Plenty going on for BSE holders to digest, sovereign risk and funding front of mind. Toliara is a world class deposit no doubt, but hard to value or discount sovereign risk before final terms are known.
Today Kenya flexed it's sovereign risk muscles with a retrospective increase in royalties for Kwale. Not unexpected the $16M VAT refund would never get refunded, but a reminder that African countries play by diff rules to the west. Toliara DFS2 costed a 4% Royalty and VAT taxes refunded, both assumptions look too optimistic obviously, ambit claims from both sides part of the game.
So Madagascar government playing hard ball still looking for higher royalties (5% now typical globally) and a percentage of the project. 10% free carried like many other African countries, 10% free, and 10% paid for 20% like they have with RIO's QIT Fort Dauphin min sands mine, maybe even Sth African style BEE 30%? Obviously Madagascar is impoverished and the south currently starving, Toliara, as one of the few large projects to help fund desperately needed improvements, has a rather large target on it's forehead.
On the other hand, 20% and 5% royalty of nothing is nothing, got to do a deal or expropriate Toliara off BSE. Nobody but the Chinese would get involved with that sort of business and probably not even them these days. Stand off can't last for ever so long as BSE is being reasonable and trying to negotiate reasonable terms and commercial funding. Maybe the President and connected parties are wanting personal payments out wide, another African tradition which BSE really can't risk getting involved with. Is the President under pressure to do a deal before 2023 elections, does he think he'll win and hand BSE out to dry for another 4 years? Board knows what ever the government want but obviously it's currently too much or to difficult.
The DFS2 confirmed just how far out of the funding money BSE are for Toliara go it alone. Was hinted as possible with covid delay in June2020, but the numbers were never going to stack up so divi policy was brought in. Currently BSE are up for US$42.3M in pre-FID funding (oct21-Dec22) and US$17M in previous vendors delayed payments by FID. $2M royalty top up payment on Kwale, $4.1M for Kwale Dune Sth ext land purchase, no doubt more for Dune Nth, other ongoing sustaining capex, rehab, Toliara exploration (if deal gets done) community and the rest. Looks like US$65-70M of extra cash flow drain to Dec2022 if Toliara moves ahead, not much left for divis and certainly won;t make a dent in the US$240M equity funding required to finance the rest of Toliara development debt. Kwale Dune Sth gets lower grade and less profitable, Kwale Nth less profitable again, so free cash flow will drop off 2033/24 (subject to min sand pricing of course).
It all comes down to a JV partner funding deal, hopefully on better terms than SFX did at the bottom of the market. What percentage to the JV partner, what percentage to Madagascar, what's left for BSE? Much better project than SFX but sovereign risk discount. I'm thinking the Chinese might be best JV partners to have. Great for business in Africa, good relations with Madagascar, and the sort of partner than can 'facilitate' government support by looking after politicians out wide in a way western companies cannot. Maybe the government strongly recommends a Chinese JV partner that sees all parties happy... BSE don;t get screwed on royalties/free-carry, JV deal is a little generous but comes with good off-take, JV partner has enough fat to keep politicians onside, BSE is squeaky clean and funded?
No doubt a few people on the ground looking at jobs are desperate to get Toliara developed, the ones missing out will be bitter as usual, but it's what the important players want that counts. Cracking deposit and exploration upside as I said, just need to see how the deal falls out (and if exploration comes good in Kenya). Clock is ticking.
Good luck
BSE Price at posting:
26.5¢ Sentiment: None Disclosure: Not Held
(20min delay)