African Energy Resources (ASX: AFR) has negotiated a strategic deal that will see the company acquire Aviva Corporation’s (ASX: AVA) 1.3 billion tonne Mmamantswe Coal Project in southeast Botswana, as well as The Sentient Group make an A$8.5 million cornerstone investment.
This is a transformative deal for African Energy that will provide the company with 3.8 billion tonnes of coal in Botswana, providing a portfolio of strategic scale that is more attractive to development partners for large-scale export operations.
As importantly, The Sentient Group – which manages over US$2.3 billion in the development of metal, mineral and energy assets globally – will become a cornerstone investor and provide African Energy with A$8.5 million in funding.
Of particular relevance to African Energy is Sentient’s long term relationship with SDIC, China’s fifth largest state owned enterprise and Sentient’s joint venture partner in SDIC Xiyang Energy Co – an integrated coal mining and power generation company operating in China.
SDIC’s experience in integrated coal and power projects has the potential to boost delivery capability of African Energy’s Sese Integrated Power Project, thereby accelerating negotiations for power purchase agreements currently underway.
Sentient’s current investment portfolio includes projects in power generation, energy storage, potash, and base, precious and ferrous metals mining, covering countries as diverse as China, Brazil, Canada, Papua New Guinea, Finland, Australia, Kenya and Botswana.
Consideration for the acquisition of the Mmamantswe Coal Project is $3.5 million, with the deal subject to Aviva shareholder approval and certain other conditions precedent.
On completion of these transactions, African Energy will have secured the full rights to 3.8 billion tonnes of coal in Botswana, and increased its working capital to about $6 million.
Cornerstone investment
Sentient will immediately subscribe for 41,666,667 shares at $0.12 each to raise an initial $5 million.
Upon formal acquisition of the Mmamantswe Coal Project, Sentient will subscribe for a further 29,167,667 shares at $0.12 each to raise a further $3.5 million.
Once the full subscription is complete, Sentient will hold around 17.5% and will be the largest shareholder in African Energy.
Mmamantswe Project
The Mmamantswe Project comprises a Measured and Indicated Resource of 1.3 billion tonnes of thermal coal, including 895 million tonnes of Probable Reserves.
A 2009 Scoping Study completed by SRK concluded that a 10 million tonne per annum open pit mining operation could produce 2.4 million tonnes per annum of washed export coal (22MJ/kg, <20% ash) and 2.1 million tonnes per annum of middlings suitable for power station fuel (15.3MJ/kg, 38% ash).
This could be achieved at a run of mine cash cost of $9.10 per tonne for a total capital cost of $350 million on an owner-operated basis.
An EIA was approved for the project by the Government of Botswana in October 2012, and an 8 gigalitre per year water borefield has been delineated and secured for the project.
This provides sufficient water for mining and processing and for a 300 megawatt mine-mouth power station.
To date Aviva has invested about $12 million in the project.
The Mmamantswe Project lies within prospecting licence PL69/2007, covering an area of 454 square kilometres.
Aviva is earning a 90% interest in the project and is currently negotiating with the owners of PL69/2007 to acquire 100% rights to the project and terminate the joint venture.
PL69/2007 will then be transferred into Mmamantswe Coal (Pty) Ltd, Aviva’s wholly owned Botswana subsidiary.
Acquisition terms
African Energy has agreed to acquire all of the outstanding shares in Botswana Energy Solutions, a BVI registered company wholly owned by Aviva and the sole shareholder of Mmamantswe Coal (Pty) Ltd.
Conditions precedent to the acquisition are:
– Mmamantswe Coal (Pty) Ltd will become the registered holder of 100% of PL69/2007 by no later than 26 July 2013;
– Completion of legal and technical due diligence by 3 May 2013 to the satisfaction of African Energy at its sole discretion;
– African Energy raising the necessary funds to purchase the project;
– Execution of the formal binding share sale agreement, the key terms of which are stipulated in the binding term sheet; and
– Approval of the transaction by Aviva’s shareholders at an Extraordinary General Meeting expected to be convened in June.
Analysis
This is a transformative deal for African Energy that provides African Energy with a substantive cornerstone institutional investor in Sentient with a large financial capability and project development focus.
Adding to the project mix is Sentient’s partner SDIC, China’s fifth largest state owned enterprise which has substantive experience in integrated power project execution and operation, which increases African Energy’s credibility as a developer of reliable base load power projects.
African Energy’s coal inventory will increase to 3.8 billion tonnes of published Measured, Indicated and Inferred Resources, providing a portfolio of strategic scale that is more attractive to development partners for large scale export operations.
The addition of Mmamantswe to Sese provides African Energy with a diversity of location and multiple development opportunities for both power generation and coal export projects.
Additionally, the placement to Sentient will propel African Energy’s working capital to around $6 million.
Today’s deal is value accretive, the advanced discussions with several global strategic groups to invest directly into Sese Power (Pty) Ltd, if successful would provide working capital to take the Sese Integrated Power Project through to financial close without further equity dilution for African Energy shareholders, which would be a coup.
Today’s deal provides a strong platform for African Energy to add value for shareholders from the company’s current market cap. of $41.3 million, presenting an opportunity for investors ahead of strong expected newsflow.
