Industry Trend Analysis - Shift To Coal Underway, Yet Diamonds Still Rule - FEB 2017

BMI View: Botswana ' s government ' s efforts to develop the coal mining sector will yield steady progress, supported by low operating costs, a solid project pipeline and rising domestic demand. Nonetheless, the government ' s coal initiatives within the context of reducing dependence on the diamond sector will face headwinds from subdued coal prices and the outsized value of the diamond sector.

Botswana's mining industry value will increasingly be driven by a government-led ramp up in coal production over the coming years. We forecast the country's coal output to increase from 2.3 million tonnes (mnt) in 2017 to 3.8mnt by 2021, with the sector's share of total mining industry value growing from an estimated 2.6% in 2012 to 6.9% by 2021.

Gradual Climb For Coal Industry
Botswana - Mining Industry Vale As Share Of GDP & Coal Sector As Share Of Mining Industry Value (%)
e/f = BMI estimate/forecast. Source: National Sources, UN, EIA, BMI

Key factors keeping Botswana an attractive mining investment destination despite a subdued coal price outlook include low operating costs, rising regional and domestic coal demand and a stable business environment. For instance, a weak domestic currency will improve miners' profit margins, as input costs are priced in domestic currency and output (commodities) are priced in the stronger US dollar. We expect the Botswana pula to follow a depreciatory trend over 2017, driven by weakness in the pula's currency basket ( see ' BWP: Pula Set For Continued Depreciation In 2017', January 17). Furthermore, coal-fired power generation plays an important role in Southern Africa's electricity mix, particularly in South Africa and Botswana, where we forecast coal to account for over 95% of Botswana's power mix by 2025 ( see 'Southern Africa To Dominate Coal Power Landscape', November 1, 2016). Botswana will be well-placed to supply the region's increasing coal demand. For instance, Shumba Energy's Sechaba coal project will first supply the local spot market and Botswana Power Corporation, then target NamPower Corporation in Namibia and ultimately develop a second deeper underground mine over the next 5-8 years to export to South Africa. In the firm's fiscal year ended June 2016, total expenditures on projects and asset development, namely two coal projects in Botswana, increased by 93% y-o-y to USD1.9mn.

Southern Africa To Be Coal Hot Spot
Select Countries - Coal Generation Contribution To Total Electricity Generation (% TWh)
e/f = BMI estimate/forecast. Source: EIA, BMI

Subdued Coal Prices To Hinder Diversification Efforts

While Botswana's coal production growth rate will stand out in a global environment of subdued prices and carbon-conscious initiatives, the sector will only barely alleviate the country's dependence on the diamond mining sector. Indeed, the poor outlook for coal prices poses a downside risk to Botswana's project development. We forecast thermal coal prices to average USD65.0/tonne in 2017 and USD63.0/tonne in 2018 ( see 'Thermal Coal Slide To Continue In 2017', December 7 2016). For example, Walkabout Resources has not provided an update to the USD767mn Takatokwane thermal coal project resource outlook since 2013, although expresses 'encouragement' at a September 2016 memorandum of understanding among the governments of Botswana, Zimbabwe and Mozambique to construct a regional railway line. Rather, the firm will concentrate on the development of graphite and lithium deposits, having changed tack to the lithium market in April 2016.

Lacklustre Price Rebound To Weigh On Project Development
Global Thermal Coal Price (USD/tonne)
e/f = BMI estimate/forecast. Source: BMI, Bloomberg

Moreover, the sheer size of Botswana's diamond sector will ensure that the precious gems outshine coal in terms of value for the foreseeable future. In October 2016, according to the Bank of Botswana, the country's diamond export value nearly quadrupled to USD341mn compared to the same period in the previous year. In comparison, we estimate that the coal mining sector over the course of 2016 totalled USD116mn.

Botswana - Coal Projects
Mine Mine Type Company Notes
Source: BMI, Company Announcements
Mmamabula West Underground African Energy Resources Drilling programme Q416; Resources - 2,433mnt
Sechaba Open Pit / Underground Shumba Coal October 2016 - Project is at an advanced stage with an initial open pit mining focused on to supply the local market; Total Indicated Resources - 113mnt
Sese Open Pit African Energy Resources (45%), First Quantum Minerals (55%) July 2016 - First Quantum Minerals to invest AUD3.0mn within 12 months to invest additional AUD7.0mn required to complete 75% earn-in; Resources - 2,517mnt
Mmamantswe Open Pit African Energy Resources Measured and Indicated Resource - 1,243mnt
Takatokwane Open Pit / Underground Walkabout Resources Total Indicated Resources - 748mnt
Mmamabula Open Pit / Underground Jindal Steel & Power Ltd Resources - 2.4bn tonnes
Morupule South Open Pit Hodges Resources (75%) JORC Inferred Resource - 2.45bn tonnes
Mea A-Cap Resources Resources - 148mnt
Foley A-Cap Resources Resources - 335mnt
Dukwe Underground Asenjo Energy -
Mmamabula West Open Pit / Underground Asenjo Energy -
Mmamabula East Open Pit / Underground Asenjo Energy -
Lechana Open Pit Asenjo Energy -
Tshimoyapula Open Pit Asenjo Energy -