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Companies expect lower profits

The challenging operating environment experienced by companies in 2016 is set to take shape in the form of figures as companies prepare for the financial reporting period.  


While there has not been comprehensive information on the extent of the damage caused by economic downturns in 2016, leading companies listed on the Botswana Stock Exchange have offered insights (BSE) in what was perhaps the worst year for local businesses, particularly big companies in the financial services industry.


The 2016 operating environment, although considerably better than 2015, was marked by several retrenchments from different sectors of the economy, with the liquidation of BCL group likely to have the most impact. The retrenchments were in addition to the rising unemployment rate, stagnated wages, and accommodative monetary policy.


As the reporting period approaches, listed companies have sent out less optimistic cautionary notes warning shareholders to exercise caution when dealing with the affected company’s stock. While some cautionary statements were scant in details, other companies were outright blunt that they were expecting lower than projected profits.


Letshego, the largest indigenous BSE-quoted company with a market capitalisation of just under P4.7 billion, has announced that that the Company’s profit after tax for year ended 31 December 2016 will be lower than those reported for the period ended on 31 December 2015. In the previous full year end results for 2015, the Pan-African financial services group achieved profit before tax of P1.1 billion, a 5% increase on the prior period.


The drop in profit is likely the result of foreign currency fluctuations, retrenchments in the local economy, reduced borrowings, and historically lower interest rates that have driven customers to seek cheap credit from banks. Over the last five years, Letshego has experienced a period of rapid transformation from its roots in Botswana as a consumer finance company established in 1998, with a single product, into a pan-African broader based financial institution.

 

It has achieved geographic and product diversification with subsidiaries across ten countries in Southern, East and West Africa – Botswana, Kenya, Lesotho, Mozambique, Namibia, Nigeria, Rwanda, Swaziland, Tanzania and Uganda. In its 2015 annual report, the group said whilst the business environment has remained competitive, it has continued to grow its market share via geographic expansion and acquisitions into new markets and diversification with a broader product and services offering.


Letshego is currently trading at P2.20 after losing 4.34% of its stock value in year to date returns. This will not look good for shareholders who had to stomach a loss of 20% in 2016. The stock however remains the most traded on the BSE. The Botswana Insurance Holdings Limited (BIHL) has also announced that the Group’s results for the year ending 31 December 2016 will likely be lower than those reported for the year ended 31 December 2015. In 2015, the group achieved profit after tax of P597.7 million, 18% higher than in 2014. The group says the expected lower profit for 2016 is mainly due to current relatively unstable trading conditions.


BIHL Group has the most extensive exposure to the economy through its dominant subsidiaries which include Botswana Life Insurance Limited, Botswana Insurance Fund Management Limited, BIHL Insurance Company Limited as well as non-controlling stakes in Letshego Holdings (23%), Funeral Service Group (35%) and 21.5% stake in Nico holdings.


The group’s profits will be dragged down by fall in insurance premiums, high claims payouts, and reduced returns from the local and global equities markets. It will also be a double whammy for BIHL which will receive a lower share of profits from Letshego.  A fall in profit for the group will mask what has been an impressive performance at the stock market after the group’s share price gained 15.46% in 2016 at a time when most stock prices were falling. For this year, the stock is up by 0.22% to trade at P17.59.


The country’s largest bank, First National Bank Botswana (FNBB), is also expected to post lower profit. Although the bank has yet to confirm it, it has hinted that its exposure to the BCL group has left them in a vulnerable position. The bank says the full details of which will be shared at the announcement of the Half Year Interim Results later this month.


In its previous financial performance for the year ending June 2016, FNBB’s profit for the year fell by 15%, marking two years of declining profits on the back of a challenging trading environment characterised by low interests, limited lending and investment opportunities. The bank saw its profit before tax fall by 13% to P659 million while the profit after tax was at a 2 year low of P504 million. With its exposure to BCL coupled with reduced consumer spending power, the interim results are expected to reflect the upheaval that happened in the last half of 2016.


FNBB’s half interim results will be closely watched by investors who have started to lose faith on the company stock. The bank, which has the biggest market capitalization under the local counter on the BSE, has lost as much as 22.51% of its share value in 2016 and the rout has extended to this year as the stock continues to lose, shedding off 7.43% to trade at P2.75.


The embattled Standard Chartered Bank Botswana which was the first to confirm its large exposure to BCL group has also warned that its financial performance might not be stellar. The bank has consecutively reported declining profits since 2014. In its last reporting period, the oldest bank in the country reported lower profit for the half year ended June 2016. For that period, the bank slightly improved on its revenues and contained costs following a dismal 2015 financial performance. However,  a 42% surge on net impairments losses resulted in the bank posting profit before tax of P80.1 million, while the profit after tax fell by 5% to P63 million.


Standard Chartered Bank Botswana shocked many in its financial performance for the year ending 2015 after recording profit after tax of P47.4 million, a steep drop from a high profit of P319.2 million recorded in 2014. The steep drop was attributed to high net impairment losses as a result of exposure to the mining sector. While the bank seemed to have been recovering from that, the liquidation of BCL will surely have a negative material impact on the upcoming full financial results to be released next month.


The bank’s share price has been under pressure since 2015 after losing 11% of its share value, followed by another decline of 30.80% in 2016. The bank’s stock is currently trading at P7.60 having lost about 1.9% since the beginning of the year.

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Global recovery from COVID-19 remains unbalanced

2nd March 2021
Global recovery

As COVID-19 and its variants continue to cast a shadow over the world’s health systems and economies, the level of uncertainty and strength of the economic recovery will vary across countries. The real GDP in all G-20 countries is expected to grow compared to the previous year, but some countries will take longer than others to return to full capacity.

According to Mooody’s Global Macro Outlook 2021-22 report released this week, precautionary behavior and official restrictions are still hampering interpersonal interactions. The resulting toll on global economic activity has been staggering, even as the economy has also shown a remarkable degree of resilience.

Overall economic outcomes in 2020 exceeded Moody’s forecasts in most countries because of stronger-than-expected rebounds in the second half of the year. Aided by technology, many people and businesses quickly adapted so that they could carry on with daily activity with reduced in-person interactions.

However, Moody’s says the recovery remains unbalanced, with the pandemic affecting individual businesses, sectors and regions very differently. According to the group, goods demand has almost fully recovered because goods can be produced and consumed with limited in-person interactions, while the recovery in service continue to lag.

Within services, businesses that were able to effectively deliver their products at arms-length have stabilized, if not prospered. Large businesses with access to cheap funding have performed better than small and mid-sized firms. According to the report, the transportation, hospitality and leisure and arts sectors continue to languish, but the information technology, consumer goods, pharmaceuticals and financial sectors have thrived.

According to the report, many individuals around the world (including Botswana), have lost their jobs and continue to face employment uncertainty, but on the flip side, the forced decline in household consumption and the rise in asses prices have buttressed household financial balances at an aggregate level. Moody’s reported that all G-20 countries will post growth rates in 2021 and 2022, but the pace of recovery will vary significantly.

“The COVID-19 shock has exposed differences between countries in terms of political leadership, community health management, fiscal and monetary policy response, economic structures and inherent economic dynamism. Public health considerations drove the economic shock of the pandemic. In that sense, the steep declines in GDP in 2020 across advanced and emerging market countries were less a reflection of underlying weaknesses in the economy, and more a function of the combined effects of the spread of the virus and the stringency of lockdown measures,” says Moody’s.

Economic outcomes will remain closely tied to the pandemic, Moody’s said. “The quicker countries can curb the spread of the virus, the faster their economic activity will recover. Otherwise the costs of keeping parts of the economy shut, in terms of lost income and revenue, will keep adding up. The longer the crisis lasts, the more difficult it will be for governments to compensate the private sector for its continuing losses.”

Without adequate government support, Moody’s predict that large-scale deterioration in asset quality will ensue. Such detrimental effects, it says, could eventually transmit the shock through financial channels to other parts of the economy.

“We have cut or estimate of the 2020 contraction for the G-20 countries. We now expect a collective contraction of 3.3%, compared with our previous estimate of 3.8%, because of a better-than-expected recovery across a wide range of advanced and emerging market economies in the second half of the year. We expect the G-20 countries to grow by 5.3% in 2021 and 4.5% in 2022, up from our prior forecasts of 4.9% and 3.8% respectively.”

US ECONOMY TO LEAD THE GLOBAL SERVICES DEMAND RECOVERY

The US economy advanced at a 4.0% annualized rate in the fourth quarter 2020, but the headline figure masks the fact that the economy has lost momentum since November, when COVID-19 cases began to rise. Moody’s says it expects this current moderation in economic growth to be temporary. Economic momentum will likely puck up pace over the course of 2021 and 2022, supported by: enhanced pandemic control, significant additional fiscal support to the economy and a more predictable policy environment.

With infection rates now starting to fall, economic momentum should naturally pick up in the second quarter and into the summer as individual states progressively ease up social distancing restrictions, Moody’s reports.  “We believe that a stronger pandemic management response from the Biden administration, will increase public confidence and allow for a relation of restrictions over this year and next.”

COVID-19 SHOCK EXACERBATES EXISTING STRUCTURAL CHALLENGES IN SOUH AFRICA

South Africa’s economy is expected to growth by 4.5% in 2021 and by 11% in the following year, following an estimated 7.0% contraction last year. According to Moody’s, this will make South Africa’s recovery one of the weakest among emerging market countries. The economy has struggled to build momentum for many years, and as a result suffers from chronically high unemployment. The COVID-19 shock has made the economic situation all the more challenging, says Moody’s.

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BOL, MDC advised to take interest in Kavango oil tale

2nd March 2021
BOL-MDC

Reconnaissance Africa, a Canadian exploration company has started piercing the natural resource-rich lands of Kavango basin in Namibia, the company in searching for oil and gas.

The prospective area stretches into North West district of Botswana, the company through its local subsidiary Recon Africa Botswana has been given the nod by Ministry of Mineral Resources, Green Technology & Energy Security to explore petroleum mineral for four (4) years.

Amid all the negative reports around the company’s drilling activities in the Kavango basin, which covers ecosystem components feeding into the mighty Okavango Delta, the bottom line is that there are prospects of billions of dollars beneath the area in form of oil and gas-and Recon Africa is out to unearth the treasures.

Member of Parliament for Selibe Phikwe Dithapelo Keorapetse says Botswana should strive to participate in the exploration and development of these potential oil and gas deposits in the North West district. Contributing to the 2021/22 budget speech on Monday Keorapetse cautioned government against watching from afar while a potential multi-billion pula industry unfolds in the Okavango area.

He implored Botswana Oil Limited(BOL) and Mineral Development Corporation Botswana (MDCB) both state owned enterprises, to take up equity stakes in the exploration activities as early as now to “ rather than being spectators and waking up late when the foreigners are enjoying the billions”.

ReconAfrica through its subsidiary Recon Botswana was issued an exploration license under the Petroleum Act to explore for petroleum minerals in the North West District of Botswana, on 1 June 2020, for a period of four years.

“Botswana Oil as the country ‘s petroleum investment company together with MDC-a state owned mineral interest holding company must come together and acquire a stake in the ongoing exploration activities ,not to wait until Recon is making money and you say you want shares”. Keorapetse made reference to Karowe mine which Botswana’s diamond mining partner De Beers Group sold to Lucara over a decade ago while still at exploration stage.

Lucara bid on the site, and its internal partner Lundin provided a bank guarantee to De Beers for fifty million dollars, capturing some seventy per cent of the stake.Soon afterward, Lucara bought the remaining stake by acquiring De Beers’s London-based junior venture partner, African Diamonds. Lucara now owns AK6 (now Karowe Mine), having spent a little more than seventy million dollars.

The mine has since developed into a prolific rare gem producer celebrated worldwide, having unearthed some the world’s largest diamond ever in history , such as the over 1000 carats Lesedi La Rona, Sewelo and the magnificent 813 carats Constellation.

“We are now mulling acquisition of shares in Lucara but when transactions were happening in 2009 we were just spectators, we could have acquired shares back then when they were affordable now it is expensive to buy into Karowe mine, we must not make the same mistake with this oil and gas projects” said Keorapetse urging Government to be pro-active and move quickly to approach Recon Africa for a stake in Recon Africa Botswana.

ReconAfrica is a junior oil and gas company engaged in the exploration and development of oil and gas in North East of Namibia and North West of Botswana—the Kavango Basin. The company officially launched the oil and gas exploration project in Namibia in early January 2021. The exploration activities are taking place in the Kawe area, Kavango East Region, Namibia.

ReconAfrica holds a 90% interest in a petroleum exploration license in Namibia which covers the entire Kavango sedimentary basin in Namibia, the remaining 10% is owned by Government of Namibia. The exploration licence covers an area of 25,341.33 km2 (6.3 million acres), and based on commercial success, it entitles ReconAfrica to obtain a 25-year production license.

Further, ReconAfrica holds a 100% interest in petroleum exploration rights in Botswana over the entire Kavango sedimentary basin in the country. This covers an area of 8,990 km2 (2.2 million acres) and entitles ReconAfrica to a 25-year production license over any commercial discovery. The company acquired a high-resolution geomagnetic survey of the license area and conducted a detailed analysis of the resulting data and other available data, including reprocessing and reinterpretation of all existing geological and geophysical data.

The survey and analysis confirm that the Kavango Basin reaches depths of up to 9,000 m (30,000 feet) under optimal conditions to preserve a thick interval of organic rich marine source rock, and is anticipated to hold an active petroleum system.

“We believe that the Kavango Basin is another world class Permian basin, analogous to the Permian basin in Texas It is estimated that the oil generated in the basin could be billions of barrels. Recon Africa’s initial goal is to establish the presence of an active petroleum system with its fully funded 3-well drilling program starting early January 2021.

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Lucara suffers P287 million loss in 2020

2nd March 2021
LUCARA

Canadian mining company, Lucara Diamond Corporation, well known globally for producing rare gems of unprecedented quality, has not been spared by the 2020 global market downturn caused by the COVID-19 pandemic.

In their financial results for the year ended 31st December 2020, released from Vancouver Canada late Monday, the junior minor reported a significant net loss of $26.3 million for the year (approximately P287 in Botswana currency).

This according to the financials is a loss of $0.07 loss per share, which is a significant decline when compared to net income of $12.7 million ($0.03 per share) in 2019. The company which wholly owns and runs Botswana’s Karowe mine registered total revenues of $125.3 million (over P1.3 billion), a 34 percent drop compared to $192.5 million (almost P2 billion) recorded in 2019 or $335 per carat from $468 per carat in 2019.

The decrease in revenue resulted in adjusted EBITDA of $18.4 million, a decline when compared to adjusted EBITDA for the same period in 2019 of $73.1 million. Lucara executives explained that total revenue decline was a result of challenging market conditions, a longer ramp-up for production and polished sales in the latter half of 2020 under the HB supply agreement.

“As a result, revenue from certain polished diamonds from Lucara’s highest value stones that would otherwise have been recorded as revenue in 2020, is now expected to be realized in 2021.” reads a commentary alongside the figures.

During the year ended December 31, 2020, Lucara sold 373,748 carats at an average price of $335 carat. Diamond sales for the fourth quarter of 2020 were held through a combination of regular tenders, Clara, for diamonds less than 10.8 carats, and through HB under the supply agreement for those diamonds greater than 10.8 carats.

The Company recognized revenue of $42.4 million or $402 per carat from the sale of 105,648 carats. Price recovery was observed in most size and quality classes. Of note, prices achieved for goods sold on Clara (under 10.8 carats in size) in January 2021 have now recovered to the level of pricing achieved early in 2020.

For the year ended December 31, 2020, Lucara registered revenue totaling $55.2 million from the two agreements with HB, including an accrual for variable consideration of $7.2 million related to “top-up” payments arising from polished diamond sales in excess of the initial purchase price paid to Lucara.

With global restrictions impeding travel for many diamantaires, Lucara says interest in Clara grew significantly in 2020 and the number of buyers on the platform increased from 27 to 75.
During 2020, Clara began selling stones on behalf of third party sellers, which was a significant objective for the year.

“As Clara becomes the online marketplace of choice for rough buyers, discussions are underway with several producers to begin trials for the sale of their diamonds on Clara” the company said
Amidst challenging circumstances for the diamond industry in 2020 Lucara forged ahead with the Karowe mine underground project.

During the year period under review $18.7 million (over P190 million ) was spent on project execution activities including the following: Site earthworks (consisting of laydown preparation and clearing of shaft and surface infrastructure locations), geotechnical test pitting and drilling, and completion of two pilot holes at the shaft locations, a 746 metre hole for the ventilation shaft and a 768 metre hole for the production shaft.

The Company was able to complete on-site earth works and geotechnical studies by using local contractors while a State of Emergency remained in effect in Botswana.  Long lead time item orders were also placed for shaft muckers, and hoist and winder refurbishment was initiated. In addition, power line engineering and detailed shaft design and engineering (consistent with original targets for 2020) progressed.

In Q4 2020, the Government of Botswana approved the proposed powerline route and granted a 25-year extension to the Karowe Mine License to 2046, sufficient to cover the remaining open-pit life (to 2026) and the expected life of the proposed underground expansion, currently planned to 2040.

Lucara says it’s currently actively exploring opportunities to arrange debt financing for the underground expansion for those amounts which are expected to exceed the Company’s cash flow from operations during the construction period. The underground expansion program has an estimated capital cost of $514 million (over P5 billion) and a five year period of development.

President & Chief Executive Officer of Lucara Diamond Corporation, Eira Thomas said the measures that Lucara took early in the pandemic, including the decision not to sell rough diamonds in excess of +10.8 carats after Q1, helped protect and support prices for large, high value diamonds that account for more than 70% of the company’s revenues.

“These efforts in conjunction with our transformational supply agreement with HB Antwerp executed in July, resulted in strong price recoveries by Q4, a trend which has continued into 2021.”
Thomas said the recent recovery of two, high value +300 carat stones “continue to highlight the extraordinary nature of the Karowe resource and underpin the rationale for underground expansion, extending our mine life out to at least 2040”.

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