do to encourage organic exploration. There needs to be a more internal drive towards aggressive exploration in the country.

There needs to be an internal process where citizens remain being players in the industry, creating jobs and increasing the value of resources in the country. Exploration is a small component of the total amount of value creation of mineral activities. We have spent about P30 million over recent years on exploration and we have managed to create value of about P200 million (on the Botswana and Mauritius Stock Exchanges).

We would like to see a more active role from government, the private sector and regulators.