Shumba Energy Limited (SHUMBA.bw) 2019 Annual Report

We have extracted the Chairman’s Statement from the 2019 annual report of Shumba Energy Limited (SHUMBA.bw), listed on the Botswana Stock Exchange:

Dear Shareholders and Investors, herewith I take pleasure on behalf of your Board of Directors in presenting for your consideration the audited results of Shumba Energy Limited (“Shumba” or the “Company”) and its subsidiaries, collectively referred to as the “Group”, for the 12 months operating year ended 30 June 2019, along with commentary on the operating environment and related outlook.

Macro environment of investment in hard commodities

Coking Coal for reductants in pyrometallurgical processes has seen less volatility and generally remains in demand and at profitable price levels, even with new projects being executed. The price of Thermal Coal, Shumba’s main area of activity, and related Coal equities continued to experience corrections but lower than expected volatility, while remaining range bound yet in a stable or falling general trend respectively, i.e. Prices down and Equities stable. Major utility & industrial consumers continue to manage lower or deplete stocks, despite increasing energy demand and the threats of the trade wars. Capital deployment for exploration remains buoyant and trending upwards providing significant funding for the usual junior resource investment market, especially for energy metals and energy fuels.

Political impacts on sentiment in Africa

Regional mineral economy politics has strongly reversed and quicker than expected in the year as governments are awakened to the hard reality that the natural resource industry is the ‘tip-of-the -spear’ for economic development and sustainability, rather than a ‘socialist-cow’ that can be milked for ever for royalties & taxes. The recent Southern African Development Community (“SADC”) regional regime changes have started to deliver a more stable sentiment on prospective risk investment in the sector. The Botswana recognition of the one China policy has opened significant investment opportunity for the Chinese Dragon that was previously closed and which has been aggressively embraced and executed in several deals and projects, with Shumba also beginning to lever this to the company benefit.

The SADC region and its individual economies need to build energy-dependent economic bases and have little choice but to exploit the Coal, for which it should not be embarrassed or apologetic as Coal still currently provides 30% of the world’s energy mix and is still only exceeded by Oil. Geographic and economic necessity, continues to swing further towards coal usage with commensurate new technological pollution/emissions control solutions in the realm of ‘clean-coal-technologies’.

China and India maintain a significant majority in Coal consumption of over 60% in total with South Korea and Japan also advancing markedly. The position of the USA and the EU is being diluted and substituted by Oil & Gas which interestingly has a larger carbon and pollutive emissions footprint on a FCA (Full Carbon Accounting) and air contamination basis respectively, yet receives no negative press or lobby from the IMF or G7 political elite.

The Shumba revised business strategy launched in Q2/2019 to unlock shareholder value through sustainable energy businesses with clear focus on operational activities to facilitate appropriate funding ability in the face of the ‘Green Lobby’ has resulted in the post 2019 balance sheet event of the acquisition of Coal Petroleum to launch the CTL business defined in the strategy. We continue to seek to lever monetisation of company assets and structuring the investment focussed in so far as it  matters in the SADC region. This sustainably offers you, our shareholders and investors strong fundamentals in the Shumba business and in progressive project developments.

The founding Management and Non-executive members continue to be very closely connected with all aspects of the execution of the Group’s strategy. The world-class delivery by management in advancement of the Company’s projects has been sustained again in this year. Further, deployment of the Group’s financial resources has remained cautious and focussed on value generation. Some of the Group’s and Company’s key financial results and features reported are:

  • Total expenditure on Projects and Asset development during the year was USD 233,416.
  • The Group’s net assets at the end of the year were USD 4,610,803, a decline year on year of 55% reflecting the losses incurred as a result of the fall of the Kibo Energy PLC shares, which the Group acquired in the prior year from the Mabesekwa transaction.
  • Cash and Cash Equivalents of the Group as at the reporting date were USD 153,003, an increase year on year of 87%.
  • Management’s ongoing commitment and competence in the disciplined maintenance of a low-cost structure within the Group shown clearly in the Group’s continued advancement and maintenance of cash position relative to its peers.
  • The Group remains adequately funded to meet its immediate expenditure requirements in the coming financial year while future funding requirements through continued asset monetisation are actively being pursued.

Coal Mining & Energy Environment – A Revised Strategy

Shumba Energy we continue to take the lead in CRD and with 3 assets in the development phase and an active Coal Trading business for Botswana Coal we are advancing rapidly. The business remains a long-term business and runs with high focus and prudent expense management for project value creation and provide protection of our shareholder’s investment, realise growth opportunity and ultimately superior return on investment. Again, this year we have continued to make all efforts to ensure that Shumba retains the first ranking position for success.

There is no change in the massive funding, public & private, driven within the development banks and some commercial banks for the ‘4th Industrial Revolution’ (“4IR”) for socio-economic development, new industries creation, transfer of technology, development of Southern African natural resources, with a ‘Renewable Energy’ focus.

Post the 2019 reporting year financial close Shumba successfully launched its bid to be the first CTL (Coal to liquids) processor in Botswana to produce energy fuels and other ‘green’ hydro-carbon derivatives or Aromatics for Liquid Organic Hydrogen production and as input for manufacture of transportable and scalable energy storage units. This creates a ‘carbon’ neutral footprint and in the context of the prevailing sentiment represents transformation of natural resources for use in a true ‘Green Energy’ future, addressing the ‘4IR’ substantially.

Established Thermal Coal Markets

The Coal trends for calendar 2018 showed short-lived price rebound and over late spring and the summer, prices for thermal coal, used as an energy source for air conditioning and industrial cooling, rose on supply-chain concerns and unseasonably hot weather in Asia and Europe. Simultaneously, however, the Chinese government continued its crackdown on polluting industries, and prices have consequently been on a general downward trajectory since late August.

The benchmark thermal coal price rose to a six-year high of USD 120 a tonne in the July quarter before falling to around USD 117 in the September quarter. According to the International Energy Agency (“IEA”), coal remains the second-largest global source of primary energy, behind oil, and the largest source of electricity; and the story of coal is a tale of two worlds, with climate action policies and economic forces leading to closing coal power plants in some countries, while coal continues to play a part in securing access to affordable energy in others.

For many countries, particularly in Southern Africa and Southeast Asia, it is looked upon to provide energy security and underpin economic development. China’s consumption rose for the first time since 2013, while India, which became the second-largest consumer after overtaking the US in 2015, experienced the largest increase in coal consumption. Meanwhile, demand in the US decreased, reaching its lowest amount since 1978 at 473 Mtce. And despite US President Donald Trump’s efforts to revive the coal industry in the country, it could be difficult to reverse the long decline in US coal mining. Higher demand and tight supply have been pushing up prices for coal and supporting robust seaborne trade in the fossil fuel. In fact, export trade of all types of coal in the world increased again by more than by 3% in 2018, from 1,370 million tonnes in 2017 and demand continues. But higher prices are not leading to investment in new mines in established economies, the IEA says in its latest report. That is largely because local opposition and policies aimed at combating climate change are creating uncertainty about future demand.

The Coal outlook for 2019 is one of stable demand ahead and as the calendar year comes to a close it appears that 2020 could be tougher for the coal space everywhere except the high base load energy deficit markets, like Southern Africa and South-East Asia. Overall in terms of demand, global coal demand looks set to remain stable over the next five years, as declines in Europe and North America are offset by strong growth in India and Southeast Asia. Coal’s contribution to the total energy mix globally is estimated to decline from 27 percent to 25 percent, mainly due to growth of renewables and natural gas, the IEA estimates. Similarly, in the short-term demand from Asia, particularly China and Japan, is expected to cool next year, in part due to the multi-year high level of thermal coal prices and in part due to a move towards cleaner energy sources. According to the IEA, air quality and climate policies, coal divestment campaigns, phase- out announcements, the declining cost of renewables and abundant supply of natural gas are all putting pressure on coal. But coal demand is set to grow across much of Asia/Africa due to its affordability and availability. “Fossil fuels are going to be with us for a long time,” IEA Executive Director Fatih Birol said in a report. “That is why the only way to tackle our long-term climate goals and address the urgent health impacts of air pollution, while also ensuring that more people around the world have access to energy, will require an approach that integrates strong policies with innovative technologies.”

Looking over to prices, thermal coal is expected to fall from recent highs on weakening demand amid a shift away from polluting energy sources, estimates forecast the average price for thermal coal in 2019 calendar year will be USD 94.50 per metric tonne. The most bearish forecast for the year comes from Liberum Capital, which is calling for a price of USD 75; meanwhile, Investec is the most bullish with a forecast of USD 109.50. So, given the stable outlook 2020 prices are expected to be range bound between USD 85 to USD 95 per metric tonne.

For Shumba, Africa remains most important as it remains unlikely in the immediate future that we will enter the sea-borne Coal market. The SADC market is still growing deficits and this will continue to force upward price pressure. We continue to focus on tactical execution for cashflow growth from our coal trading business and in line with this, low cost coal production for supply to the regional industrial market as with our Lonrho contract, directly through offtake agreements. This remains a point of focus. We retain our intent to future export onto world seaborne spot markets in the medium term, but this continues to depend largely on the logistical infrastructure establishment and transport costs. Positive signs for this have further emerged in the reporting period from regional governments and parastatals like Transnet in South Africa and international development investment from the Chinese.

Overview of Operations

Sechaba Mine and SCIPP Project

You may recall that this project was independently valued by KPMG at USD 50m at the end of 2018 stage of development. Then Shumba executive management executed a legally binding 50/50 Joint Venture (“JV”) with Lurco of RSA for a consideration in total of USD 20m in cash and cash equivalents in the Q1 of the reporting year, effectively giving 50% share and operational management control of theJV within a new JV Co, subject to certain conditions precedent.

Unfortunately, up to the end of the reporting period, Lurco have struggled significantly to meet their financial obligations in this regard and a number of agreement deferrals were incurred, with payments to Shumba being much reduced and delayed. However, Shumba management remained cautiously optimistic that Lurco would ultimately fulfil their obligations. Mabesekwa Mine and MEIPP Development and Studies

The JV with Kibo Mining Plc that earned 27% of Kibo listed on the LSE – AIM exchange valued at GBP 10m at the time of the transaction, has unfortunately been significantly devalued by 90% since, due to Kibo having undertaken what was essentially a forced execution of a deal with its funders and a change in its name to Kibo Energy Plc. This resulted initially in Shumba position being diluted to 22%, then the share price began to retract.

As a result, Shumba decided to reduce its holdings for cash to also support its own operating cash requirements in the face of the Sechaba JV payments deferments. At the end of the reporting period Shumba approximately has 19% of Kibo Energy Plc. In Q3/2019, Shumba entered into a binding Coal Supply Agreement (“CSA”) with Coal Petroleum Ltd (“CoPet”) to guarantee supply of all the feedstock that would be required for the life of its CTL Project  from its 700Mt Mabesekwa coal resource and project situated approximately 60km south-west of Francistown.

The market strategy for the Mabesekwa asset remains focussed on vending out as feedstock for Coal to Liquids and with the post reporting period acquisition of Coal Petroleum Ltd, this will become a tactical reality as the agreement with Kibo Energy Plc is re-structured to better suit Shumba, the Kibo JV and the government requirements and objectives.

Morupule South Mine Project

Strategic discussions and negotiations are ongoing with a number of parties for the development of at least three sub-sections of the Morupule South Coal asset. The project has a resource of 2.45 billion tonnes of JORC compliant resources of which 380 million tonnes are in the measured and indicated categories.

Lethlakeng Prospecting Licence No. 308/2014

During the reporting year, the Lethlakeng project and the associated licences was after strategic review by the Management and Board relinquished back to the Botswana government.

Post Year End Developments

The core strategy of the Group embraces both the Thermal energy production space as a pure non- operational investment partner earning both royalties from revenues and profits, as well as shareholder dividends; the pure Renewable Energy production and Storage space; and the development and establishment of a CTL facility in Botswana for fulfilling all of the countries domestic fuel supply requirements and export into the SADC region.

Since the end of the reporting period Shumba has concluded a binding agreement and has acquired 80% of the equity and control of Coal Petroleum Ltd (“CoPet”). CoPet is a private Botswana company that has been focussed on the development of a commercial scale liquid fuels production facility, called ‘Project Tsosoloso’ (“The Project”) and providing Botswana first and then Africa with energy fuels and speciality chemicals for value added product production.

CoPet has partnered with Power China International (“PCI”) and Wison Group (“WG”), both leading Chinese EPC companies with a proven track record and recent experience in the coal-based power & CTL technologies for the execution of the BFS. They are in the process of completing the technical design to Project Development Plan (“PDP”) level to arrive at a detailed and accurate capital and operating cost estimation required to secure the project execution funding. Further, CoPet is working with local Botswana professionals and now with Shumba specialists for the integration of the Mabesekwa site geotechnical, regulatory permitting and environmental impact assessment (“EIA”) activities.

Shumba is continuing to engage with PCI and WG on technical and project development issues, also on funding matters, including potential equity and project financing options. Finally, now on behalf of the Board and Management, I offer our continuous appreciation and sincere regard for the ongoing support shown by you, our shareholders and investors new and old alike in the ever changing, challenging world and environment we find ourselves continuing in.

We look forward to another year of real value growth and realisation of a share value and share price improvement as the delivery of post year end operational revenue growth projects are realised and the new strategy is executed and communicated broadly to investors.

Once again, the Shumba team has delivered for you, our value shareholders and stakeholders alike, through the solid and continued execution within our sustained philosophy of “Saying what we will do and doing what we have said we will do!”

Take care.

ALAN M. CLEGG Pr. Eng Pr.CPM PMP FSAIMM F.Inst.D
NON-EXECUTIVE CHAIRMAN