CIC Energy buys back shares, advances Mmamabula

CIC Energy (ELC-T, CIEGF-o) is planning to buy back up to 5% or 2.7 million of its outstanding shares on the open market in a bid to boost its stock, which the company says is undervalued.

In a release, CIC’s president Gregory Kinross, said the move is meant to create value for shareholders at the current share price level to better reflect the company’s strong cash position of $95 million and its progress at the Mmamabula power project, in Botswana.

“Our view is that current market prices for our shares do not reflect the fundamental value of CIC Energy’s assets, including our large, advanced-stage coal resource in one of the best jurisdictions in Africa,” Kinross said.

At presstime, CIC shares traded at around $3.46 in Toronto, much closer to their 52-week low of $2.77 than their 52-week high of $18.15.

The buyback will proceed over the next 12 months, but the company is not obliged to go ahead with the purchases or to buy the entire 5% stake. CIC will finance the purchases from its treasury. The company has 53.7 million shares outstanding, and 61 million shares fully diluted.

CIC has also raised coal resources by 28% at the Mmamabula coal field. Measured resources now stand at 2.87 billion tonnes, while indicated resources are 62 million tonnes, for a combined measured and indicated resource of 2.93 billion tonnes. Inferred resources stand at 34 million tonnes. The coal is found in two seams over five coal-bearing zones. To date, 2,235 holes have been drilled.

Coal calorific values vary between 20.8 and 22.6 megajoules per kg, making it suitable for use as thermal coal. Washability studies indicate that washing can reduce sulphur content to 0.24-0.57% from 1.5-3.5%, at a cut point density of 1.8 gram per cubic cm. Washability analysis indicates theoretical yields of 75% to 89% at a cut point density of 1.8 gram per cubic cm. Current washability studies are examining partially washing sized coal as an alternative method.

The plan for the Mmamabula project calls for a complex comprising an electricity generating station, a coal export facility and a coal-to-hydrocarbon conversion plant. The power station project was recently downsized to 1,200 megawatts after the engineering contractor that CIC was negotiating with was unwilling to agree to certain allocations of risk.

The company is in negotiations with Asian engineering contractors for a first phase, which would include two 600-megawatt generating units. If an agreement is reached, the plan is to start building one unit, and then start the second before the first is complete. The company is also pursuing the coal export project and the coal-to-hydrocarbons project, but the first priority is to finalize the contract for the power generating station.

CIC envisages that option agreements could be signed to add four more 600-megawatt units in two phases, with the station eventually generating up to 3,600 megawatts.

“The project is virtually fully permitted at this point,” says CIC chief executive officer Warren Newfield. “We are now awaiting the final pricing of a fixed-price, turn-key EPC (engineering procurement construction) contract. . . We hope to have it (finalized) prior to year-end.”

Newfield declines to disclose the capital cost of the project. But he gives an indication.

“If you look at comparative projects of this size, you are talking in excess of US$5 billion. . . including capitalized interest during construction.”

Once the contract is finalized, CIC can sign an agreement that it has negotiated with the government of Botswana. The government is then anticipated to issue mining and power generation licences. Power purchase agreements are expected to be signed with Botswana Power and with Eskom, South Africa’s national power utility. The agreements will allow the completion of a bankable feasibility study, and a group of international and South African banks are expected to finance the project.

The engineering contractor will bring its own labour force from Asia to build the power station, although workers from Botswana will also be hired. Several thousand workers will be onsite during construction, and they will be housed in a purpose-built camp.

“We are targeting the financial closing for the project toward the end of the second quarter of next year,” Newfield says. “Construction (then) starts immediately, and we are targeting with our new Asian EPC solution at having the first 1,200 megawatts coming on-stream in late 2012.”

Newfield says the first unit should be commissioned toward the end of 2012, with the second unit coming online four to six months later, at which time the station will be operating at the design capacity of 1,200 megawatts.

Newfield says that there are ready markets for electricity in Botswana and South Africa. To address the power shortage in South Africa, Eskom, the national power utility, needs to sign long-term power supply agreements with private-sector electricity producers.

“In the long-term, I believe that the real opportunity to solve the energy crisis is through private investment. And fortunately, here too, things are heading in the right direction,” Newfield says. “South Africa is just starting to take some tangible steps towards attracting independent power producers.”

Turning to the coal export project and the coal-to-hydrocarbons project, CIC has entered a technology agreement with Royal Dutch Shell (RDS. A-N, RDSA-l), securing an option to license Shell’s coal gasification technology. Jacobs Engineering(JEC-n) has evaluated the technology, concluding that it is suitable to gasify CIC’s coal.

There are three possible scenarios considered for the plant, and all of them involve producing methanol from coal gasification. In the first scenario, methanol would be produced as the end product, and then pumped to South Africa via a pipeline. Alternatively, the methanol could be converted to gasoline. Lastly, some of the methanol could be converted to gasoline, and the rest to dimethyl ether. Propylene may also be one of the end products. Projected capital costs vary between US$2.6 billion and US$4.9 billion.

Shell is currently busy with a study that will identify the best product mix for the plant. An environmental impact assessment will also be completed, followed by a bankable feasibility study. CIC is targeting production startup in 2014.

The third component of the Mmamabula project is a coal export facility, for which a prefeasibilitystudyis being conducted. The coal would be exported via Namibia, requiring a 1,500-km railway line toWalvis Bayor Luderitz. Newfield anticipates that a consortium of coal mining companies with mines in the Waterberg in South Africa, including CIC, would build the line. CIC is confident of ready markets for the coal in Europe, Brazil and Korea.

Mmamabula is located near the main road and rail corridor from Gaborone to Francistown, about 120 km northeast of Gaborone. Newfield says there is enough water available for the project in the area.