Mmamabula power plant hits major hiccup for CIC Energy (July 21, 2008)

VANCOUVER — Plans to develop a new coal mine and coal-fired power station in Botswana to add muchneeded capacity to South Africa’s power grid have been derailed and shares of CIC Energy (ELC-T, CIEGF-O) fell hard on the news.

Failure to renegotiate risk allocations meant CIC missed a key deadline with its preferred engineering, procurement, and construction (EPC) contractor. The missed deadline derails the mega Mmamabula Energy Complex (MEC) project because manufacturing slots for long lead-time equipment, such as boilers and turbines, are no longer earmarked for CIC. As such, the project cannot continue on or near schedule.

The schedule is not the only loss from the failed negotiations. The preferred EPC contractor indicated in May that it would be difficult to enter into a turnkey contract for a project of the size of the MEC on the terms and conditions generally used in EPC contracts. A contract, it stipulated, would require revised terms and conditions that CIC realized would not be acceptable for financial backers without changes to risk allocations.

In furious negotiations with the contractor and the project’s two key offtakers — South Africa’s state power company, EKSOM, and Botswana Power — over the weeks before the deadline, CIC tried to revise the project’s risk allocations to meet every party’s requirements but the groups were unable to reach an agreement.

As such, the company was forced to pull the plug on MEC’s phase-one development, a fully permitted operation with construction scheduled to begin before the end of the year. For US$9.5 billion, CIC and partner International Power (IPRPY-O, IPR-L) were going to build a 2,100 to 2,400-megawatt coal-fired power plant supported by a coal mine churning out 7.5 to 9 million tonnes of coal annually. The plant and mine were slated to be operational in late 2012.

Phase two was expected to double mine production and plant capacity.

Now CIC is being forced to consider a revamped first phase involving a smaller power plant. The advantage of a smaller operation is that the EPC terms and conditions would not be an issue and thus risk allocations would not have to be reconfigured.

CIC’s management is certain that a power plant will still be built.

“There’s absolutely no doubt that there’s a major need for this project — it really does form an essential part of ESKOM and Botswana Power’s planning for the future,” said CIC president Gregory Kin- ross. “The fundamental need for this project hasn’t gone away and it’s a void that isn’t easily filled.”

CIC has started talks with new potential EPC contractors around a downsized plant. The company expects to be able to release costs and size estimates in a few months.

News that CIC will not proceed with MEC’s first-phase development as planned must have slipped out early because the company’s share price lost almost 20% in the three days preceding the June 23 announcement. Following the official news, CIC fell even further, losing $4.62 or 45% in a day to close at $5.73. At presstime, it was trading at around $5.59.

Mmamabula, in southeast Botswana, hosts coal resources totalling 2.3 billion tonnes in the measured and indicated categories. Coal qualities indicate raw calorific values of 21-23 megajoules per kg.

The silver lining around the power plant derailment is that the two other projects at Mmamabula have overtaken power generation in terms of financial benefit. CIC is also aggressively pursuing plans to develop a coal-to-hydrocarbons project and coal export opportunities.

The coal-to-hydrocarbons project would gasify coal to produce petrochemicals, gas, and fuels. Three feasibility studies are under way investigating different aspects of this project. An initial market study has already indicated several opportunities to sell downstream products within South Africa and into international markets.

In terms of exporting coal, CIC is investigating exporting seaborne-traded A-grade thermal coal from the Mmamabula coal field to the west coast of southern Africa. The export coal project is advancing apace with a main, rail, and port prefeasibility study under way. The project would require a 1,500-km rail line from Mmamabula through Botswana and Namibia to be built, as well as a coal terminal and loading facility.

In a conference call regarding the power plant changes, CIC CEO Warren Newfield addressed the changing roles of the different projects over the past few years.

“A few years ago when we started at Mmamabula, power was the only real option,” he said. “Now, the best use of coal is either export or to create fuel products — the power plant is no longer essential. However, in doing those things we will create a significant byproduct that can feed a power station, which is why it remains important.”

In addition, neither the coal-to-hydrocarbon project nor the export coal project can start up quickly. While the power project is fully permitted, the other two are still in study stage. Moreover, the rail line needed to export coal is a significant undertaking in terms of costs and time for which no agreements have been reached.