Doing business in Botswana
Botswana has consistently shown itself to be a politically, economically, and geographically stable jurisdiction for businesses to base themselves in. Despite an expected hit from weak commodity conditions, the country’s government expects strong growth rates to continue this year, with no indication that things are going to change any time soon. Here, we look at what is attracting international companies to Botswana and examine the London-listed investing opportunities operating in the country.
Earlier this month, Botswana’s finance minister Kenneth Matambo warned that economic growth is expected slow to 4.2pc in 2019 from an estimated 4.5pc in 2018. Interestingly, rather than this being indicative of a problem within the country itself, he said the decline was more reflective of an expected general slowdown in the global minerals sector. With mineral revenue currently sitting as the highest contributor to Botswana’s budget, making up 35.6pc of all revenues, there is always going to be a risk that any commodity bear market will have a negative impact.
What is encouraging, however, is that even following this drop, Botswana’s growth rate remains far more significant than most areas of the Western world and many nations in Africa. While mineral prices will always fluctuate, this ongoing progress suggests that Botswana has built up a great deal of fundamental strength.
What’s more, the fact that the country has repeatedly been voted the most attractive African economy in which to do business over recent years suggests that this is a long-term positive trend. Indeed, several years ago, the country was even voted the second most attractive investment location in the world by New York University’s Altman’s Baseline Profitability Index. So, what are the factors drawing international investors towards Botswana and boosting its economy?
For one, the country boasts a stable, democratic government, with a zero-tolerance approach to corruption, few ownership restrictions, and no foreign exchange controls. It also has a very skilled workforce with high rates of literacy and English as a key language.
The country also boasts highly-sophisticated mining legislation, which has enabled it to create a booming diamond industry. Around 24 million carats of the precious mineral was produced in 2018. The guarantee of existing infrastructure is particularly attractive for prospective mining firms looking to make the plunge.
Finally, the country is well-placed geographically, dead in the center of the vast African market. Operators in the country have preferential access to the Southern African Development Community’s entire market place representing more than 292m people. Botswana also provides duty-free access to South Africa, Namibia, Lesotho, and Swaziland
As we have written about at length, macro issues are a very significant factor in the UK junior resources sector. Many players operate in highly unstable jurisdictions where violence and unrest pose as much as a threat to their portfolio as the risk of a project failing for geological reasons.
With this in mind, Botswana’s relative stability is likely to give punters investing in firms operating in the country an additional layer of comfort when it comes to the potential risks that could impact their returns. Here, we have highlighted two stocks operating in the country that we believe to offer an attractive proposition to investors.
Metal Tiger’s focus lies in Botswana’s large Kalahari Copper Belt (KCB). The area’s prospectivity was highlighted last year when a pre-feasibility study gave a project in the area called T3 a base case NPV of $281m. This came just weeks after a resource upgrade gave the site a total mineral resource estimate of 590Kt copper and 27Moz silver.
Until July last year, T3 was 30pc-owned by Metal Tiger and 70pc-owned by its fellow London-listed miner MOD Resources. However, Metal Tiger sold its remaining stake to MOD Resources, in exchange for 17.1m MOD shares and 40.7m unquoted options with a nil exercise price and three-year lifespan.
The thinking behind the deal was that 100pc-ownership would make T3 more attractive to development financiers. However, with Metal Tiger’s effective stake in MOD now sitting at 25pc, the firm has the added benefit of retaining exposure to the project’s upside without the ongoing fear of cash calls.
Aside from its position in MOD, Metal Tiger also has direct exposure to the KCB through its 30pc stake in Tshukudu Exploration. Once again, this has been set up alongside MOD.
Tshukudu holds 18 JV exploration licences covering a total area of 8,163km2. Last year, the two businesses drilled 148 holes across this land, including 41 in the final quarter. In an update last month, Metal Tiger said this work identified copper-containing Ngwako Pan Formation contacts and/or vein hosted copper at numerous sites.
This year, the firm plans to conduct follow-up drilling of ‘very encouraging’ shallow mineralisation along the dome area called T4-T23 in Q1. They will also undertake initial testing of extensive copper and zinc soil anomalies within the adjacent T20 exploration project over the period. Then, in the second half of the year, the JV plans to conduct follow-up drilling at a site called the A4 dome.
Finally, Metal Tiger also has the right to acquire up to 50pc of a business called Kalahari Metals (KMI) under an investment agreement established last June. KMI holds interests in 12 exploration licences covering 8,724km2 in the KCB.
When all of its positions are combined, Metal Tiger has one of the largest single company exposures to the KCB in the world. What’s more, the company could be headed into a hectic period for newsflow over the coming months.
Last week, KMI revealed a series of drill-ready targets from the second phase of its airborne geophysics survey over two areas in the KCB called the Ngami copper project (NCP) and the Okavango copper project (OCP). What’s more, the firm revealed that major city investor Sprott Capital Partners – also its largest backer – would support it in a £3m fundraise at 1.45p a share. Metal Tiger will use the proceeds from the raise, which was launched alongside a separate £1m raise, alongside its existing cash resources to support its JV projects.
Metal Tiger’s shares yet to recover from last year’s commodity downturn, and currently sit at 1.25p a share. However, any positive developments could provide an opportunity for the firm to bounce back to the >3p it sat at last August.
Tlou is developing low-carbon producing coal bed methane (CBM) projects, which it hopes to use to generate electricity in Botswana and, in the future, southern Africa more broadly. As it stands, Botswana is experiencing an electricity deficit and is in need of a clean energy source to replace coal and diesel. Tlou believes CBM could be the answer to this.
The company’s flagship asset is the Lesedi project, which has a certified contingent resource of up to 3.2TCF and is currently, according to the firm, the most advanced CBM project in Botswana. Lesedi sits within Tlou’s 8,300km2 of acreage, which also includes the Mambo project area. In February last year, the business announced that 2P gas reserves across this entire area had jumped by 944pc to 41BCF. This upgrade followed a seismic survey, a core-hole drill campaign, and the testing of pilot wells that produced sustained gas flows.
The company has made a great deal of drilling progress at Lesedi over the last few months, drilling two vertical wells and making preparations for another two. It has also completed its first development pod and submitted an environmental impact assessment for a power generation facility at the site and transmission lines to connect to the electricity.
The big piece of news flow, however, is Tlou’s submission of a response to a Request for Proposal (RFP) for the development of up to 100MW of CBM-fuelled pilot power plants to the Government of Botswana. The RFP forms a vital step towards the creation of a CBM market in the country. However, its progress has been shaky, with Botswana’s government withdrawing its initial request early last year after finding that the bids it had received had fallen short of compliance standard. Its cancellation led Tlou, one of just two total bidders, to tank.
Things turned a corner again in July when Tlou announced that it was one of just two companies to be invited once again to bid for the development. The market received the news well, and shares bounced 12.3pc. Tlou said its submission will outline a staged development starting with 10MW of generation, project feasibility, field development, installation of power generation facilities and supply of power into Botswana’s grid.
In August, the company said that while there is no guarantee of success, it felt a pre-tender meeting with the government was positive. It added that there appears to be ‘continued government goodwill to advance [Lesedi]’. The firm finally submitted its response in October. With little news since, could an update be on the cards soon?
Despite a rally so far this year to 6.2p a share, Tlou remains well below the 10.8p it sat at this time in 2018. Any news on the bid is likely to move the needle for its shares- whether or not you think it is worth investing in now depends on your confidence that the RFP will go Tlou’s way.
The author was remunerated but does not hold shares in the company