Thanks Blow & Huge - I don't know when the Botswana results will...

Thanks Blow & Huge - I don't know when the Botswana results will be through, but I have no reason to suspect that the long overdue announcement will be bad - geo modelling done in 2010 suggested 2.7bt of shallow coal from a total target of 6.6bt, and drilling has already shown some significant coal bearing zones, including this: "Drilling on PL340/2008 on the north-western boundary of the license has indicated a coal mineralised strike length of approx. 20km and confirms previous historical results from exploration programs completed in the 1980s."
For an indication of likely coal qualities probably have a look at those announced by Asenjo in Serowe & CIC at Mmamabula.

Some reading for those interested in commodity cycles & Botswana - thoughtful content, not PR spin or cryptic commentary:

Botswana's hog cycle in a commodity super cycle

*PROFESSOR ROMAN GRYNBERG

Friday, 20 July 2012

Last week, the international media reported the comments of the Botswana's Minister of Minerals, Energy and Water Resources, and reportedly, soon-to-be Vice-President of Botswana, Dr Ponatshego Kedikilwe that the government intends to lower the taxes on the new generation of largely Australian and Canadian junior mining companies that are searching for coal and base metals in Ngamiland (the area between the Okavango and the Namibian border).

Noisy neighbours

This constitutes a sharp contrast to every one of Botswana's neighbours who in the last two years have been competing with each other to make life more difficult for mining companies in general and foreign owned mining companies in particular. In Zimbabwe the government has made it quite clear that it intends to localise the ownership of foreign-owned mining companies. In South Africa it seems the ANC and the political classes in general cannot discuss mining without scaring the pants off the mining companies with discussion of either 'selective' or wholesale nationalisation. Few in the mining community in Botswana doubt that Julius Malema's comments about mine nationalisation in South Africa deserves a medal for what he has done to help push investment across the Limpopo basin to Botswana. In Zambia President Michael Sata (aka 'the cobra') doubled royalties on copper companies after coming to power. In all fairness to Sata, the tax regime in Zambia had given the government only a very minor share of the huge increase in copper revenues and was in need of change. In Namibia, a country not known for impulsive mining policy decisions the government presented proposals for radical increases in mining taxes from 37.5 percent to 44 percent last year which have been subsequently withdrawn.

The super cycle

So is Botswana just an island of peace and tranquillity in an African sea of turmoil or do the neighbours know something the policy makers in Gaborone don't? Commodity and mineral prices are in the middle of what economists are now calling a super-cycle. For decades up until 2000 commodity exporting countries suffered terribly from a declining terms of trade as commodity producers saw their real earnings of commodity exporting countries fall. This was also true of mineral exporters as it was for agricultural commodity exporters for almost half a century. However, everything changed at the turn of the century with the surging demand for mineral products and some agricultural products from India and China. Commodity prices have risen and now show no real long term decline for the moment prompting many countries to reconsider their mining tax regimes. Most of the mining tax regimes that SADC countries are trying to change were designed in the 1990's when commodity prices were low and African countries desperate for more mining investment.

The hog cycle

But there is another cycle in economics that explains the Botswana government's behaviour and that is the theory of the hog cycle. The up-shot of the theory is that when prices of pork or beef rise and you see all of your neighbours moving into the beef market the theory says that it is probably a really good time to start raising goats because by the time the cattle or pigs mature and are ready for slaughter the market will be over-supplied and the price will have collapsed. Indeed Botswana's position is essentially a policy hog cycle in the midst of a commodity super-cycle- it is doing the opposite of all its neighbours. All of Botswana's neighbours are trying to raise taxes or force expropriation to capture ever more of the economic rents that come from high mineral prices and in the process are frightening the mining companies out of their wits. This in turn is decreasing the incentive to investment in their own countries. Botswana is sending the opposite signal to the market.

Eye-popping head grades?

But Botswana has one major disadvantage as a mining location, and that is with the notable exception of its two fabulously rich diamond mines at Jwaneng and Orapa almost everything that has been discovered in Botswana is generally low or medium grade, whether it is copper, coal, uranium or nickel. Eye-popping reserves and grade levels have generally not yet come to the surface though they may yet eventuate in parts of Ngamiland. As a result while the deposits are likely to be profitable they are unlikely to generate huge super-profits. Almost all the coal deposits are found in eastern Kalahari basin but there is no suitable train line to the coast and despite what some of the coal mines say there is no sustainable supply of water. Its small but increasing deposits of copper, nickel, lead, zinc and silver are starting to form the basis for a major base metal industry in Ngamiland. But if infrastructure is inadequate in the east of the country where the coal deposits are found they are almost non-existent in the parts of Ngamiland where the Botswana's copper belt is found. To lower mining taxes is something that sends a strong message to the mining industry - our neighbours can do as they wish but Botswana is open for business and the new miners are welcome. No miner will ever oppose a tax decrease but the real question is whether lowering taxes can be anything more than just symbolic as without the massive investment in railways, electricity and water and these are investments that no mining company can make, the mining investments will not materialise. But Botswana can probably afford to be generous with its Canadian and Australian junior miners as most of its revenue will not come from them in the foreseeable future.

The secret of Botswana's revenues in the minerals sector is that almost all the revenue comes from dividends and taxes on the big diamond mines and there is certainly no public intention of lowering taxes on De Beers. In an earlier time when other African countries were being told by the World Bank and international advisers that they should not own mines because they are risky and this should be left to the private sector, Botswana under presidents Seretse Khama and Ketumile Masire did the exact opposite. It had a right to 15 percent of the diamonds mines gratis. It took that and the proceeded to acquire 50 percent interests in Debswana which own the Jwaneng and Orapa mines. Seretse Khama and Masire then proceeded to acquire a 15 percent direct stake in De Beers.

The dividends they derived from this is the real source of the government's mining revenue. The reason they went against the stream was because the rates of return at Jwaneng were so high, reportedly with costs of US0.10 to extract a dollar of diamonds, that it would have been foolish to have done otherwise. Lowering taxes on the new junior miners is a clear signal to global mining industry that Botswana intends to keep its place as a premier venue for mining investment in Africa but there is still no substitute for the expensive and difficult work of developing the necessary infrastructure to turn acceptable base metal deposits into highly profitable ventures.

*These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed.

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