Raising Exploration Capital in Southern Africa: A Diamonds Perspective

Raising Exploration Capital in Southern Africa
A Diamonds Perspective
James AH Campbell
Managing Director, Botswana Diamonds plc
Mining Investment Botswana 2019

2
Mining Investment Botswana
21-22 May 2019, Gaborone
Raising Exploration Capital in
Southern Africa: A Diamonds Perspective
Outline
⧫ Diamond industry fundamentals
⧫ Global exploration trends
⧫ Why Southern Africa
⧫ Developing diamond projects
⧫ Financing exploration projects
⧫ Discussion & Conclusions
2Mining Investment Botswana 2019

3
Diamond Industry Fundamentals

Positive Supply & Demand Outlook
⧫ ‘Moderately optimistic’ long-term outlook: rough diamond supply predictable and stable until
2030; rough diamond demand expected to grow 2-4% (nominal) per annum
⧫ Continued growth of middle class in China and India underpins growth forecast
⧫ Key challenges: US-China trade war; substitution from laboratory-grown diamonds; financial
stability of midstream segment
⧫ Digital technologies delivering improved efficiencies throughout the value chain
Source: Bain & co., 2018
Mining Investment Botswana 2019 4

Rough and polished prices trending up
Source: Bain & co., 2018
⧫ Rough and polished prices trended up during the first half of 2018
⧫ Macroeconomic fundamentals driving both polished and rough diamond prices remain positive
in the longer term
⧫ The forecast supply-demand shortfall will trend diamond prices generally upwards in the years
ahead

Diamond price stability
⧫ Fastest commodity to recover following the GFC
⧫ Less prone to volatility than mainstream commodities
⧫ Rough diamond prices expected to continue outperforming gold in years ahead
⧫ Diamonds attracting interest as an investment category
6

7
Global Exploration Trends

8
Global exploration spend on the rise
⧫ Global exploration
activity strengthening on
the back of rising bulk
commodity prices
⧫ Global budgets expected
to increase by 5-10% in
2019
⧫ Gold accounted for half
of global exploration
budgets in 2018
⧫ SA exploration budgets
have steadily declined
over the past 10 years
⧫ Why isn’t Southern Africa
attracting a larger share
of exploration budgets?
Sources: S&P Global; Stockhead
Global exploration budgets are still below 2014 levels

9
Grassroot exploration spend declining
⧫ Grassroots exploration
budgets declining
since the 1990’s
⧫ Minesite budgets
upward trend reflects
industry risk aversion
⧫ Projects developed by
majors with existing
cash flows and some
bank funding
⧫ Juniors are not
benefiting from the
rising annual
exploration budgets

10
Why Southern Africa

11
A highly prospective diamond region
⧫ Prospective Archean cratons hosting significant
diamond deposits
⧫ Solid track record of economic diamond production
⧫ One third of global carat production in 2018
⧫ Limited competition
Bain & co., 2018
Kimberlites in
southern Africa.
Source: De Wit et al,
June 2016

0
1
2
3
4
5
6
7
8
9
10
40 45 50 55 60 65 70 75 80 85
Diamondprospectivityranking*
Mining investment attractiveness**
Cumulative diamond production (2008-2017) for selected African countries***
12
*Author’s own research, **Adapted from Fraser Institute, 2018, *** Kimberley Process data, 2017
High exploration attractiveness
Change since 2017
South Africa
Namibia
DRC
Botswana
Zimbabwe
Angola
(2015)
Tanzania

Investors deterred by perceived risk
13
Southern Africa is becoming more attractive, however perceptions of hostile
investment environments still deter investors
Investment Attractiveness Index (Fraser Institute, 2018): a composite of mineral
investment and policy perception factors.
⧫ Botswana is the highest
ranked African country
⧫ SA and Zimbabwe’s policy
rankings have improved
significantly in the last year
⧫ Unclear legislation is a
concern for investors
⧫ DRC and Zimbabwe policy
perceptions rank in the
bottom 10 globally
⧫ Africa ranks as the second
least attractive region for
investment globally

Few key players, limited local funding
Company Listing Country of activity Producer (P)
Explorer (E)
Market Cap
(various
currencies)
Alrosa MCX Angola, Zimbabwe E, P 10.5 BN USD
BlueRock Diamonds AIM South Africa P 1.5 M ZAR
Botswana
Diamonds
AIM Botswana, South
Africa, Zimbabwe
E 4 M GBP
De Beers N/A Botswana, Namibia,
South Africa, Angola
P, E N/A
Diamcor Mining TSX-V, OTC South Africa P 8.6 M CAD
Firestone Diamonds AIM Lesotho P 12.1 M GPB
Gem Diamonds LSE Botswana, Lesotho 123 M GBP
Lucapa Diamond ASX Angola, Lesotho,
Botswana
P, E 81.8 M AUD
Lucara Diamond TSX, BSE Botswana, Lesotho P, E 661 M CAD
Pangolin Diamonds TSX-V Botswana E 5.7 M CAD
Petra Diamonds LSE Botswana, South
Africa, Tanzania
P 180.6 M USD
Trans Hex JSE South Africa P, E 63 M ZAR
Tsodilo Resources TSX-V Botswana, South
Africa
E 9.1 M CAD
⧫ Predominantly foreign-listed
juniors and mid-tier
⧫ Limited production cashflow
to fund exploration activities
⧫ Primarily funded through
equity capital out of the UK,
Canada and Australia
⧫ Subject to full extent of
onerous regulatory and
reporting obligations
⧫ No significant projects in the
pipeline, beyond Alrosa’s
Luaxe
⧫ No evidence of exploration
activities gaining momentum
Source: company websites, Mincosa
14

15
Developing Diamond Projects

Risk reduction investment begets investor appetite
Mapping,
sampling,
geophysics
Core drilling or
trenching
(100’s kg)
Initial bulk
sampling
(10-100’s t)
Infill drilling;
bulk sampling
(1000’s t)
Inferred
Resource
Indicated
Resource
Diamond potential;
surface size estimate
Preliminary grade
estimate; prelim.
geological model
Global grade;
preliminary value
estimate
Geological, density,
volume, grade,
revenue models
Technical Economic
Evaluation
Pre-Feasibility
Study
Bankable
Feasibility Study
MineralisationTarget / Anomaly
ActivityOutcomes
Mineral
Resource
Economic
Studies
Duration: months
Cost: USD thousands
Duration: years
Cost: USD millions
⧫ Investors’ appetite
grows with confidence,
as do costs and
timeframes
⧫ Compressing
timeframes without
compromising on
quality
⧫ Maximising optionality
(phased approach)
⧫ Reliable resource
models
⧫ Extract value or cut
losses early
⧫ Deep expertise and
technology are key
differentiators
16
INCREASING COSTS & TIMEFRAMES
DECREASING UNCERTAINTY & RISK

17
Stakeholders’ expectations
Revenue
Job creation
Beneficiation
Sustainable
development
Political stability
Good governance
Security of investment
Diamond prospectivity
Track record of economic
production
Security of tenure
Tax incentives
Enabling
regulatory
environment
Economic
growth
Credit rating
Social licence
to operate
Investors
Explorers
Governments
Commercial
return

Junior regulatory compliance similar to majors
⧫ Mineral reporting requirements vary across
jurisdictions
⧫ Most reporting standards share common
codes and guidelines, e.g. CIM, JORC, SAMREC
⧫ Public reporting by Competent Persons (‘CPs’)
must adhere to minimum standards set by
professional codes of practice
⧫ Relevance and transparency of reporting is
critical to attracting junior funding, yet
onerous
⧫ TSX, AIM and ASX host the bulk of junior and
mid-tier exploration companies
Source: PWC, Stock Exchanges, Mining Association of Canada

19
Funding Exploration Projects

Value creation and risk

Share price growth from one AFD share on listing (2005): 25x at Lucara peak share price
⧫ Early investors recognized the potential, took the risk and extracted substantial value
from African Diamonds plc share price growth
⧫ Would AK6 be Karowe Mine today, were it not for ‘Friends, Family & Fools’?
Fast-forward more than ten years: has anything changed?
Potential: early gains and long-term value

Traditional or alternative funding?
⧫ Traditional equity and debt
financing has been
constrained by falling
commodity prices and
continued uncertainty
⧫ Alternative funding sources
better suited to junior and
mid-tier miners
⧫ Investors with higher risk
appetite and faster decision-
making than banks
⧫ Alternatives seldom accessible
to early stage ‘greenfield’
project developers
Modified after PwC, 2013

SA’s exploration funding incentive is failing
⧫ Mining funds designed to benefit from tax
concessions in the South African Income Tax Act
(2009) have emerged recently
⧫ Section 12J grants venture capital companies
(VCCs) a 100% deduction of the amount invested
in a mining company before it can generate
taxable income from production
⧫ The mining company must be unlisted, or a
junior listed on the AltX of JSE
⧫ Section 12J initiative was intended to boost
junior exploration funding in South Africa,
similarly to the Flow-through share scheme in
Canada
⧫ Sadly, Section 12J has not achieved the purpose
it was designed for.

Funders with expertise, such as HDI, 162 Group and Lundin Group, have
effectively applied a mix of entrepreneurial skills, business experience and risk
appetite in the resources space to develop opportunities with potential.
24
Where are the new mining incubators?
Hunter Dickinson Inc. Lundin Group 162 Group Burgundy Diamonds
For over 30 years, HDI have
successfully identified,
acquired and developed
mineral assets with high
growth potential. Their
portfolio has featured over
15 private and listed
companies with projects
around the world. HDI have
raised more than CAD 1.9
billion in equity financing
since 1985 and generated
healthy returns on equity
capital for shareholders.
Founded in 1971 by Adolf
Lundin, the
Lundin Group has raised
billions of dollars to fund
resource projects in the
mining and oil/gas sectors.
Progressive and true to its
visionary founder’s
philosophy, today it
comprises twelve listed
companies operating in
over twenty countries.
Focused on high potential
natural resource start-ups,
the 162 Group has
negotiated over 30 joint
ventures with multinationals
and established 15 listed
resources companies with
interests across the globe,
including AIM-listed
Botswana Diamonds. The162
Group’s core strategy is to
identify opportunities, create
the project, work with
partners and develop.
A new entity focussed on
the diamond exploration
sector, Burgundy
Diamonds seeks to
establish itself as a niche
project incubator
operating within the “gap”
between Juniors and
Majors, providing risk
funding and project
development in
partnership with owners of
diamond projects.

⧫ CSEF, or Crowd Sourced Equity Funding, enables
project owners to raise funds through secured
online platforms from a large number of small
investors who can own equity in emerging mining
companies for as little as $500
⧫ Dedicated crowdfunding platforms for mining
companies have been launched in Canada and
Australia and others are in development in the UK
⧫ Regulators in Canada and the US have already
adopted rules allowing the sale and purchase of
securities via crowdfunding portals. Lobbying is
ongoing in Australia to change the legislation in
support of crowdfunding
⧫ The viability of crowdfunding platforms in the
diamond exploration space remains to be
ascertained.
25
Is crowdfunding a viable alternative?

26
Discussion & Conclusions

Southern Africa’s competitiveness
27
STRENGTHS
♦ Highly prospective diamond region
♦ Track record of commercial
production
♦ Evolved regulatory environment with
strong judiciaries
♦ Mostly growing economies
♦ Improved mining attractiveness
rankings
WEAKNESSES
♦ Capital constrained explorers
♦ Local HNWI* not investing in local
exploration
♦ Insignificant local listings of junior
explorers
♦ Governments’ exploration databases
♦ Licence application processes
OPPORTUNITIES
♦ Developed financial markets
♦ Juniors driving greenfields exploration
♦ HNWI*: over 40,000 in SA; over 3,000
in Botswana
♦ SA’s 12J (or equivalent) as potential
flow-through schemes
♦ Crowdfunding for exploration
THREATS
♦ Onerous regulatory requirements
♦ Uncertainty and complexity of mining
policy
♦ Investors’ perceptions of resource
nationalism
♦ Governments’ royalties and free carry
expectations
*HNWI = high net worth individuals with total wealth >$1M

(12 000)
(10 000)
(8 000)
(6 000)
(4 000)
(2 000)
0
SA Bots Bots Kalahari Zim Swaziland Lesotho
NPV
18.8%
4.5%
-11.2%
5.51%
7.68%
5.29%
NPV and IRR
28
Economic competitiveness analysis
⧫ SA ranks best of the five in terms of IRR (and NPV), mainly due to lower royalties
⧫ High rates of royalties in Botswana will effectively turn off marginal projects
⧫ Botswana Kalahari model would only work for a substantial deposit, subject to some
fiscal change
Hypothetical primary diamond resource tested against five Southern African
diamond mining fiscal regimes: SA, Botswana (x2), Zimbabwe, Swaziland, Lesotho

29
Economic competitiveness analysis (cont’d)
(10 000)
(5 000)
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
SA Bots Bots Kalahari Zim Swaziland Lesotho
Cash Flow
Royalties WHT Taxes Dividends - free carry inc WHT BOD (Net of WHT)
⧫ SA’s higher absolute returns (lower royalties and lower costs of operation) make it
more attractive than the other four jurisdictions
⧫ Discount rates account for perceptions of SA’s higher political and legislative risk
(viz. uncertainty around the Mining Charter).

Balanced, stable fiscal regimes are most competitive
⧫ An ideal mining fiscal regime would combine a royalty and a tax targeted
explicitly to economic rents, along with the standard corporate income tax
⧫ Calculating economic rent is complex, whereas royalties are easier to
administer
⧫ Investors regard ad valorem royalties as a regressive form of taxation; royalty
taxes based on their ability to pay (income or profits) are favoured
⧫ Botswana’s fiscal regime is considered exemplary within the African context
⧫ Namibia has scrapped the proposed local ownership requirements
⧫ The revised SA Mining Charter is silent on equity requirements for
exploration companies: an opportunity or a threat?
⧫ Can a better balance be struck between governments’ and investors’ fiscal
expectations?
Source: Fasken, PWC, University of Dundee

Improving exploration attractiveness
31
Government’s role Explorers’ role
Entrepreneur-friendly regulatory
environment
Risk mitigation through portfolio
approach and rigorous reporting
Clarity in legislation and policy Advocacy, lobbying
Business incubators for junior
explorers
Partner with individuals with solid
track record
Incentivisation of local & foreign
investment
Deploy new technology & innovative
approaches to exploration (especially
in mature areas)
Rigorous licensing process; stringent
data filing obligations
Regulatory compliance & prompt
submission of exploration data
Exploration dollars are ‘orphans’ in need of a home

Conclusions
⧫ Diamond demand is forecast to grow, while
supply is diminishing
⧫ Exploration expenditure is on the increase
⧫ The case for diamond exploration in Southern
Africa is strong
⧫ Junior diamond explorers’ struggle to access
greenfields funding continues
⧫ Instruments designed to benefit investors from
tax concessions (e.g. SA) are not directly
supporting exploration
⧫ Expert entrepreneurial investors have taken
risks and reaped rewards
⧫ Appealing to the more entrepreneurial HNWIs
is key
Image courtesy of
Lucara Diamond

Questions?

About the Author
⧫ James Campbell is Managing Director of Botswana Diamonds plc and has spent over
thirty years in the diamond industry in a variety of leadership roles both in major and
junior companies. He is also a Non Executive Director of Shefa Yamim ATM (a precious
stones explorer in Israel, listed on the LSE).
⧫ Previous roles include Chief Executive Officer and President of Rockwell Diamonds Inc;
Non Executive Director of Stellar Diamonds plc; Vice President - New Business for
Lucara Diamond Corp, Managing Director of African Diamonds plc; Executive Deputy
Chairman of West African Diamonds plc.
⧫ James worked at De Beers for over twenty years; his roles included General Manager
for Advanced Exploration & Resource Delivery and Nicky Oppenheimer's Personal
Assistant.
⧫ James holds degrees in Mining & Exploration Geology from the Royal School of Mines
(Imperial College, London University) and an MBA with distinction from Durham
University. He is a Fellow of the Institute of Mining, Metallurgy & Materials, South
African Institute of Mining & Metallurgy and Institute of Directors of South Africa. He
is also a Chartered Engineer (UK), Chartered Scientist (UK) and a Professional Natural
Scientist (RSA).
⧫ James is also chairman of Common Purpose SA (a not-for-profit organization that
develops leaders who can cross boundaries and is synonymous with the terms ‘cultural
intelligence’ and ‘leadership beyond authority’).
34
https://twitter.com/JAHC1
https://www.linkedin.com/in/jamesahcampbell/
https://www.slideshare.net/JamesAHCampbell1
https://www.youtube.com/JamesCampbell_JAHC

162 Clontarf Road
Clontarf
Dublin 3
Ph: +27 83 457 3724
Web: www.botswanadiamonds.co.uk
Twitter: @BotswanaDiamond
Email: james@botswanadiamonds.co.uk

Raising Exploration Capital in Southern Africa: A Diamonds Perspective

Recommandé

Recommandé

Contenu connexe

Tendances

Tendances (20)

Similaire à Raising Exploration Capital in Southern Africa: A Diamonds Perspective

Similaire à Raising Exploration Capital in Southern Africa: A Diamonds Perspective (20)

Plus de James AH Campbell

Plus de James AH Campbell (20)

Dernier

Dernier (20)

Raising Exploration Capital in Southern Africa: A Diamonds Perspective