Lucara Diamond Corporation, a Canadian multi listed miner has approved a budget of up to $53 million (over P540 million) for early works related to a proposed underground mine at its wholly owned top gem producer Karowe Diamond Mine located in the Boteti region, Botswana .
The Vancouver headquartered high carats producer reported this week through a statement which states that the investment decision is subject to receipt of all required authorizations and the arrangement of financing, all which are expected to be complete in the second half of 2020. The Botswana Stock Exchange (BSE) listed miner says positive results of a feasibility study announced on November 4, 2019, based on the Company’s ability to fund these initial capital expenditures from operating cash flow, a program of early works, including detailed engineering and design work has been approved to mitigate key risks related to schedule
Positive Results from Feasibility Study
Lucara reported last month that underground Feasibility Study to expand the mine was showing positive results. Karowe is one of the world’s most prolific producers of large, high value type IIA diamonds and the only diamond mine in recorded history to have produced two +1000 carat diamonds. A statement from Lucara indicates that the underground expansion would double the mine life, and generate significant revenue and cash flow out to 2040, extending benefits to the Company, its employees, shareholders, communities surrounding the mine, and Botswana.
The Underground mining operation combined with the current open pit mining is expected to yield production figures of upto 7.8 million carats out to 2040 and $5.25 billion in Gross Revenue at pre-production capital costs of $514 million for the underground project. Lucara further revealed that After-tax undiscounted net cash flow of $1,220 million is projected to be gathered from this operation assuming no real diamond price escalation.
Karowe Mine has produced 2.5 million carats since 2012 and generated $1.5 billion in revenue. According to findings from the study Long hole shrinkage underground bulk mining method selected will provide early access to higher value ore and allows for a short payback period of 2.8 years and low operating costs of $28.43 per tonne processed. On the basis of a construction start in mid-2020, ore from underground mining will seamlessly integrate into current operations providing mill feed starting in 2023 with a ramp up to 2.7Mtpa to the processing plant by 2026, and the opportunity to increase throughput.
The Underground is designed to access the South lobe kimberlite resource below the current planned bottom of the open pit which is expected to be at approximately 700 meters above sea level (“masl”)), to a depth of 310 masl. Access to the South Lobe underground will be via two vertical shafts being production and ventilation of approximately 765 and 715 meters deep respectively.
The statement further revealed that Identified key focus areas of hydrogeology, geotechnical constraints of the kimberlite and host rocks have been addressed through an intensive set of work programs and data collection that commenced during the Preliminary Economic Assessment completed in November 2017 and were substantially updated and augmented by the FS study. Commenting on the findings Lucara Chief Financial Officer, Zara Boldt, said the company was weathering the current downturn in the diamond market better than most of its peers.
“Karowe’s high value deposit and unique production profile has allowed us to generate enough cash to operate our business, develop the Clara sales platform and to have been a steady dividend payer,” he said. Based on the strong economics outlined in the feasibility study, Zara noted that Lucara was confident that external financing requirement will be modest and that attractive financing options are available to supplement the expected contribution of the company cash flow from operations to fund the underground project.
“We are optimistic about diamond prices recovering in the short to medium term as global supply decreases next year and we have also identified a number of optimization opportunities for the underground that could add additional value to the project in the near term,” he said. Eira Thomas, Lucara President and CEO noted that her company is highly encouraged by the results of the Karowe Underground feasibility study which has outlined a much larger economic opportunity than first envisaged in the 2017 PEA and represents an exciting. “This is a world class growth project for our Company,” she said.
Thomas explained that a significant portion of the cost to expand Karowe Mines into an underground operation will be funded from cash flow, and the investment is expected to be paid back in less than 3 years. “The underground allows us to exploit the highest value part of the ore body first and generate more than $5.25 billion in gross revenue.
What’s more, margins remain healthy despite the application of conservative diamond pricing models that reflect the current, difficult market environment’’ she said. The CEO further said that they believe the market is now stabilizing with a view that the fundamentals are expected to strengthen in line with supply shortfalls from mature, depleting mines in Australia and Canada.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”