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African Energy Resources promise highlighted in Helmsec report

African Energy Resources (ASX: AFR) has been rated a speculative buy by Helmsec Global Securities, based on the company’s large near-surface Sese coal project.

In September, results from a Concept Study confirmed the technical and commercial viability of the project, with robust cash flows and strong operating margins a possibility.

A 2.7 billion tonne coal resource has been identified at Sese, with a  Feasibility Study for initial development underway.

The following is an excerpt from Helmsec’s report.

AFR has a massive, near surface coal resource sitting in the centre of a chronic regional power shortage. Development of a coal mine and power station at Sese is a logical supply response to the unresolved Southern African power shortage.

A power station is one crucial leg of AFR’s four stage plans for Sese. A mine and wash plant producing coal for regional industry will come first to establish capability and key relationships. AFR is confident the regional industrial demand can absorb 1 Mtpa from Sese. From there negotiations with governments, IPPs and financiers will be made easier.

AFR’s ultimate goal for Sese is the Indian thermal coal market, which requires a new rail and port link. Extraordinary volumes and margins for coal exporters beckon, with finance standing in the way of a green light for one of two rail and port proposals.

Sese is valued here at $1.00 per African Energy share, based on early indications of future cash flows, after discounts for extensive market, estimation and finance risks.

The supply response to the power shortages in southern Africa is likely to continue to disappoint unless relatively easy options like Sese are pursued. AFR is a play on Southern Africa’s continued development, to the mining boom that is currently driving economic growth in the region, and to India’s relentless electrification drive. Helmsec reiterates a Speculative Buy recommendation.

KEY POINTS

- AFR’s 2.7 billion tonne coal resource at Sese consists of a single seam up to 26 metres thick, all of it within 80 metres of the surface. The Sese resource has been defined over 30 km of strike and up to 10 km down dip.

-  In the last few years power shortages in southern Africa and the emergence of India as a major importer of thermal coal have put Botswana in position to develop its massive coal resources for the first time. Sese is potentially the largest coal project in Botswana and also potentially the 2nd lowest unit cost coal project in Africa.

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

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

- A compelling case can be made for the establishment of an Independent Power Project at Sese, supplying base load electricity to regional markets.

- The Botswana government, in partnership with neighbouring states, various private interests and development banks, has advanced two rail and port projects that would support +30 Mtpa coal exported from Sese. Botswana coal is likely to find ready markets in India.