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An African Lion

World Coal,

Botswana’s hungry domestic market is on track for substantial growth, thanks to the country’s political stability and rapidly expanding and diversifying economy.

Hodges Resources Ltd aims to provide thermal coal to Botswana and export coal to
energy-hungry markets such as China and India. At the company’s Moiyabana coal project, an independent review by Runge defined an exploration target of 1.4 – 1.65 billion t, with 660 million t amenable to opencast mining methods.

When combined with its Morupule South project, which comes with a JORC-compliant 414 million t inferred resource and an additional 700 – 800 million t target, the company’s overall exploration target increases to more than 2 billion t.

Additional exploration would further increase the tonnage estimates, but the company first needs to prove its reserves. Hodges’ first priority is to carry out a targeted drilling programme that will reclassify the target resource into a JORC standard inferred resource at Moiyabana. The company also needs to complete reconnaissance drilling at Morupule South.

The relatively unexplored Moiyabana project has the potential to be a large tonnage project and, with further exploration and testwork, knowledge of coal qualities would be improved. This would allow for greater economic optimisation down the track.

The initial phases are concentrating on only a quarter of the area the company holds under the prospecting license, whereas the other three quarters of highly prospective land remains to be explored.

Hodges Resources is well positioned to take advantage of the surge in demand for electricity in Botswana. Moiyabana is strategically located in central east Botswana, approximately 70 km from the Morupule coal mine and 50 km from existing rail infrastructure in the central east

Recent drilling at the neighbouring Morupule South project has identified coal seams at shallow depths.  Morupule South is situated only 3 – 5 km from the old and new (under construction) coal-fired power plants and a high voltage power line runs over the area. Road and rail infrastructure is on Morupule South’s doorstep. This makes the company ideally suited to potentially servicing Botswana’s growing domestic appetite for thermal coal.

The Moiyabana project comprises two prospecting licenses (PL93/2007 and PL94/2007), covering a total 593 km2. Morupule South has one prospecting license (PL121/2010), and both projects lie within the southeast Central Kalahari Basin.

Historically, the areas were partially explored by Shell Coal Botswana during the 1970s. Moiyabana was more recently explored by the licensee company, Jaquar Ventures (Pty) Ltd, which completed 13 diamond drill holes during the period 2009 – 2010.

Coal quality intersected in previous drilling at the Moiyabana project is variable, but raw qualities are interpreted as being highly suitable for domestic thermal markets and indicative of the area’s coalfields. The washed coal is believed to have the potential to attain export standards. Hodges is currently undertaking the studies to determine the coal’s abilities.

Hodges is keeping a close eye on export opportunities to markets such as China and India. These countries require an increasing amount of thermal coal to power their growing economies. The company is aiming to provide both markets, in addition to being a ready source of thermal coal for the domestic Batswana market.

Demand for thermal coal in Botswana

An ongoing domestic customer base for Hodges Resources’ thermal coal is assured, thanks to the country’s rapidly expanding and diversifying economy and the corresponding increase in demand for electricity.

Botswana’s low corporate tax rate, combined with its stable democratic political system, commitment to free trade, great infrastructure, educated, skilled and flexible workforce and its numerous trade agreements (including with the US and EU) mean the country’s traditionally resource-dominated economy is quickly diversifying to include value-added sectors such as manufacturing.

The manufacturing sector in Botswana is seen as having significant growth potential as a result of the abundance of natural resources available in the country. For example, the processing of raw material from the soda ash industry has stimulated the Batswana manufacture of detergents, potash and fertilisers, and copper and nickel is being used to produce electrical components. All of this activity requires a lot of electricity and future developments will require more.

Even at this early stage of its economic expansion, Botswana produced just 20% of its own power, importing the remaining 80%, mostly from neighbouring South Africa, which is facing power shortages of its own.

This reality is driving efforts to construct a new thermal power plant close to both an existing thermal power plant and Hodges’ projects, particularly Morupule South. Morupule South is neighbouring the current and new thermal power plant, while Moiyabana lies just 50 km from the same railway line that is adjacent to this project. It is also within easy trucking distance.

In just two years, electricity demand is expected to increase to 770 MW, which will result in a <200 MW deficit. During the next decade, this deficit will continue to increase, unless future Batswana thermal coal producers such as Hodges enter the market.

Demand from export markets

Rapidly growing markets such as China and India will serve as key export markets for the comany, while Europe is expected to increase imports of thermal coal as a result of the phasing out of nuclear energy in response to the Fukushima nuclear power plant disaster in Japan in March 2011.

Overall, international demand for thermal coal is set to increase, with thermal coal on track to increase as a proportion of global electricity generation capacity according to a recent report by Citi.

India has a large shortage of coal and no indigenous capacity to fill it, with demand set to increase from 50 million tpa in 2010 to 210 million tpa by 2025. China remains the world’s largest coal consumer, and new Wood Mackenzie research predicts that China may import up to 857 million tpa of coal by 2015. Meanwhile, Europe is expected to import more than 100 million tpa by 2020.

Two proposed rail solutions, which will carry export quality thermal coal from landlocked Botswana to ports on either of Africa’s west or east coasts, are being evaluated by separate consortia, with prefeasibility studies expected to commence by early 2012.

The eastward Ponto Techobanine rail and port, which would run through Mozambique and Zimbabwe, would bring Hodges’ product closer to Asian markets, particularly India, while the westward Trans-Kalahari railway would pass through Namibia. The transport costs associated with each route are considered to be equally competitive. It is estimated that the cost of shipping coal the extra distance around the South African cape to India will be the same as the potential taxes and tariffs charged while transporting it through Zimbabwe and Mozambique.

Both rail solutions are expected to move to feasibility studies by early 2012 and, assuming a three to four year construction period, an international export solution could be ready as soon as 2017.

According to Global Energy Magazine, several Indian power companies are reportedly targeting Botswana for major export deals, comparable with those they already have in place with Indonesia and Australia, leveraging in large part from the knowledge that a westward rail link may be built linking Botswana’s coalfields to Namibia’s Walvis Bay port.

Uma Shankar, the Indian power secretary, has said domestic fuel in India was not sufficient and that more thermal coal needed to be imported to fuel the country’s power plants. India’s power ministry believes it must lift generation capacity to 200,000 MW if it is to sustain economic growth and to keep up with its ambitious agenda to provide nationwide electricity by 2012. Its current capacity is 167,278 MW.

The Batswana Government is also likely to sit up and take notice of the revenue generating opportunities associated with exporting coal, with the Fossil Fuel Foundation of Africa – which has already dubbed Botswana the “awakening coal giant” – estimating that the country could generate US$ 5.9 trillion in revenue if Government and private investors exported a substantial amount of the country’s 212 billion t of in situ coal.

There is, however, no urgency
with respect to pursuing export opportunities. Hodges’ primary focus and competitive advantage remains the domestic Batswana market. It is a massive opportunity and it is right in the company’s own backyard.

Hodges is well positioned to fast track its projects to supply this expanding domestic market and hopes to enter it in the short term by either securing an off-take agreement with an existing power producer or by building a plant with a partner or Government agency.

“An African Lion”

In a June 2010 research note, Boston Consulting Group described Botswana as being one of eight “African Lions”, noting its average growth rate of 9%/year since independence, and predicted that coal mining would be a notable source of revenue for the country.

Botswana has in situ coal resources of 212 billion t and, in addition to the exploration and production of thermal coal for use in the country’s growing electricity generation capacity, there is also considerable potential for the production of coal-to-liquids, coalbed methane (CBM) and underground coal gasification (UCG).

Botswana also consistently ranks as the best country for investment in Africa and compares well against developed mining jurisdictions such as Australia and Canada.

It also has a competitive tax regime with a low 3% royalty on coal sales and a 22% corporate tax rate. There is also 100% depreciation of capital expenditures, an unlimited carry forward of losses and free repatriation of profits.

Author: Mark Major, Hodges Resources Ltd, Australia

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