raising exploration capital in southern africa a diamonds...

Raising Exploration Capital in Southern AfricaA Diamonds Perspective

James AH Campbell

Managing Director, Botswana Diamonds plc

Mining Investment Botswana 2019

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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

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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

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7

Global Exploration Trends


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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

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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


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Why Southern Africa


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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

Dia

mo

nd

pro

spec

tivi

ty r

anki

ng*

Mining investment attractiveness**

Cumulative diamond production (2008-2017) for selected African countries***

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*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

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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 momentumSource: company websites, Mincosa

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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

Act

ivit

yO

utc

om

esM

iner

al

Res

ou

rce

Eco

no

mic

St

ud

ies

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

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INCREASING COSTS & TIMEFRAMES

DECREASING UNCERTAINTY & RISK

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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


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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.

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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, theLundin 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.

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Is crowdfunding a viable alternative?


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Discussion & Conclusions


Southern Africa’s competitiveness

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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 Swazi land Lesotho

NPV

18.8%

4.5%

-11.2%

5.51%7.68%

5.29%

NPV and IRR

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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

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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 Swazi land 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

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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’).

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Ph: +27 83 457 3724

Web: www.botswanadiamonds.co.ukTwitter: @BotswanaDiamond

Email: [email protected]

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