African Energy Resources delivers “commercially viable" Concept Study at Sese Coal Project

African Energy Resources (ASX: AFR) has ticked an important box for the development of the 2.7 billion tonne Sese Coal Project in Botswana after receiving results from a Concept Study that confirm the technical and commercial viability of the project.

Robust cash flows and strong operating margins are possible under a variety of scenarios that do not require new rail and port infrastructure.

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.