CIC Energy Eyes South African Power Demand

SITE VISIT

Gaborone, Botswana — Although nowhere near as glamorous as Botswana’s main mineral commodity, diamonds, the country’s significant coal deposits are capturing the attention of those looking to capitalize on soaring power demands in the Southern African region.

One such company, CIC Energy (ELC-T, CIEGF-O), seeks to develop the large Mmamabula thermal-grade coal project, located in southeastern Botswana, in combination with a large power generation facility.

Mmamabula is situated just across the border from the South African Waterberg coalfields (containing more than 40% of that country’s coal reserves), which hosts the 16-million-tonne-per-year Grootegeluk open-pit mine operated by Exxaro Resources (EXXAF-O, EXX-J). Grootegeluk feeds the nearby 3,600-megawatt Matimba coal-fired power station run by South African state electrical utility, Eskom.

Demand for electricity in South Africa has seen a significant increase along with growth in the gross domestic product (GDP) and major electrification initiatives undertaken throughout the country. To keep up with projected demand, capacity has to be expanded by about 1,500 megawatts per year for the next 20 years.

The seriousness of the issue was evident during a recent visit to the project and to Cape Town, with a number of rolling blackouts occurring during peak load periods.

CIC Energy sees Mmamabula as one of few major projects capable of coming on-stream rapidly to contribute new base load capacity to South Africa.

To achieve its goal, CIC has signed a project development agreement with London-based International Power (IPRWF-O, IPR-N, IPR-L), a company involved in more than 40 power stations in 20 countries worldwide. The agreement sets forth a 50-50 partnership for developing Mmamabula.

The co-development plan forecasts two stages. First-phase plans call for construction of three generation units with net capacity of 2,100-2,460 megawatts, supplied by 7.5- to 9-million-tonne-per-year coal operations. Costs for this stage are pegged at about US$5.5 billion, about 95% of which will go toward plant construction.

About 80% of the required capital funding is expected to come in the form of limited recourse project debt with equity investors contributing the rest.

Pending completion of a bankable feasibility study currently under way, CIC Energy and International Power anticipate power plant construction to begin in late 2007 and commercial operation of the first unit by March or April of 2011. The second and third units would each come on-line at subsequent 6-month intervals.

A second-phase expansion proposed at the planned Mmamabula generating facility sees another three units added to boost total capacity to about 4,200-4,920 megawatts, about 13% of Eskom’s current capacity and 10 times Botswana’s current national usage.

Previous work

The Mmamabula coal deposit was previously explored by the coal divisions of BP (BP-N, BP-L), Anglo American (AAUK-Q, AAL-L, ANAAL-J), Amax Exploration and Royal Dutch Shell (RDS.A-N, RDSA-L).

Since 2005, CIC has completed more than 100,000 metres of drilling in over 1,000 holes, leading to a recently revised measured and indicated resource estimate of 2.3 billion tonnes of coal contained within the Mookane, Dovedale and Serorome blocks of Mmamabula East and the Mmamabula South block.

The resource encompasses the two primary coal seams, D1 and M2. Seams are generally flat-lying and within 100 metres of surface in the targeted blocks on the 508-sq.-km Mmamabula East licence. On the 140-sq.-km Mmamabula South licence, a significant amount of faulting has offset the seams into 11 separate blocks with interpreted vertical throws of about 50 metres.

The D1 seam averages 3.3 metres in thickness in the Dovedale block, 4.4 metres on Serorome and 6 metres on Mmamabula South. Coal from the D1 seam has an average raw calorific value (CV) of about 20.5 megajoules per kg.

The deeper M2 coal seam, which averages 3.3 metres thick in the Dovedale block, 3.5 metres on Serorome and 3.2 metres on Mmamabula South, has a higher average CV of 23.2 megajoules per kg.

Coal from both seams has a high sulphur content ranging from 1.5% to almost 3.5%, however washability studies indicate good amenability and can reduce contained sulphur to the 0.24% to 0.57% range with a modest reduction in product yield.

Current drilling on the Serorome and Border blocks of the east licence is aimed at adding resources. Interestingly, coal qualities improve toward the east, boosting the potential of finding high-quality export coal in the Border block on Mmamabula East, which adjoins the South African border.

The company’s proposed mining plan calls for a conventional underground board-and-pillar method using continuous miners. Portions of the Mmamabula South licence may be amenable to open-pit development.

The Mmamabula energy project enjoys excellent infrastructure, being adjacent to the main highway and railway linking Botswana’s capital, Gaborone, with Francistown to the east. It is also close to a major South African electrical grid.

A memorandum of understanding is already in place between CIC and Eskom. Key to the ongoing bankable feasibility study is the finalization of a power purchase agreement with the utility, as the majority of the power generated from the planned operation would feed the South African grid. It is expected the agreement would last about 40 years.

Mining licence applications have been submitted with the Botswana government and memorandums of understanding are also in place with state-owned Botswana Power Corp.

The construction phase of the project is expected to provide several thousand jobs, while about 2,500 will be employed in its operation.

Estimates indicate the Mmamabula energy project could boost the GDP of Botswana by about 7%, providing some welcome diversification from diamond mining, which accounts for more than one-third of the country’s GDP and about 75% of its export earnings.

In addition, the project would effectively remove Botswana’s reliance on South Africa’s Eskom for its electrical power, instead allowing it to become a major power supplier to its southern neighbour.

With its recent coal resource boost and the focus on Southern Africa’s power needs, shares of CIC have risen to the $15.00 level, giving the company a $718-million market capitalization based on its 47.9 million shares outstanding. The stock has a 52-week trading range of $6.00-$16.95.

T.N.M. NUGGET

CIC ENERGY’S MMAMABULA COAL MINE-POWER PROJECT

THE ASSET: Co-developing, with International Power, the Mmamabula Energy project in southeastern Botswana

RESOURCES: Measured and indicated resource of 2.3 B t coal contained in the Mookane, Dovedale and Serorome blocks of Mmamabula East and the Mmamabula South block

MINE PLAN: Proposed mining plan calls for conventional underground board-and-pillar method using continuous miners. Portions of Mmamabula South may be amenable to open-pit mining.

PRODUCTION SCHEDULE: Coal production of 7.5-9 M t per year starting by 2011 to coincide with start of 2,460-MW power generating plant; Expansion to 4,920 MW would require more coal production

COSTS: Phase 1 coal mine — generating plant development costs estimated at US$5.5B