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.
Botswana’s economy showed slight growth signs in the first quarter of 2021, following a devastating year in 2020.
During 2020, the entire second quarter was on zero economic activity as the country went on total lockdown in an effort to curb the spread of the virus.
Diamond trade plummeted to record low levels as global travel restrictions halted movement of both goods and people and muted trade.
The end result was a significant decline for the local economy, at an estimated 7 percent contraction, just marginally below the 2008/09 global financial crises.
According to figures released by Statics Botswana this week, the country’s nominal Gross Domestic Product for the first quarter of 2021 was P47.739 billion compared to a revised P45.630 billion registered during the previous quarter.
This represents a quarterly increase of 4.6 percent in nominal terms between the two periods.
During the quarter, Public Administration and Defence became the major contributor to GDP by 18.4 percent, followed by Wholesale & Retail by 11.4 percent. The contribution of other sectors was below 6.0 percent, with Water and Electricity Supply being the lowest at 1.6 percent.
Real GDP for the first quarter of 2021 increased by 0.7 percent compared to a contraction of 4.6 percent registered in the previous quarter.
The improvement in the first quarter 2021 GDP reflected continued efforts to reopen businesses and resume activities that were postponed or restricted due to the COVID-19 pandemic.
The real GDP increased by 0.7 percent during the period under review, compared to an increase of 1.2 percent in the same quarter of 2020.
The recovery in the domestic economy was observed across majority of industries except Accommodation & Food Services, Mining & Quarrying, Manufacturing, Construction, Other Services and Agriculture, Forestry & Fishing.
The overall slow performance of the economy was mainly due to the impact of measures that were put in place to combat the spread of the COVID-19 pandemic.
The Non-mining GDP increased by 4.1 percent in the first quarter of 2021 compared to 4.0 percent increase registered in the same quarter of the previous year.
Agriculture, Forestry and Fishing industry decreased by 2.0 percent in real value added during the first quarter of 2021, relative to a contraction of 5.2 percent registered during the same quarter of 2020.
The main driver of the unfavorable performance stems from a decrease in real value added of Livestock farming by 3.0 percent.
Mining and Quarrying registered a decrease 11.4 percent in the real value added, this was mainly influenced by the drop in the Gold and Diamond real value added by 17.5 and 12.5 percent respectively.
Diamond production in carats went down by 12.1 percent while the tonnage of Gold produced went down by 17.5 percent.
The poor performance of the diamond sub-industry is attributed to the reduction in production due to a lower grade feed to the plant at Orapa in response to heavy rainfall and operational issues, including continued power supply disruptions.
With regard to Gold is due to diminishing resource base which affect production.
The Manufacturing industry recorded a decline of 7.4 percent in real value added during the first quarter of 2021, compared to a decrease of 2.3 percent registered in the corresponding quarter of 2020.
The deep low performance in the industry is observed in the two major sub-industries of Beverages & tobacco and Diamond cutting, polishing and setting by 57.0 and 38.5 percent respectively.
The reduction in Beverages is attributed to alcohol sale ban imposed during the quarter under review in order to reduce the spread of the COVID-19 virus. On the other hand, exports of polished diamonds went down by 24.9 percent compared to a decrease of 11.5 percent registered in the same quarter of the previous year.
The construction industry recorded a decline of 4.8 percent compared to an increase of 4.3 percent realized in the corresponding quarter in 2020.
This industry comprises of buildings construction, civil engineering and specialized construction activities. The industry is still showing signs of the consequences of COVID-19 pandemic. The industry recorded a negative growth of 7.4 percent in the previous quarter.
Water and Electricity Water and Electricity value added at constant 2016 prices for the first quarter of 2021 was P506.2 million compared to P378.2 million registered in the same quarter of 2020, recording a growth of 33.8 percent.
In the first quarter of 2021, Electricity recorded a significant growth of 62.4 percent compared to a decrease of 67.6 percent recorded in the corresponding quarter of 2020.
The local electricity production increased by 22.4 percent while Electricity imports decreased by 33.3 percent during quarter under review. The water industry recorded a value added of P231.3 million compared to P209.0 million registered in the same quarter of the previous year, registering an increase of 10.7 percent.
Wholesale and Retail Trade real value added increased by 11.4 percent in the first quarter of 2021 compared to an increase of 5.5 percent registered in the same quarter of the previous year. The industry deals with sales of fast moving consumer goods.
Diamond Traders recorded a significant growth of 112.7 percent as opposed to a decline of 22.7 percent recorded in the corresponding quarter last year. The positive growth is due to improved demand of diamonds from the global market.
The Transport and Storage value added increased by 0.6 percent in the first quarter of 2021, compared to a 2.4 percent increase recorded in the same quarter of the previous year.
The slight improved performance of the industry was mainly attributed to the increase in real value added of Road Transport and Post & Courier Services by 4.3 and 2.1 percent respectively.
The slow growth was influenced by a significant reduction in Air Transport services of 69.7 percent due to reduced number of passengers carried. Rail goods traffic in tonnes went down by 6.4 percent and passenger rail transport was not operating during the quarter under review.
Accommodation and Food Services Accommodation and Food Services real value added declined by 31.7 percent in the first quarter of 2021 compared to a decrease of 4.4 percent registered in the same quarter of the previous year. The reduction is largely attributed to a decrease of 42.1 percent in real value added of the Accommodation activities subindustry.
The suspension of air travel occasioned by Covid-19 containment measures impacted on the number of tourists entering the borders of the country and hence affecting the output of Hotels and Restaurants industry. COVID-19 restriction measures resulted in reduced demand for leisure and conferencing activities, as conferences are largely held through virtual platforms.
Finance, Insurance and Pension Funding industry registered a positive growth of 8.3 percent due to the favorable performance from monetary intermediation and Central Banking Services by 16.4 and 5.4 percent respectively during quarter under review.
It is still tough in the tourism industry — big players in this sleeping giant are not having it easy, but options are being explored to keep the once vibrant multibillion Pula sector alive until the world gets back to normalcy.
One of the primary measures against the spread of Covid-19 is to stay home; this widely pronounced precaution against the global contagion that has claimed over 4 million lives across the world is however a thorn in the flesh of one of the major industries in the global economy — the tourism sector .
This sector is underpinned by travel – an act which is the virus‘ number one mode of spread, especially across borders.
Chobe Holdings Limited, one of Botswana’s leading high end eco-tourism giants said its survival strategies are underpinned by well-crafted stakeholder engagements in the mist of these unprecedented times of muted trading activity.
“Throughout the COVID-19 pandemic, Chobe continued to invest in and strengthen its relationships with key stakeholders in both its traditional markets and the SADC region,” the company directors updated shareholders this week.
To keep the business afloat, the company which owns and operates some of the exquisite tourism destinations along the banks of the mighty Chobe said it has triggered its existing available debt financing avenues.
Chobe revealed that its current overdraft of BWP 25 million has been extended on favourable terms.
The company shared that it has negotiated a further USD 1.5 million (over P16 million) standby loan with a flexible settlement terms and preferable cost implications to the bottom line.
“We are confident that the Group has sufficient cash inflows, cash reserves and un-utilized prearranged borrowing in place to settle any liabilities falling due and support the smooth recovery of operations in the short and medium term,” the company directors said, noting that they will retain the flexibility to vary operations should market conditions change.
Early this year, Chobe announced that the ongoing crisis in the tourism industry forced the company to draw from its prearranged overdraft facility of P25 million to the extent of P11.6 million.
Last year Chobe’s occupancy levels around its lodges and hotels went down 89 percent. This resulted in unprecedented revenue decline of 93% to P27.78 million from the P373.94 million in the previous year ended February 2020.
Operating profits went down 159% with profit after tax down 170%, mirroring a loss of over P67 million.
Chobe management said during the last half of the financial year they have done all they could to contain costs across the company’s operations.
During the last half of the year Chobe’s marketing and reservations teams continued to pursue the “don’t cancel but defer policy”.
“We thus continue to hold advance travel receipts, to the value of about P34 million at the financial year end,” the company revealed early this year.
Chobe said it continues to engage Government, through HATAB and BTO to prioritize the vaccination of workers in the tourism sector.
“Throughout the pandemic we have ensured that employees are trained in and comply with COVID-19 infection mitigation protocols as well as ensuring that all visitors to our remote camps and lodges as well as our staff and contractors are tested for COVID-19 before reaching the camp or lodges,” the company said.
However, the company said vaccinating the tourism staff will provide the best way to ensure that both employees and guests are protected from the virus.
“We continue to manage our cashflow through stringent cost control measures, balanced against the protection of the Group’s physical assets and the wellbeing and retention of its people,” the company said.
Chobe has successfully retained its top management through the pandemic. To this end the company directors continue to closely monitor the Group’s recovery from COVID-19 and adjust salary reductions to support operations and aid retention.
Domestic and regional travel resumed during the second quarter of the 2020/21 financial year with the Group opening a strategic mix of camps and lodges.
A comprehensive domestic, regional and international marketing plan was put in place to support these openings.
International travel resumed in the first quarter of the 2021/22 financial year with occupancies forecast to steadily increase, albeit from a low base, through the second quarter.
The company is optimistic that forward bookings are strong for the 2022/23 financial year.
“There is pent-up demand from our traditional source markets to travel now, but this is tempered by uncertainty and access constraints,” the company stated.
“Both the domestic and international markets are sensitive to such uncertainty, and it is critical that both the private and public sector work together to develop and publish clear, authoritative and consistent travel information in order to build confidence”
Chobe entered the pandemic with the Shinde camp rebuild in progress — one of its high end camps and this was completed in the first half of the 2020/21 financial year accounting for the majority of the Group’s capital expenditure for that period.
De Beers Group, the world’s leading rough diamonds producer by value and Botswana’s partner in the diamond business, ramped up its production in the second quarter of 2021, in response to stronger demand for rough diamonds in the global markets.
The London headquartered diamond mining giant revealed in its production report this week that rough diamonds output increased by 134% to 8.2 million carats in the three(3) months of quarter 2 2021, “reflecting planned higher production to meet stronger demand for rough diamonds”.
This was against the backdrop of curtailed demand in the same quarter last year, mirroring the impact of Covid-19 lockdowns across southern Africa during that period.
In Botswana, where De Beers sources majority of its rough diamonds through partly government owned Debswana, production increased by 214% to 5.7 million carats. The percentage jump mirrored planned low production in the second quarter of 2020 where output was adjusted to market demands and implemented Covid-19 protocols.
Debswana operates four (4) Mines: Jwaneng Mine- being its flagship producer and largest revenue contributor. Jwaneng Mine which is the wealthiest diamond mine in the world by value is envisaged for multi-billion expansion to an underground operation in future to stretch its existence by few more decades.
The underground project which is anticipated to cost a whooping P65 billion will be the world‘s largest underground diamond mine.
The company which accounts for over 65 % of De Beers’s global production also operates Orapa Mine- one of the world’s largest by area, Letlhakane Mine currently a tailings treatment operation and Damtshaa Mine which is under care and maintenance following market shrink in 2020.
Namibia production decreased by 6% to 0.3 million carats, primarily due to planned maintenance of the Mafuta vessel which was completed in the quarter and another vessel remaining demobilized. In Namibia De Beers sources diamonds both in land and marine through Namdeb and Debmarine respectfully.
In South Africa-the spiritual home ground of De Beers Group, production increased by 130% to 1.3 million carats, due to planned treatment of higher grade ore from the final cut of the Venetia open pit, as well as the impact of the Covid-19 lockdown in Q2 2020.
Production in Canada increased by 14% to 0.9 million carats, primarily reflecting the impact of the Covid-19 measures implemented in Q2 2020.
De Beers said consumer demand for polished diamonds continued to recover, leading to strong demand for rough diamonds from midstream cutting and polishing centers, despite the impact on capacity from the severe Covid-19 wave in India during April and May.
Rough diamond sales totaled 7.3 million carats (6.5 million carats on a consolidated basis), from two Sights, reflecting the impact of the reduced Indian midstream capacity on Sight 4, compared with 0.3 million carats (0.2 million carats on a consolidated basis) from two Sights in Q2 2020, and 13.5 million carats (12.7 million carats on a consolidated basis) from three Sights in Q1 2021.
The H1 2021 consolidated average realized price increased by 13% to $135/ct (H1 2020: $119/ct), driven by an increased proportion of higher value rough diamonds sold.
While the average price index remained broadly flat, the closing index increased by 14% compared to the start of 2021, reflecting tightness in inventories across the diamond value chain as well as positive consumer demand for polished diamonds.
Full Year Guidance Production guidance is tightened to 32–33 million carats (previously 32-34 million carats (100% bases)), subject to trading conditions and the extent of any further Covid-19 related disruptions.
When commenting to 2021 quarter 2 production figures, Mark Cutifani, Chief Executive of Anglo American- De Beers parent, said the entire Anglo American Group delivered a solid operational performance supported by comprehensive Covid-19 measures to help safeguard the lives and livelihoods of its workforce and host communities.
“We have generally maintained operating levels at approximately 95% of normal capacity and, as a consequence, production increased by 20% compared to Q2 of last year, with planned higher rough diamond production at De Beers” he said.