African Energy Resources (ASX: AFR) is adding to its African coal inventory with a new discovery at the Sinazongwe prospect in Zambia close to existing coal mines.

Multiple coal seams were intersected in all of the completed core holes and, importantly, these coal seams are open along strike and down dip. 

Raw coal calorific values returned ranged from 10 to 26 megajoules per kilogram.

Highlighting the potential for coking coal properties, there was an extensive presence of vitrinite bands.

In mid-2011, reconnaissance exploration identified coal bearing sediments with a strike length of about 10 kilometres.

These sediments are mapped by a geological survey as the extension of the stratigraphy that hosts the Maamba Colliery and the Collum Coal Mine, Zambia’s only producing coal deposits. 


Next steps

African Energy now plans to test the coking properties of the coal as well as undertake washing yield analysis. 

This work will determine if the coal has the potential for one or two products – a higher value coking fraction and a middling for use as a power station fuel. 


Sese – path to production

Meanwhile, over at the Sese Thermal Coal Project in Botswana, African Energy recently completed a milestone rail delivery of coal to Maputo.

The significance of this is that the company has demonstrated that the transport of Sese coal via rail to the east coast of Africa is possible using existing infrastructure.

The trial shipment is a huge step in African Energy’s and Botswana's ambitious plans to fully exploit its coal resources with exports and power plants as the primary targets. 

Importantly, the east coast of Africa is considered an ideal location from which Botswana’s coal may be ultimately exported to Asian markets.

The market for Sese coal includes domestically with existing industrial customers and nearby markets, with this demand set to grow as new customers enter the market as new mines and businesses develop.

There is also a growing regional market in Southern Africa, with the Power Pool facing net regional electricity generating deficit as Eskom exports scale back.

Then there are the export markets where demand remains high, especially in India, with few undeveloped coal provinces capable of meeting this demand.

Proactive Investors is a market leader in the investment news space, providing ASX “Small and Mid-cap” company news, research reports, StockTube videos and One2One Investor Forums.

Frazer Tabeart

Yeah it’s what would be referred to as sub-spec coal in the market. It’s not the same quality coal as Newcastle grade coal.

Our washed coal which will be exported will be in the range of 5,000 to 5,500 kilocalories per kilogram. Newcastle grade coal is 6,300 by comparison.

Our export quality coal is clearly not the same as Newcastle. You get obviously a lower price for your product as a result of that, but it is the sort of coal which is now more widely traded than any other coal and the reason is the supply of Newcastle coal is dwindling, it’s expensive and India’s not prepared to pay $130 a tonne for coal.

So they’ve made the decision to go for lower quality coal and they just burn more of it in their power stations. It then becomes an ash management issue and a logistics issue, but they get a cheaper result at the end of the day.

Very similar quality coal to the biggest coal basin in the world, which is Powder River Basin in America and that coal is now being exported to Europe.

The Concept Study was completed under the supervision Philip Clark, the company’s Senior Coal Consultant, along with a number of other independent consultants including GEMECS, Coffey Mining, Minserve Pty Ltd and Wood Mackenzie.

Attractive project economics have been forecast and include: Stage 1 (Contractor) OPEX at US$13/ROM tonne and CAPEX at US$46 million; and Stage 2 (Contractor) OPEX at US$10/ROM tone and CAPEX at US$104 million.

The Study concluded that the project could be developed through a staged approach.

An initial, up to 1 million tonnes per annum (Mtpa) operation (Stage 1) can generate cash flows from 2013 and involves selling washed coal into domestic and regional markets.

Additional coal sales to a power station, and moderate volumes of export sales could expand Sese into a 3‐5Mtpa (Stage 2) operation.

Existing rail and port infrastructure are able to support Stage 1 and Stage 2 operations. Stage 1 and Stage 2 were considered to be best suited to a contractor serviced operation.

Expansion of the project beyond Stage 2 is possible through increased sales of coal to power stations, and/or through increased volumes of export sales (with India the likely market).

Increased volumes of export sales would require the construction of a heavy haulage railway and associated port infrastructure.

The ultimate Stage 4 project could exceed 30Mtpa production assuming new infrastructure is built. Stage 3 and Stage 4 will likely be an owner operated mine.

African Energy Resources believes that further evaluation of the project is warranted and has approved a bankable feasibility study to refine the technical and commercial evaluation of a mining operation to deliver up to 5Mtpa (Stage 2 operation).


Infrastructure

A detailed assessment of rail and port infrastructure was not undertaken as part of the Concept Study, although the company is maintaining dialogue with long term infrastructure consortia evaluating both east‐coast and west‐coast proposals.

Stage 1 and Stage 2 projects do not involve the export of large tonnages of coal and therefore require no additional rail or port infrastructure beyond that which exists within 30 kilometres of the deposit.

This allows Stage 1 and Stage 2 to be developed in a short time frame which is not captive to new infrastructure development. The volume of export coal that is commercially viable from the Stage 2 operation will be determined once export trials are concluded using material from the forthcoming bulk‐sample pit.

The timing of Stage 3 and Stage 4 operations will be determined by the timetable of proposed new heavy‐haulage railways or expansions of power station requirements.

Geology and Resource

The Sese coal deposit occurs in eastern Botswana and is hosted in the same Lower Karoo sediments as all other coal deposits in the region. The coal at Sese is characterised by a thick main coal seam which occurs close to the basal unconformity between the Karoo Supergroup and the Precambrian
basement.

The Sese Main Seam averages 14m in thickness, varying from 5m to 26m thick, and is close to surface. The Main Seam has been subdivided into the better quality Lower Main Seam (which accounts for over 60% of the total resource) and the thinner Upper Main Seam.

Along the northern margin of the tenement the coal is within 15m of the surface, deepening gently to no more than 80m at the southern boundary. Resource delineation drilling in 2010 provided information for an initial resource estimate in May which included 500 million tonnes of Indicated Resource and 2,223 million tonnes of Inferred Resource.


Mining Method

The Sese deposit has a number of characteristics ideally suited to low cost open cut mining methods:

- Large continuous seam with a strike‐length of some 35km;
- Thick main seam which averages 14m thick;
- Full seam strip ratios of 1.6:1
- Little apparent structural modification, and
- Very shallow dips in a very flat surface terrain.

Mine design has been based on conventional open‐cut strip mining where mining occurs along the strike of the deposit with successive strips being mined down‐dip. Mining commences with a box‐cut with waste initially hauled external to the pit.


Marketing – Coal Price forecasts

Wood Mackenzie has forecast a free‐on‐board (east‐coast port, southern Africa) price of approximately US$80/t for Sese export coal in 2013, increasing gradually to over US$100/t by 2025. This assumes that
Sese coal will compete with Indonesian sub‐bituminous coals and that Mozambique middlings will not exert downward pressure on prices.

Price projections for supply of domestic coals into southern African power stations range from US$1.20 to US$1.60 per MJ/kg. Based on this assumption, Sese power station coal has a range of expected mine‐gate
prices between US$25 and US$35/t depending on product specifications.

Operating Cost Estimates

Operating cost estimates have been prepared for each Stage and include provision for site preparation, drill and blast, waste mining, coal mining, general and administration and rehabilitation.

The estimates have been prepared to a nominal +/‐ 30% to +/‐35% basis (US dollars at 1 July 2011) with no provision for contingency or escalation.

These operating cost estimates have been benchmarked against the Wood Mackenzie Southern African Coal Supply Series Cost Analysis May 2011, and are consistently along the industry trend for ROM costs vs. ROM strip ratio, lending further credibility to the estimates.

Cost estimates have also been confirmed with initial discussions from southern African based mining contractors. The operating costs exclude the cost of rail and port costs which have yet to be established, but which are not relevant to Stage 1 and Stage 2.

Capital Cost Estimates

Capital costs estimates for each stage were generated to include all pre‐production mine development, major mobile mining plant (Stage 3 and Stage 4 owner operated mines only), coal handling and processing plant (minor costs only for Stage 1 and Stage 2 related to earthworks, raw water and rejects handling), support plant, non‐structural assets and pre‐production operational readiness, training and management costs.

The estimates have been prepared to a nominal +/‐ 30% to +/‐ 40% basis (US dollars at 1 July 2011), and include sustaining capital but no provisions for escalation or contingency.

Bankable Feasibility Study

Components of the BFS have already commenced, most notably an infill drilling programme to deliver a Measured Resource.

As part of the BFS, a Botswana consultant, Ecosurv has been appointed to undertake an Environmental Impact Assessment (EIA) on behalf of African Energy.

This commenced in July 2011 and has now reached the stage of community and stakeholder consultation, from which the terms of reference for the formal
documentation of the EIA will be derived. It is expected that the EIA will take 12‐15 months to complete.

Scott who is based in Botswana - has over two decades of experience with seven years at BHP Billiton (ASX: BHP).

Importantly Scott has experience in southern Africa, and most recently held senior project management roles in the expansion project at the Morupule Colliery in Botswana, currently the country’s only operating coal mine.

Scott will initially be responsible for delivering Feasibility Studies at the company's Sese coal project.

At Sese - earlier in the year African Energy reported and initial resource of 2.73 billion tonnes of thermal coal.

The coal occurs in one main seam which averages 14 metres in thickness over an area of 110 square kilometres, and most importantly is close to surface, which is expected to be amenable to low strip‐ratio open pit mining.

The main seam has been subdivided into an Upper and Lower seam on the basis of shale content.

Frazer Tabeart,  African Energy Resources' managing director, told Proactive Investors today that the funds enable the company to "substantially de-risk the project in the next 12 months through a trial pit which will provide bulk samples to allow potential customers (export and domestic/regional) to test the quality of the coal," as well as demonstrate the company's commitment to the project and its development.

The trial pit will also give African Energy the opportunity to assess export logistics in the region.

By continuing its resource drilling programs the company will progress through an Indicated resource on the whole deposit to a Measured resource for the area, which is likely to provide the first 25 years of production.

The company will commence the environmental impact assessment shortly, which is likely to be a critical step on the path to production.

The full Feasibility Study to assess all technical and commercial aspects of the project with a view to initial production in 2013, is subject to the usual government regulatory hurdles.

Helmsec has an exclusive mandate to provide financial and related marketing advice over a 12 month period.

In May African Energy announced a better-than-expected initial gross in-situ coal Resource at Sese of 2.73 billion tonnes, providing a boost to the company as it looks to upgrade the entire Resource to an Indicated category during the September quarter.

The company continues to unlock the potential for a much bigger coal resource in Botswana, with the discovery of a thick coal seam at Sese West on June 8, located just a few kilometres to the south of the Sese coal project.

Drilling at Sese West is part of a regional uranium exploration program, although coal seams were discovered ranging in thickness from seven metres to 30 metres, with the depth to the top of the coal varying from 79 metres to 157 metres.

The new discoveries are located just a few kilometres to the south of the Sese coal project, which hosts a JORC 2.73 billion tonne Resource.

However, Sese West is currently only valid for radioactive minerals, with African Energy having already applied for amendment to the licence to include the rights for coal.

The requested amendment is currently subject to the recently announced moratorium on coal and coal bed methane licence applications, which is due to end this September.

Highlighting how African Energy is looking to boost exploration in the area, the company has submitted six further prospecting licence applications for coal and coal bed methane in the last eight months.

The Sese coal project comprises one wholly owned prospecting licence valid for uranium, coal, coal bed methane, base and precious metals, and is strategically located near infrastructure with a sealed highway between Francistown and Gaborone and is easily accessible.

Rail, road and power infrastructure is also close to the project.

- AFR’s 2.7 billion tonne coal resource at Sese consists of a singleseam up to 26 metres thick, all of it within 80 metres of thesurface. The Sese resource has been defined over 30 km of strikeand up to 10 km down dip.

- In the last few years power shortages in southern Africa and theemergence of India as a major importer of thermal coal have putBotswana in position to develop its massive coal resources for thefirst time.

- Sese is potentially the largest coal project in Botswana and also potentially the lowest unit cost coal project in Botswana.

- Initial wash tests indicate Sese can potentially produce a thermalcoal product suitable for export and a domestic power station coal product.

- Sese is next to existing infrastructure that could support a small to medium scale operation delivering coal to regional customers.

- The Botswana government, in partnership with neighbouring states, various private interests and development banks, has advanced two rail and port projects that would support Sese’s full scale development. Pending finance arrangements decisions to proceed with construction could be made in 2011.

Enterprise Comparison

The use of enterprise value comparisons to derive values is necessarily a broad brush method that takes no account of disparate yields, coal qualities or unit costs. In early 2011 the most commonly applied multiple was US$0.50 per tonne of resource for undeveloped projects, based on transactions occurring over the past year. For Sese such a multiple would imply a US$1.3 billion project value.

With an enterprise value of A$0.10 per resource tonne based on a resource of 2.7 billion tonnes, African Energy is valued far less than most of its peers:

African Energy (ASX: AFR) $0.10
Aspire Mining (ASX: AKM) A$1.83
Bandanna (ASX: BND) A$1.33
Nucoal Resources (ASX: NCR) A$0.45 and
Coal of Africa (ASX: CZA) $0.44

Block‐B has been classified as an Indicated Resource containing 500 million tonnes (Mt) coal. Block‐A and Block‐C (2,230 Mt) are classified as Inferred Resources.

The Lower Main Seam accounts for 62% of the total resource and contains coal which is suitable for washing to create an export quality product (up to 5,420 Kcal/kg).

The Upper Main Seam coal can be washed, or blended with the Lower Main Seam middlings to make a product which is suitable for use as power station fuel.

The Sese Coal project comprises one wholly owned prospecting licence (PL96/2005) and six prospecting licence applications located in northeast Botswana, about 50 kilometres southwest of the town of Francistown.

African Energy discovered the large deposit of thermal coal at Sese in June 2010.

Importantly, the project is close to the sealed highway between Francistown and Gaborone and is easily accessible. Rail, road and power infrastructure is also close to the project.

Infill drilling is currently underway, and the company expects to upgrade the entire resource to an Indicated Resource category during the July‐September quarter.

On March 8 African Energy acquired two uranium based projects in Zambia. The two projects, Chirundu Uranium and Kariba Valley, were initially part of a joint venture with Albidon (ASX: ALB).

African Energy is funding the acquisition from existing cash reserves, with working capital funded by a partial drawdown of the $5 million convertible loan facility with Macquarie Bank (ASX: MQG).

The company is looking to move the acquisitions forward quickly, and is evaluating a number of additional exploration targets at Chirundu and Kariba Valley tenements with the aim of boosting the resource.

African Energy did have a slight delay in receiving some results from South Africa, but this actually was a plus and allowed the incorporation of information from the recently completed infill drilling in Block‐B into the resource model.

At Block-B, eleven reverse circulation and 15 diamond drill holes were completed earlier in the year, across an area of around 21 square kilometres.

The average seam thickness in Block-B was 14.8 metres, with an average depth to the top of this seam of 40 metres.

The company said this may permit the classification of an Indicated Resource for this part of the deposit, with Block‐A and Block‐C likely to be classified as an Inferred Resource.

This initial resource will provide a boost for the company, which also recently increased African exposure with the 100% acquisition of two uranium based projects in Zambia.

The two projects, Chirundu Uranium and Kariba Valley, were initially part of a joint venture with Albidon (ASX: ALB).

Clark has most recently been providing general consulting services to the company, specifically focusing on a Concept Study on development options for the Sese coal deposit in Botswana.

Sese has delivered bumper results recently, and last month results showed the potential for Block-A, Block-B and Block-C to form a 110 square kilometre continuous coal seam.

African Energy is forecast to deliver an initial Inferred Resource in April 2011.

As part of the process, the government will suspend the granting of new prospecting licences for coal and associated minerals (coal bed methane and sediment‐hosted uranium) until completion of the review period.

African Energy has six applications for new tenements surrounding the granted prospecting licence (PL96/2005) which hosts the Sese coal deposit. These six new tenement applications will be subject to the moratorium on grants during the review.

The company welcomes the review and the efforts to optimise government involvement in the industry especially in the areas of infrastructure development and offers its cooperation and assistance.

African Energy is confident these applications will be processed as expected, once the moratorium as been lifted, as the Ministry has assured the company that the review has no impact on granted tenements, which includes Sese.

On March 7 African Energy secured funding for more advanced exploration at Sese, with a US$5 million convertible loan facility with powerhouse investment bank Macquarie Bank (ASX: MQG).

African Energy has had a string of stellar drilling results from Sese, and recently identified the average seam thickness in Block-B to be 15 metres, with easy extraction due to being near surface, with an average depth to the top of the seam just 38 metres.

Infill drilling is continuing toward the objective of defining an indicated resource and preparations have commenced for a trial pit to extract a 10,000t bulk sample later around the middle of the year.

The company expects to release its initial Inferred Resource estimate at Sese in late April.

As part of the process, the government will suspend the granting of new prospecting licences for coal and associated minerals (coal bed methane and sediment‐hosted uranium) until completion of the review period.

African Energy has six applications for new tenements surrounding the granted prospecting licence (PL96/2005) which hosts the Sese coal deposit. These six new tenement applications will be subject to the moratorium on grants during the review.

The company welcomes the review and the efforts to optimise government involvement in the industry especially in the areas of infrastructure development and offers its cooperation and assistance.

African Energy is confident these applications will be processed as expected, once the moratorium as been lifted, as the Ministry has assured the company that the review has no impact on granted tenements, which includes Sese.

On March 7 African Energy secured funding for more advanced exploration at Sese, with a US$5 million convertible loan facility with powerhouse investment bank Macquarie Bank (ASX: MQG).

African Energy has had a string of stellar drilling results from Sese, and recently identified the average seam thickness in Block-B to be 15 metres, with easy extraction due to being near surface, with an average depth to the top of the seam just 38 metres.

Infill drilling is continuing toward the objective of defining an indicated resource and preparations have commenced for a trial pit to extract a 10,000t bulk sample later around the middle of the year.

The company expects to release its initial Inferred Resource estimate at Sese in late April.

African Energy has identified the average seam thickness in Block-B to be 15 metres, with easy extraction due to being near surface, with an average depth to the top of the seam just 38 metres.

The company said the shallow depth of the overburden and the thickness of the coal seam are very encouraging, offering very low strip ratios at potential sites for initial mining operations.

More importantly what this drilling actually identifies, along with drilling results from Block-A and Block-C, is a continuous coal seam over an area of 110 square kilometres.

These results could be just the beginning for Block-B as drilling will continue to the end of the month.

African Energy is forecast to deliver an initial Inferred Resource in April 2011.

African Energy responded to the following from the ASX:

'I refer to your letter of 14 December 2010 and with regard to the company's announcement released at 09:18 (EDST) on 14 December 2010 titled "Block-C Coal Drilling Results Exceeds Expectations".

African Energy then stated:

'The company considers the information contained in the announcement to be material to the company pursuant to listing rule 3.1.'

'The managing director, Dr Frazer Tabeart, received details of the drilling results published in the announcement via email at 01:54 (WST) on Monday 13 December 2010.'

'There was no earlier announcement from the company relating to new information contained in the announcement.'

'The board and management spent 24 hours compiling the drilling information and preparing the announcement suitable for release to the market pre-open on Tuesday 14 December 2010. Drilling results remained confidential until the release was made.'

'The company confirms it is in compliance with the listing rules, in particular listing rule 3.1.'

The announcement refers to results from Block-C at the Sese coal project in Botswana, where the average main coal seam thickness is 11 metres, with an average depth to the top of this seam of 52 metres, which the company says 'significantly exceeds previous expectations'.

Drilling at the target will be completed next week, with 43 reverse circulation and 25 diamond core holes already completed, covering around 70 square kilometres.

The initial inferred resource will be towards the end of the first quarter in 2011.

The exploration target at Sese is 1.0 to 1.5 billion tonnes of 4,000kcal/kg to 5,000kcal/kg thermal coal.

In Block-C, the average main seam thickness is 11 metres, with an average depth to the top of this seam of 52 metres, which the company says significantly exceeds previous expectations.

Drilling at the target will be completed next week, with 43 reverse circulation and 25 diamond core holes already completed, covering around 70 square kilometres.

The initial inferred resource will be towards the end of the first quarter in 2011.

The exploration target at Sese is 1.0 to 1.5 billion tonnes of 4,000kcal/kg to 5,000kcal/kg thermal coal.