The decision by Standard & Poor’s Global Ratings to downgrade South Africa’s foreign-currency debt has triggered concern that such move might have spill over effects to the country’s trading partners, Botswana included.
S&P Global Ratings cut South Africa’s foreign denominated debt from investment grade to junk status on Monday, just two days after President Jacob Zuma’s major cabinet reshuffle that resulted in the axing of the popular Finance Minister Pravin Gordhan. The credit ratings agency says its decision to downgrade South Africa’s 17 year old investment grade comes on the back of mounting concern that Africa’s most industrialised nation’s economic growths might be seriously hampered by its toxic political climate.
“The downgrade reflects our view that the divisions in the ANC-led government that have led to changes in the executive leadership, including the finance minister, have put policy continuity at risk. This has increased the likelihood that economic growth and fiscal outcomes could suffer,” S&P said in a statement on Monday before adding that they have put the country on negative outlook, reflecting their view that political risks will remain elevated this year, and that policy shifts are likely which could undermine fiscal and growth outcomes more than they currently project.
The reaction to S&P’s downgrade was swift and mainly felt in the financial sector as the country’s banking index fell to the lowest in six months. The banking index plummeted by more than 8 percent following the cabinet reshuffle, resulting in most bank stocks shedding billions of rands in value. The main concern for banks is the return on assets and equity, in light of fears that non-performing loans might spike. The downgrade means the banks’ cost of funding might go up, resulting in the banks charging more for their loans, hitting consumers the hardest.
Besides the banking sector appearing like the first casualty, the country’s often volatility currency is expected to fluctuate in the coming days. The performance of the South African rand is closely watched by its trading partners, particularly in Southern Africa, where the country dominates trade. The rand is now the worst-performing emerging-market currency over the past week, with a loss of 9.7 percent against the dollar. Only two weeks ago, the rand was the best-performing emerging-market currency, gaining 10.1 percent against the dollar since the beginning of the year.
“Pula is pegged to the rand 45% and therefore any weakness in rand will affect pula movement against its major crosses especially the dollar. At FNBB, we estimate that the rand explains at least 80% movement of the pula against the dollar – therefore, a weaker rand against the dollar, means a weaker pula against the dollar. Our main export receipts and in dollars, and therefore weaker pula could reduce our exports receipts in value terms,” Mr. Moatlhodi Sebabole, Research manager at FNBB, said by email.
“SACU receipts are a function of trade of the member states outside SACU and SA contributes 90% of the customs received within the block. It is my belief that on the backdrop of recovery in global demand and improvement in mineral prices, as well as more stable production side for South Africa, the trade prospects for South Africa still look better than there were last year. A slightly weaker rand than current levels could actually increase the competitiveness of SA exports, with a trade-off to higher costs of imports of course and how that could impact local production and balance of payments.”
Mr. Sebabole further said in their view as FNBB, the global positives offset the local negatives, citing their models which show that the rand reacts 40% to local fundamentals and 60% to the global dynamics. As a result, they expect a relatively stable rand that will hover around an exchange of USD/ZAR at 13.00 for 2017 and 10.34 for BWP/USD. He said the SACU receipts forms least of their worries from the rand perspective, instead their focus is on upside risks that could arise from lower demand and slower recovery in commodity prices.
“Therefore at this moment, we do not anticipate any meaningful economic spillovers to Botswana. However, if the political risks heighten to instability and disruption of services, it will affect local business since we import over 60% from South Africa. Services like postal, logistics and fuel transportation could get disrupted should there be nation-wide SA services breakdown.” On the possibility of the banking stocks rout spreading over to Botswana Stock Exchange’s listed banks, home to one of the bank owned by a South African bank, the FNBB maestro says such possibility is unlikely.
“Given the weak-form efficiency of Botswana’s stocks, I do not anticipate the shocks that the banking sectors shares are taking in the JSE to be felt to that extent in the BSE-listed banking shares,” Mr. Sebabole said. “Of the 3 listed banks, only 1 is parented in South Africa and has not shown signs of weakness when its parent listing underwent significant price reduction in the past two weeks. The correlations between the JSE and BSE listed equities remain low and therefore casualty effect of declining stock prices in SA will not directly cause local stocks to underperform.”
Mr. Sebabole went on to sound caution that should South Africa receive further downgrades from other ratings agencies then it will lose its investment grade. The possibility of that is highly likely as Moody’s, another ratings agency, says it is assessing the economic impact of the changes to leadership in key government institutions and it is expected to announce its rating on Friday. Furthermore, ratings agency Fitch is likely to follow rival S&P and cut South Africa's sovereign credit rating to below investment-grade.
“If South Africa loses investment grade, then government and corporate borrowings will increase, and given that large corporates operating in Botswana originate from SA – an increase in cost of borrowing for parent SA companies might affect the corporates who fund from their SA counterparts. Additionally, foreign funding for banks might increase and cost of capital for placement of local funds in the SA institutions will rise in a risk-weighted adjusted basis,” Mr. Sebabole warned.
The future of Botswana’s largest copper and silver operation, Khoemacau Copper Mining, looks promising as the new owners, MMG Group, commit to the mine’s expansion plans. MMG, an Australian headquartered company owned by China, has expressed its dedication to doubling Khoemacau’s production and transforming it into one of the most significant high-grade copper operations in Africa.
Nan Wang, the Executive General Manager for Australia and Africa at MMG, stated that while the immediate focus is on maintaining a consistent production level of 60ktpa, there are solid plans to increase Khoemacau’s production capacity. The company aims to double its production from 3.65Mtpa to 8.15Mtpa, resulting in an increase in payable copper from approximately 60ktpa to around 130ktpa.
To achieve this expansion, Khoemacau has completed a pre-feasibility study on the project and a solar power initiative. The next step is to conduct a feasibility study, which will pave the way for increased production capacity. Additionally, Khoemacau has identified extensive exploration opportunities across its license area, positioning the company for an exciting new phase of development.
The current Khoemacau operation reached full production and nameplate capacity in December 2022, following over a decade of investment totaling over P10 billion. This significant investment allowed for an intense exploration program, resulting in the development of the most automated underground mining operation in Botswana. The first concentrate was produced in June 2021, and the product entered the export market in July of the same year. Throughout 2022, the company has been working on the pre-feasibility study for the expansion project, with the feasibility study scheduled for the following year.
The expansion plans will involve the construction of a new world-class process plant in Zone 5, where the current mining of ore takes place. This new plant will be larger than the existing one in Boseto, which currently receives ore from Zone 5. The expansion will also involve the development of new underground mines, including Mango, Zone 5 North, and Zeta North East. These additional mines will bring the total number of underground shafts at Khoemacau to six. The ramp-up of production from the expansion is expected to occur in 2026.
Khoemacau, which acquired assets in the Kalahari Copper Belt after the liquidation of Discovery Metals in 2015, currently employs over 1500 people, with the majority being Batswana. The Khoemacau Mine is located in north-west Botswana, in the emerging Kalahari Copperbelt. It boasts the 10th largest African Copper Mineral Resource by total contained copper metal and is one of the largest copper sedimentary systems in the world outside of the Central African Copperbelt.
The mine utilizes underground long hole stoping as its mining method and conventional sulphide flotation for processing. Resource drilling results have shown the existing resources to have continuity at depth, and there are several exploration targets within the tenement package that have the potential to extend the mine’s life or increase productivity.
The Zone 5 mine has already ramped up production, and further expansion in the next five years will be supported by the deposits in the Zone 5 Group. The estimated mine life is a minimum of 20 years, with the potential to extend beyond 30 years by tapping into other deposits within the tenement package.
In conclusion, the commitment of MMG Group to Khoemacau’s expansion plans signifies a bright future for Botswana’s largest copper and silver operation. With the completion of pre-feasibility and feasibility studies, as well as significant investments, Khoemacau is poised to become one of Africa’s most important high-grade copper operations. The expansion project will not only increase production capacity but also create new job opportunities and contribute to the economic growth of Botswana.
Khoemacau Copper Mining, a leading copper mining company, has recently announced its acquisition by MMG Limited, a global resources company based in Australia. This acquisition marks a significant milestone for both companies and demonstrates their commitment to continued investment, growth, and sustainability in the mining industry.
MMG Limited is a renowned mining company that operates copper and other base metals projects across four continents. With its headquarters in Melbourne, Australia, MMG has a strong track record in mining and exploration. The company currently operates several successful mines, including the Dugald River zinc mine and the Rosebery polymetallic mine in Australia, the Kinsevere copper mine in the Democratic Republic of Congo, and the Las Bambas Mine in Peru. MMG’s extensive experience and expertise in mining operations make it an ideal partner for Khoemacau.
MMG’s commitment to sustainability aligns perfectly with Khoemacau’s values and priorities. Khoemacau has always placed a strong emphasis on safety, health, community, and the environment. MMG shares this commitment and applies the principles of good corporate governance as set out in the Corporate Governance Code of the Hong Kong Listing Rules. As a member of the International Council on Mining and Metals (ICMM), MMG adheres to sustainable mining principles, ensuring responsible and ethical practices in all its operations.
Over the past 12 years, Khoemacau’s current shareholders have made significant investments in the development of the company. With approximately US$1 billion deployed in the project, Khoemacau has successfully transformed from an exploration and discovery phase to a fully-fledged operating copper mine. The completion of the ramp-up of the Zone 5/Boseto operations has set the stage for the next phase of expansion.
With the acquisition by MMG, Khoemacau is poised for an exciting new chapter in its development. The completion of a pre-feasibility study on the Khoemacau expansion and a solar power project has paved the way for increased production capacity. The feasibility study will be the next step in doubling the production capacity from 3.65 million tonnes per annum (Mtpa) to 8.15 Mtpa, resulting in a significant increase in payable copper from approximately 60,000 tonnes per annum (ktpa) to 130,000 ktpa. Additionally, Khoemacau has extensive exploration opportunities across its license area, further enhancing its growth potential.
The CEO of Khoemacau, Johan Ferreira, expressed his gratitude to the current owners for their stewardship of the company and their successful transformation of Khoemacau into a fully operational copper mine. He also highlighted the company’s focus on the expansion study and its vision for the future with MMG. Ferreira emphasized that the partnership with MMG will ensure Khoemacau’s long-term success, delivering employment, community benefits, and economic development in Botswana.
MMG Chairman, Jiqing Xu, echoed Ferreira’s sentiments, stating that the acquisition of Khoemacau aligns with MMG’s growth strategy and vision. Xu emphasized MMG’s commitment to creating opportunities for all stakeholders, including shareholders, employees, and communities. He expressed confidence in Khoemacau’s expansion potential and the company’s ability to realize its full potential with the support of MMG.
The sale of Khoemacau to MMG is subject to certain conditions precedent and approvals, with the expected closing date in the first half of 2024. This acquisition represents a significant step forward for both companies and reinforces their commitment to sustainable mining practices, responsible resource development, and long-term growth in the mining industry.
In conclusion, the acquisition of Khoemacau Copper Mining by MMG Limited signifies a new era of investment, growth, and sustainability in the mining industry. With MMG’s extensive experience and commitment to responsible mining practices, Khoemacau is well-positioned for future success. The partnership between the two companies will not only drive economic development but also ensure the safety and well-being of employees, benefit local communities, and contribute to the overall growth of Botswana’s mining sector.
The Botswana Power Corporation (BPC) has taken a significant step towards diversifying its energy mix by signing a power purchase agreement with Sekaname Energy for the production of power from coal bed methane in Mmashoro village. This agreement marks a major milestone for the energy sector in Botswana as the country transitions from a coal-fired power generation system to a new energy mix comprising coal, gas, solar, and wind.
The CEO of BPC, David Kgoboko, explained that the Power Purchase Agreement is for a 6MW coal bed methane proof of concept project to be developed around Mmashoro village. This project aligns with BPC’s strategic initiatives to increase the proportion of low-carbon power generation sources and renewable energy in the energy mix. The use of coal bed methane for power generation is an exciting development as it provides a hybrid solution with non-dispatchable sources of generation like solar PV. Without flexible base-load generation, the deployment of non-dispatchable solar PV generation would be limited.
Kgoboko emphasized that BPC is committed to enabling the development of a gas supply industry in Botswana. Sekaname Energy, along with other players in the coal bed methane exploration business, is a key and strategic partner for BPC. The successful development of a gas supply industry will enable the realization of a secure and sustainable energy mix for the country.
The Minister of Minerals & Energy, Lefoko Moagi, expressed his support for the initiative by the private sector to develop a gas industry in Botswana. The country has abundant coal reserves, and the government fully supports the commercial extraction of coal bed methane gas for power generation. The government guarantees that BPC will purchase the generated electricity at reasonable tariffs, providing cash flow to the developers and enabling them to raise equity and debt funding for gas extraction development.
Moagi highlighted the benefits of developing a gas supply industry, including diversified primary energy sources, economic diversification, import substitution, and employment creation. He commended Sekaname Energy for undertaking a pilot project to prove the commercial viability of extracting coal bed methane for power generation. If successful, this initiative would unlock the potential of a gas production industry in Botswana.
Sekaname Energy CEO, Peter Mmusi, emphasized the multiple uses of natural gas and its potential to uplift Botswana’s economy. In addition to power generation, natural gas can be used for gas-to-liquids, compressed natural gas, and fertilizer production. Mmusi revealed that Sekaname has already invested $57 million in exploration and infrastructure throughout its resource area. The company plans to spend another $10-15 million for the initial 6MW project and aims to invest over $500 million in the future for a 90MW power plant. Sekaname’s goal is to assist BPC in becoming a net exporter of power within the region and to contribute to Botswana’s transition to cleaner energy production.
In conclusion, the power purchase agreement between BPC and Sekaname Energy for the production of power from coal bed methane in Mmashoro village is a significant step towards diversifying Botswana’s energy mix. This project aligns with BPC’s strategic initiatives to increase the proportion of low-carbon power generation sources and renewable energy. The government’s support for the development of a gas supply industry and the commercial extraction of coal bed methane will bring numerous benefits to the country, including economic diversification, import substitution, and employment creation. With the potential to become a net exporter of power and a cleaner energy producer, Botswana is poised to make significant strides in its energy sector.