Australian based Trans Kalahari railway line consultants, Aurecon, last week Thursday, handed over to Botswana Government, a preliminary assessment of the viability and modalities surrounding the development of the rail line.
The report titled ‘Trans-Kalahari Railway Preliminary financial and commercial assessment’ was prepared by Tom Frost and Ben Ellis dated 11 December 2014. This report precedes a final assessment report that will be presented in January next year.
The purpose of the assessment was to determine the commercial viability of Botswana coal mines if they were to use the envisaged Trans Kalahari Railway line where various TKR development scenarios were considered and sensitivity analysis was performed on all key inputs.
The 1477 kilometers railway line will run from Mmamabula through six coal producing regions in Botswana, to Walvis Bay, Namibia.
KEY FINDINGS First, the rail related costs are particularly sensitive to assumptions with respect to WACC, gauge and below rail capex costs thus: The major impact policy makers can have on the project costs is through the choice of route and gauge. The optimised route is only 124km -less than 10 percent shorter- than the Government of Botswana route but the longer route is estimated to be nearly $2 per tonne higher. A move to narrow gauge would increase costs by around $3 per tonne primarily through higher above rail operating costs. Accessing cheaper investor capital would also improve the viability of the railway significantly
Secondly, the results are also very sensitive to assumptions with respect to mine operations
Last, consultants say ramp up is a major risk for project investors and miners. If all miners are not able to ramp up production from 65 to 95 Mtpa to full production in seven years costs will increase significantly
RISK FACTOR The major risk factor and potential upside is with respect to sale price of coal, the report says.
To achieve the target export sale quality, it is likely that miners will use underground mining techniques.
“Botswana coal typically is deposited in a number of seams at varying depths; Coal quality varies across these seams, with the higher quality coal typically lower in the deposit; At a high level two mining techniques are typically considered; Underground (bord and pillar).”
The report states that Underground mining will be more expensive at approximately $25 per tonne ROM, but miners are able to target only the best seams and it yields a higher proportion of coal per tonne of ROM lower the proportion of waste from the mining
A major disadvantage of underground mining bord and pillar mining, however is that it leaves more than 30 percent of the coal behind, as pillars and therefore a much larger resource is required for any given output level.
Open cut is cheaper at approximately $12 per tonne ROM but miners clear all seams and it produces a significant amount of waste product and low quality coal.
BENEFITS OF THE RAIL LINE The railway line is expected to unlock the monetisation of Botswana’s coal resources, which are seen as a way to augment the depleting diamond resources that have been the mainstay of the country’s economy. Aurecon has given the resultant capital expenditure costs at a total of USD14.2 billion, comprising USD8.6 billion for electrified rail, and USD1.9 billion for above rail, and USD3.6 billion for the port.
The “Pre-Feasibility Study of the TKR Report” prepared by Canadian firm, CPCS in 2011, contained capital and operating costs estimates for the rail and port but the new assessment by Aurecon is said to be 90 percent different due to several considerations such as: A high level review of these costs has been undertaken as a result of a number of issues: changes to the construction market since 2011; changes in operating philosophy of the rail, and proposed enhancements to the project.
“Lower capex possible however will result in higher operating costs, and overall higher whole-of-life costs,” states the report.
There are two coal quality options that policy makers will be faced with, Option 1 being Richard Bay benchmark export which has middlings, and Option 2 which is lower than Richard Bay quality coal, little or no middlings.
Benchmark quality export coal can be produced but only if there is a domestic market for the low quality ‘middlings’ by product while producing a lower quality export coal (~5,500 c/kg) middlings production is eliminated or minimized.
Botswana possesses substantial coal deposits of 212 billion tonnes, the majority of which are low grade. Under favourable conditions, and until solar power becomes a feasible option for supplying base load electricity, this coal could be either exported or used for local regional electricity production and consumption. Electricity shortages impose a considerable constraint on economic growth in sub-Saharan Africa. This strengthens the argument for local production of coal-fired electricity, especially if regional fossil fuel supplies are integrated in a technologically adept manner to ensure economies of scale. However, coal extraction for either export or local production is environmentally costly despite advances in technology.
The alternative is for Botswana to export its coal, which would attract immediate export revenue. This is unlikely to create sustainable economic diversification, though. Botswana is landlocked and lacks available transport infrastructure to facilitate exports of such a scale, weakening the argument for this option.
The high quality export/middlings option is potentially attractive to miners if the middlings can be sold to a relatively close power station because it maximises the price achieve for export coal and minimised the proportion of output that has to be transported to a port
If all the miners took this strategy a much higher ROM output would be required if 60mtpa of export coal were to be produced and the middlings output would be in the order of 20mtpa. Current domestic Botswana electricity demand can be satisfied by under 2mpta of coal. It is not expected that the market will expand sufficiently to be able to provide a market for high volumes of middlings. If the middlings are not sold then the average cost of producing benchmark export coal will rise by 20 percent to 30 percent and become uneconomic. As a result it is anticipated that the majority of producers will blend to produce a higher volume mid range ~5,500 c/kg.
The Richards Bay has been used to benchmark potential Botswana coal products and estimate a sale price, which at the moment stands at US$ 65 per ton, a five year low. Botswana’s Export quality coal with 20 percent ash and 5500kcal/kg is estimated to sell at US$60 per ton, with expected price increases forecast for the next ten years.
Price variations from this benchmark are calculated based on a wide range of factors including, caloric value, sulphur content, ash and moisture levels.
A primary problem is that demand for Botswana’s coal is not guaranteed. The International Energy Agency’s (IEA) ‘Annual Energy Outlook 2014’ foresees a general shift away from carbon-intensive fuels for electricity generation, though that may largely be restricted to the Organisation for Economic Co-operation and Development (OECD) countries.
A 2014 statistical review by British Petroleum, the global energy giant, shows that total world coal consumption in 2013 was the equivalent of 3 826 million tonnes of oil (Mtoe), up from 2 342 Mtoe at the turn of the century. Much of this growth is primarily generated by non-OECD countries.
However, increasingly competing with coal and cohering with the IEA assessment, consumption of ‘other renewables’ was up to 279.3 Mtoe from only 51.8 Mtoe in 2000. In the absence of globally binding policies to mitigate climate change, though, the EIA still projects coal consumption to increase at an average rate of 1.8 percent per year through 2040 in non-OECD countries. Coal’s share of fuel consumption for electricity will only decline from 43 percent in 2010 to 37 percent in 2040.
Furthermore, Aurecon has identified a number of alignment improvements that will reduce the length by a total of approximately 108km, in addition to the 24km reduction resulting from the GoB enhancement between Mochudi and Kang. However, the PFS Northern Alignment, whilst environmentally and socially superior to the Southern Alignment, adds significant costs to the supply chain.
“Considering the economics of exporting coal from Botswana, it is critical that (whole-of-life) costs be minimised – optimising the alignment provides the greatest opportunity in this area,” stated the report.
DIESEL OR ELECTRIC TRAINS? The debate around whether to employ diesel or electric locomotives on the Trans Kalahari Highway will be decided on various factors, including environmental and long term cost concerns.
Electrification of the envisaged railway line provides several additional benefits such as: Opportunity to convert coal unsuitable for export to power; Provides additional high value link to Namibia; SADC region projected to experience continued shortfall in power; Electricity generation from own resources provides significant balance of payments benefits compared to importing up to 450 million litres of diesel fuel each year; Improved supply security – not reliant on external suppliers for a critical input and cleaner, quieter operation compared with diesel locomotives
RISKS TO THE PROJECT There remain various latent risks to the project such as : Loss of the project to a major resource player whereby a major coal developer possibly seeks to take control of the project once the Botswana Government has invested significantly to initiate the project; Major User seeks to dictate terms favourable to them; Low coal price – non-viable project; Principal driver for the project is the commercial viability of export coal; Timing as a critical issue with the project being delivered at a time when the market can sustainably support it; Land acquisition and negotiations and approvals, though not a concern for the majority of the alignment of the TKR, the revised alignment has a significant impact upon the viability of the project and might bring the TKR closer to populated or developed areas; Project timing with resource projects gearing up for the next wave bringing Botswana and Namibia domestic resources and workforce to develop this project.
Finally, the Walvis Bay Export Terminal development faces a risk of running slow or capability of Walvis Bay developers to meet the timeline of the TKR as it must be considered within and as part of the total export supply chain Walvis Bay Export Terminal fails to develop, the rail is unlikely to proceed.
The finalisation of the Development Plan for the Trans Kalahari Railway line will be possible after the following are completed: Finalisation of Supply Chain Infrastructure; Master Plan mapping of clusters and connections to copper/manganese; Finalisation of the commercial model assessment for the TKR; Incorporating the commercial outcome from the mine to ship modelling; Finalisation of structure assessment and impact on Government of Botswana; Funding sources identified and the Project Memorandum being developed to engage with the market in the next stage.
The efficiency of the railway line coal supply chain is expected to be maximized by Copper resources in North West Botswana identified to boost TKR viability, Manganese ore resources in southern Botswana identified to add to the viability of the TKR, both these mineral developments (copper and manganese) will add to the diversification of Botswana’s GDP. Mineral resources along the TKR corridor in Namibia have the ability to further improve the viability of the TKR.
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Following a devastating first half of the year 2020 due to COVID-19, the global diamond industry started gaining positive momentum towards the end of the year as key markets entered into thanks giving and holiday season.
However Bruce Cleaver, Chief Executive Officer of De Beers Group cautioned that the industry is not out of the woods yet, citing prevailing challenges ahead into 2021.
The first half of 2020 was characterized by some of the worst challenges in history of global diamond trade.
The midstream, where rough diamonds are traded in wholesale and bulk to cutters and polishers, was for the most part of second quarter 2020, suffocated by international travel restrictions as countries responded to the contagious Corona Virus.
This halted movement of buyers and shipment of the rough goods , resulting in unprecedented decline of sales, in turn ballooning stockpiles as the upstream operations produced with little uptake by the midstream.
The situation was exacerbated by muted demand in the downstream where jewelry industries and tail end retailers closed to further curb the spread of COVID-19.
However towards the end of third quarter getting into the last quarter of the year, demand in both midstream and downstream started to steadily pick up as countries relaxed COVID-19 restrictions.
De Beers, the world’s largest diamond producer by value started reporting significant recovery in sales in the sixth and seventh cycle, figures began to reflect an upswing in sentiment as well as increase in uptake of rough goods by midstream.
Sales for the sixth cycle amounted to $116 Million, following a sharp downturn in the previous cycles, significant jump was realized during the seventh cycle, registering $320 million, an over 175 % upswing when gauged against the proceeding cycle.
De Beers noted that diamond markets showed some continued improvement throughout August and into September as Covid-19 restrictions continued to ease in various locations.
“Manufacturers focused on meeting retail demand for polished diamonds, particularly in certain product areas, accordingly, we saw a recovery in rough diamond demand in the seventh sales cycle of the year, reflecting these retail trends, following several months of minimal manufacturing activity and disrupted demand patterns in all major markets,” said De Beers Chief Executive, Bruce Cleaver in September last year.
The diamond mining behemoth continued to register impressive sales in the eighth and ninth cycle signaling the industry could end the year on a positive note.
The momentum was indeed carried into the last cycle of the year. The value of rough diamond sales (Global Sightholder Sales and Auctions) for De Beers’ tenth sales cycle of 2020 amounted to $440 million, a significant increase from the 2019 tenth sales cycle value.
Against what seemed like a positive year end that would split into the New Year Bruce Cleaver, CEO, De Beers Group, however warned the industry not to count eggs before they hatch.
“Positive consumer demand for diamond jewellery resulting from the holiday season is supporting the continuation of retail orders for polished diamonds from the diamond industry’s midstream sector. This in turn supported steady demand for De Beers’s rough diamonds at our final sales cycle of 2020,” Cleaver had said in December.
In caution the De Beers Chief noted that “While the diamond industry ends the year on a positive note, we must recognise the risks that the ongoing Covid-19 pandemic presents to sector recovery both for the rest of this year and as we head into 2021.”
All segments of the supply chain were severely impacted by the global lockdown measures introduced in response to the Covid-19 pandemic in the first half of 2020.
After a strong US holiday season at the end of 2019, the rough diamond industry started 2020 positively as the midstream restocked and sentiment improved.
However, from February 2020, the Covid-19 outbreak began to have a significant impact on diamond jewellery retail sales and supply chain, with many jewelers suspending all polished purchases and/or delaying payments to their suppliers.
Rough diamond sales were materially affected by lockdowns and travel restrictions, delaying the shipping of rough diamonds into cutting and trading centers and preventing buyers from attending sales events.
These resulted in significant decline in total revenue for the business in the first six months of 2020. Total revenue decreased by 54% to $1.2 billion from $2.6 billion registered in the prior half year period ended 30 June 2019.
For the entire first six (6) months of the year 2020 De Beers Rough diamonds sales fell drastically to $1.0 billion from $2.3 billion in the prior H1 period ended 30 June 2019. Sales volumes decreased by 45% to 8.5 million carats compared to 15.5 million carats registered in the prior period.
Next month Minister of Finance & Economic Development, Dr Thapelo Matsheka will face the nation to deliver Botswana‘s first budget speech since COVID-19 pandemic put the world on devastating economic trajectory.
The pandemic that broke out in late 2019 in China has put the entire world on unprecedented chaos ,killing over P1 million people across the globe , shattering economies and almost rendering the year 2020 – a 12 months stretch of complete setback.
The 2021/22 budget speech will come at time when Botswana’s economy is still trying to emerge out of this.
National lockdowns and local travel restrictions have hit small medium enterprises hard, while international travel restrictions halted movement of both good and people, delivering by far some of the heaviest and worst catastrophic blows on the diamond industry and tourism sector, the likes of which this country has never seen before on its largest economic sectors.
As Minister Matsheka faces parliament next month, the reality on the ground is that Botswana’s national current cash resource, the Government Investment Account (GIA) is depleting at lightning speed.
On the other hand the COVID-19 economic mess is prevailing, the virus is reported to have taken a new dangerous shape of a deadly variant, spreading like fueled veld fire and causing some of the world’s super powers back to tough restrictions of lockdown.
According official figures released by Bank of Botswana, in October 2020 the GIA was running at P6 billion compared to the P18.3 billion held in the account in October 2019.
However reports indicate that the account could be currently holding just about P3 billion. The draw down from the GIA has been by exacerbated by declining diamond revenue, the country‘s largest cash cow. The sector was experiencing significant revenue decline even before COVID-19 struck.
When the National Development Plan (NDP) 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at a 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.
Taking into account the COVID-19 economic mess in 2020/21 financial year, the budget deficit could add up to P20 billion after revised figures.
Drawing down from government cash balances to finance these budget deficits meant significant withdrawals from the Government Investment Account, hence the near depletion of this buffer.
Meanwhile should Botswana’s revenue streams completely dry up to zero levels; the country would only have 11 months, before calling out for humanitarian aids and international donors, because foreign reserves are also on slow down.
During 2019, the foreign exchange reserves declined by 8.7 percent, from Seventy One Billion, Four Hundred Million Pula (P71.4 billion) in December 2018 to Sixty Five Billion, Three Hundred Million Pula (P65.3 billion) in December 2019.
The reserves declined further in 2020, falling by 2.3 percent to Sixty Three Billion, Seven Hundred Million Pula (P63.7 billion) in July 2020. This was revealed by President Masisi during State of the Nation Address in November last year.
The decrease was mainly due to foreign exchange outflows associated with Government obligations and economy-wide import requirements.
However latest statistics(October 2020) from Bank of Botswana reveal that Botswana’s foreign reserves are estimated at P58.4 billion, with government’s share of these funds significantly low.
Government has since introduced several measures to contain costs and control expenditure with the most recent intervention being the halting of recruitment in government departments and parastatals.
Furthermore, Value Added Tax has been signaled to go up from 12% to 14% in April this year with more hikes and service fees anticipated as government embarks on unprecedented domestic revenue mobilization.