Hang­ing in there

Di­a­monds crunch­ing the econ­omy but in­ter­est in new min­ing de­vel­op­ments re­mains

Finweek English Edition - - Companies & Markets - BREN­DAN RYAN bren­danr@fin­week.co.za

BOTSWANA HAS TAKEN a ham­mer­ing from the melt­down in com­mod­ity prices – in par­tic­u­lar, di­a­monds – but it’s cop­ing and con­tin­ues to at­tract keen in­ter­est from ju­nior min­ers looking for a range of base met­als. That emerged at last week’s Botswana Re­sources con­fer­ence held in Gaborone.

And re­cent de­vel­op­ments have shown min­ing com­pa­nies will act ag­gres­sively to take ad­van­tage of op­por­tu­ni­ties in that coun­try. In May a fight erupted be­tween JSElisted Zam­bian Cop­per In­vest­ments (ZCI) and ASX-listed Natasa Min­ing over con­trol of African Cop­per, which owned the small Mowana cop­per mine in north-east Botswana.

African Cop­per ran out of cash at yearend 2008 and was forced to put the mine on care and main­te­nance. The com­pany ini­tially struck a res­cue deal with Natasa, which was voted down by share­hold­ers due to the oner­ous con­di­tions at­tached to the agree­ment. ZCI then moved in and ended up with 82% of the com­pany. ZCI shares are cur­rently sus­pended on the JSE be­cause it’s classed as a cash shell. This ac­qui­si­tion should al­low ZCI to be re­clas­si­fied as an op­er­at­ing min­ing com­pany and have its trad­ing sus­pen­sion lifted.

ASX-listed Di­a­monex wasn’t so for­tu­nate over the fate of its Ler­ala di­a­mond mine, which started pro­duc­ing in Au­gust last

year as Botswana’s first “in­de­pen­dent” di­a­mond pro­ducer not un­der the con­trol of De Beers.

Di­a­monex raised the funds needed to de­velop Ler­ala when it listed in 2004. In a clas­sic ex­am­ple of the cycli­cal risks in­her­ent in min­ing ven­tures, the mine started pro­duc­tion just in time for the col­lapse of the di­a­mond mar­ket.

Di­a­monex put its Botswana op­er­at­ing sub­sidiary un­der ju­di­cial man­age­ment in Jan­uary this year and is cur­rently sell­ing 80% of its in­ter­est in the sub­sidiary through Flem­ing As­set Man­age­ment. The com­pany has also been forced to sur­ren­der its other di­a­mond ex­plo­ration per­mits held in Botswana.

Botswana is heav­ily de­pen­dent on di­a­monds, which over re­cent years have ac­counted for around 70% of ex­port earn­ings and 40% of gov­ern­ment rev­enues. In re­sponse to col­laps­ing de­mand and prices for rough di­a­monds, De Beers shut down its Botswana mines for most of first quar­ter 2009.

Ac­cord­ing to econ­o­mist Keith Jef­feris, MD of Econ­sult and a for­mer deputy gov­er­nor of the Bank of Botswana, di­a­mond sales are likely to be 50% down this year and 25% down next year on the vol­umes re­alised in 2008. Jef­feris says Botswana’s bal­ance of trade turned sharply neg­a­tive in the first six months of 2009 but the coun­try was still in rea­son­able shape.

Botswana’s for­eign ex­change re­serves were still healthy at just more than 60m pula (around R69bn), while im­port cover sat at just less than 20 months.

Jef­feris told the con­fer­ence Botswana’s real GDP was fore­cast to de­cline by 10,2% this year but would start to re­cover in 2010 as di­a­mond pro­duc­tion picked up.

The crunch in the di­a­mond sec­tor has un­der­scored just how cru­cial it is for Botswana to suc­ceed in its strat­egy to di­ver­sify its econ­omy from over­whelm­ing de­pen­dence on di­a­monds, which was high­lighted at last year’s con­fer­ence. A de­ci­sion to de­velop the coun­try’s next cop­per mine could be taken in first quar­ter 2010, when ASX and AIM-listed ju­nior Dis­cov­ery Met­als is due to com­plete the bank­able fea­si­bil­ity study on its pro­posed Boseto mine. It will cost an es­ti­mated US$140m to de­velop the mine, which is sit­u­ated west of Maun in north­ern Botswana.

The coun­try’s most im­por­tant di­ver­si­fi­ca­tion scheme is TSX-listed CIC En­ergy’s Mmam­ab­ula coal project that’s pri­mar­ily in­tended to sup­ply power to South Africa’s Eskom grid, al­though there are also longer-term plans to ex­port coal. The project has been down­sized to a 1 320MW power sta­tion due to start gen­er­at­ing in first half 2013 but for that to hap­pen a num­ber of key agree­ments have to be put in place by third quar­ter 2009. Those in­clude fi­nal­i­sa­tion of the power pur­chase agree­ment with Eskom on which ev­ery­thing else hinges. Ac­cord­ing to CIC En­ergy’s pre­sen­ta­tion at the con­fer­ence “sig­nif­i­cant tan­gi­ble progress has been made to date”.

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