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JANUARY 2020 ISSUE 6

BOTSWANA COMMODITIES MARKET

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Page of Contents Introduction

2

Developing a Commodity Market

3

The Rise of Incubation Funds

7

Actuarial Insights on Pension Funds

9

Is Coal Against the Wall?

13

The Gold Rush Against Volatility

18

ESG InsightsÂ

21

Regulation & Policy

24

Youth Climate Change Activists

26

Out & About

29

Outlook

30


E m e r g e n c e o f L o c a l C o m m o d i t i es M a r k e t

As the new dawn of 2020 falls upon us we cast our eyes unto the horizon in an effort to predict with excitement, certainty and renewed hope the outcome of the new year in the local and regional markets. Climate change had adverse impact on the agriculture sector both regionally and internationally in 2019, with the only local listed agriculture company Seed Co with a market capitalization of US$105.15 Million reporting subdued results for their half yearly results for 30 June 2019 citing as always the impact of unfavourable climate conditions. The late rains of 2019 brought new tides and blessings to the water intensive sector, enabling those who had given up to pick up their tools in preparation for a handsome harvest in H1 2020. The perennial trade war between USA and China has opened opportunities for alternative markets for emerging and frontier countries to position themselves as secondary markets. Landlocked countries such as Botswana are on a crusade to revive the agriculture sector in order to seize opportunities and close the gaps emanating from the trade war.

I n t r o d u c t i o n | Pa g e 2

Hence, the prediction that 2020 will be declared the renaissance year for the agriculture sector. 2020 will be the year of revival as the agriculture sector returns to its hay days of contributing more than 5% to the national gross domestic product. In our January 2020 issue  our Research & Analytics Unit will paint the ideal picture of the local commodities market. The main focus will be on the agriculture sector, the role that institutional investors play in amalgamating this fragmented sector. We will also provide insights on other non-agricultural commodities; precious metals and the energy sector.  We believe the commodities market which is non-existent holds the key to economic diversification from minerals, primarily diamonds. The local financial content has been centered around fixed income and equities as the main financial instruments.  Agriculture will bring diversification to the financial offering and familiarity to more structured products like derivatives to hedge against downside risk.


I n s t i t u t i o n a l I n v es t o rs R o l e

LCM Capital Research & Analytics Unit attended the Botswana Pension Society Trustee Breaksfast Seminar on 4 December 2019 in Gaborone where the Pension Fund Rule 2 (PFR2) was unpacked, risks and challenges addressed and demystified by the two leading institutional investors in terms of asset under management and the Non-Bank Financial Regulatory Authority (NBFIRA) providing invaluable regulatory insights in a room full of Botswana Pensions Society Members, Trustees, Asset Managers and Investment Managers and Advisers. To those unfamiliar with PFR2, this is a retirement funds regulation that promotes prudence, good corporate governance and robust risk management that ensures capital preservation of retirement funds while providing attractive alpha.  In addition to the fiduciary care of those entrusted with retirement funds, there is a regulatory requirement that set the limit to the offshore/onshore asset allocation.

D e v e l o p i n g a C o m m o d i t y M a r k e t | Pa g e 3

PFR2 stipulates that retirement funds should invest not less than 30% of their assets locally and invest up to 70% of their assets in offshore markets. This is in an effort to drive local capacitation, grow emerging local asset management companies and ensure a satisfactory rate of skills trasfer to upcoming young finance professionals.   Since 2017, there has been a gradual increase in onshore investments as highlighted in the recently released NBFIRA 31 December 2018 audited financial statements.  The offshore/onshore asset split at 31 December 2018 was 59/41 compared to a 65/35 split the prior year. According to the annual accounts, the 6% increase in onshore allocation was driven by the positive performance of the local bond market, which was mainly driven by government bonds yields adjustments and favourable monetary policy rates.


D e v e l o p i n g a C o m m o d i t y M a r k e t | Pa g e 4

I n s t i t u t i o n a l I n v es t o rs R o l e

Equities continue to dominate other asset classes holding up at 67% of the overall asset allocation with a total value of P53 billion, followed by bonds at 18%. Alternative investments continue to trail behind at 4% inclusive of Botswana property. Retirement funds play a significant role in the development and diversification of the Botswana economy, contributing 42% to the GDP as at 31 December 2018. The turbulence felt by equities globally resulted in a 3.7% AUM shed from P82 billion to P79 billion during the period under review. With the bulk of the investment allocated to equities, this represents high concentration risk for retirement funds which are susceptible to any hiccups in the equity markets. Equity volatility will continue to be felt in 2020 as macro economic risk factors continue to playout into the new year and uncertainty around trade wars and the imminent Brexit persist. This uncertainty on global markets will exert pressure on fund managers to reevaluate their strategic asset allocation in an effort to cushion against volatility in the local and offshore equity markets and to asses other asset classes that have traditionally been overlooked.   Retirement Funds Asset Allocation 31 December 2018

Source: NBFIRA

Local Equities

21.0%

Offshore Equities

47.0%

ETFs

1.0%

Bonds

18.0%

Cash

9.0%

Alternative

4.0%

With agriculture taking center stage and prominence in the local economic activity, strategic focus should be around how to incorporate and integrate agricultural commodities in the local capital markets as a way to boost diversification and shield retirement funds from global economic and political shocks. A sustainable solution lies in the development of a structured commodities market that will provide hedging solutions needed to mitigate against cyclical risks especially borne by climate change in the agricultural sector.

 In the chase for an attractive alpha both locally and offshore by institutional investors and fund managers the pendulum should swing towards alternative investments. The billions of pula lost as a result of local listed companies experiencing tougher and challenging economic market, calls for an outside the box mind shift and faith and courage to step into the unknown in an effort to diversify the plain vanilla offering that is no longer fulfiling the appetite of investors. Skills and talent of those with alternative investments experience remain a constraint in developing a commodities market. However, there are emerging companies with alternative investments expertise who should work with institutional investors to make this a reality.


I n s t i t u t i o n a l I n v es t o rs R o l e

D e v e l o p i n g a C o m m o d i t y M a r k e t | Pa g e 5

Cocoa Market   $2.1 Billion @ CAGR of 3.1%    

Chocalate Market $131.7 Billion @ CAGR of 2.3% CC1:COM Cocoa Generic 1st 'CC' Future Monthly Price $2,600 $2,550 $2,500 $2,450 $2,400 $2,350 $2,300 $2,250 $2,200 $2,150 Jan Source: Bloomberg

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec


I n s t i t u t i o n a l I n v es t o rs R o l e

D e v e l o p i n g a C o m m o d i t y M a r k e t | Pa g e 6

Most Traded Commodities Between U.S and China

Soya Beans US$12.46B Market ValueÂ

Copper US$1.6B Market ValueÂ


J u n i o r M i n e rs

LCM Capital Research & Analytics Unit attended the annual Botswana Resource Sector Conference where the Botswana Geoscience Institute announced that there were 1,000 mining prospective licenses issued and only 5 active junior explorers on the ground and contributing to research and development as required by the institute. This alarming statistic of less than 1% active explorers indicate the many hurdles that prospective license holders face in the capital intensive sector and why it is still a long walk to actualization for many local explorers who would want to venture in this space.  The million dollar question is how can we transform the 99% dormant licenses to action?

T h e R i s e o f I n c u ba t i o n F u n d s | Pa g e 7

DURING THE YEAR 2019,

99% LICENSES DORMANT

The inherent risks and deep pockets required have left many prospective Citizen Owned Companies with licenses collecting dust in drawers and not paying any dividends to the companies, industry and economy.

Every year hundreds of Mining Engineering and Environmental Science Graduates are purged to the unemployment line after enduring intensive and demanding 4 year programme due to the lack of new active junior miners. The problem is even exacerbated by the 4th industrial revolution technology i.e the use of drones and automated machinery that requires limited human resource. Mining graduates at home and abroad are then forced to upskill or pursue other disciplines in a dire need to gain experience in an already job challenged environment.


J u n i o r M i n e rs

As the current administration gears towards a job stimulus agenda through the Ministry of Trade and Industry Middle Class Strategy, focus should be on creating sustainable solutions that bring together financiers and investors in the ecosystem for blended finance solutions and risk sharing. Institutional investors remain the largest investors in the Botswana economy with Asset Under Management of less than P100 Billion which is approximately close to US$10 Billion Dollars. The disposition of institutional investor is to invest for the long term with  a much lower risk appetite compared to other traditional sources. With the green economy in full swing and demand for non-diamond resources like copper, gold and manganese on the rise, the attractive green economy might swing institutional investors to consider early investment in junior miners.

T h e R i s e o f I n c u ba t i o n F u n d s | Pa g e 8

Post 53 years of independence we are yet to see local citizen owned junior mines. The success of the Pension Fund incubation programme should be used as a benchmark for other industries that are still evolving and developing at a snail pace. Incubation funds when done right with the right structures can indeed provide solutions needed to awaken dormant players due to the lack of funding.  So how can this be done? The initial step will be to set up an incubation fund which will enable different players to invest into the fund. Alternative models of funding should also be explored, for instance intial coin offering thorugh blockchain platforms to raise funds. This model has been used in South Africa to support rising black junior miners.  There are also global angel investors with a high risk appetite that can particpate in junior mines.


B e y o n d B o r d e rs

A c t u a r i a l I n s i g h ts o n P e n s i o n F u n d s | Pa g e 9

Refilwe Modise: Actuarial Science Analyst at The Pension Protection Fund and University of Kent Student

By : Refilwe Modise My name is Refilwe Modise and I am an Actuarial Science student currently completing a year in industry at The Pension Protection Fund (PPF). The mandate of this company is as its name suggests, to protect people’s pensions. How, you may ask. Well, when pension schemes and companies go insolvent, it poses a risk to the pensions of its employees as so many other people have to be paid first upon winding up. Consequently, the PPF was set up as an agent of the government to act as insurance to these pension schemes through requiring schemes to pay levies that will ensure that employees will receive their pensions if ever the case of insolvency.    The set-up of the PPF as an indirect insurance company (for lack of a better word), in the pensions industry means I have gained an understanding of the inner workings of both pensions and insurance. I have completed 6 months of my placement where I have been in the Risk and Modelling team and now recently switched to the Financial Management (FM) team, meaning a variation of learning has and is taking place. In the risk team, I did some modelling and coding, but mainly, I ran the quarterly baseline model, a process done to assess the probability of success of achieving our goal of being 110% fully funded by 2030. In my current role in FM, the work is more diverse. 

Looking ahead towards 2020, the main issues affecting the PPF and pensions will be legislative changes on cases such as the Bauer and Hampshire cases that may mean that PPF will have to switch from paying capped pensions to at most a 100% of pensions, causing quite significant financial changes to the firm. There is a gradual switch to defined contributions (DC) schemes away from defined benefit (DB) schemes as these are cheaper to run as underfunded DB schemes looking to reduce their risks. DB schemes however offer better benefits to employees, hence a constant resistance to this switch which can be seen for example in regular strikes to fight the proposed switch to DC schemes by universities.

Important changes within pensions include: Buyouts – a growing number of pension schemes are buying out through purchase of annuities from insurance firms in a bid to transfer risk. An insurance policy is issued to individual members such that schemes are able to wind up or run without financial pressure as their risk is diversified. It has gained popularity and we expect it to continue on in this manner, with DB schemes expected to have a clear ‘end destination’ in sight, making buyouts quite an incentive. A report published on the 26th of March 2019 by Lane Clark & Peacock stated that the pension buyout market was entering ‘a new phase’ that could see its well from £5bn to £300bn over the next 10 years.  


B e yo n d B o r d e rs

A c tu a r i a l I n s i g h ts o n P e n s i o n F u n d s | Pa g e 1 0

"Pension Buyout  Market to Grow from £5Bn  to  £300Bn over the next 10 years "

This hence also offers a huge opportunity for insurance companies as the market has entered a buyout boom. Growth of Superfunds– Also known as consolidators, these aim to collect together several corporate pension schemes and run them more cheaply and efficiently than the companies that set them up. The companies that set the schemes up which are known as sponsors will pass all the assets and liabilities in the scheme on to the superfund. The sponsors may still have to make a payment to allow for the deal to take place, as well as investors who may also pour in capital into the fund. One thing to note though is that they provide competition to insurance companies which as previously mentioned take on schemes via buyouts.

Solvency II insurance capital rules make insurers more attractive as it means that they have to hold a lot of capital to back the pension promises, meaning much lower chances of going insolvent. Superfunds are set to have different set of rules and will likely hold less capital than the insurers. That means that companies will be able to pass schemes on to the superfunds more cheaply than a buy-in or buyout would cost, posing a question for schemes on whether they take the cheaper route or uphold protecting pensions by minimising risks of insolvency. The first two superfunds — ClaraPensions and The Pension SuperFund — say they are in talks with companies over their first deals, although the consultation on exactly how they will work has only just been launched. Superfunds are definitely a wave to watch out for in 2020 and coming years as they may shape how pensions will work going forward.


B e y o n d B o r d e rs

A c t u a r i a l I n s i g h ts o n P e n s i o n F u n d s | Pa g e 1 1

Brexit – it is a fair point to make that the impacts of Brexit are wide spread and far stretching. It is consequently not surprising to see Brexit posing an impact within the pensions industry. Brexit is expected to cause significant economic uncertainty in the future which thus causes volatility within markets. In the first instance, volatility will affect the investment performance of pension pots as most UK schemes hold a large proportion of their assets within the UK economy. This could very likely cause financial strain on DB schemes since when financial markets suffer, any deficit in defined benefit schemes could also increase. Funding deficits mean a scheme’s liabilities outweigh the value of its investments and hence this could cause significant financial strains for the schemes. Worst case scenarios may mean schemes go insolvent and a transfer into the PPF (assuming membership) could save pensions, but we also need to remember that they are capped and hence some pensions will still be lost. DC schemes pay out pensions dependent on the performance of the pot within the investment arena. In the DC scheme scenario, this poses a risk to pensioners as it would mean they may receive lower pensions depending on how long lasting the negative effects of Brexit are, if at all the UK does indeed suffer from Brexit in future.


B e y o n d B o r d e rs

A c t u a r i a l I n s i g h ts o n P e n s i o n F u n d s | Pa g e 1 2

"On the other hand, it is reported that if no-deal was the outcome, it could mean that DB pension pot values are likely to be significantly higher than average property values. In times of greater uncertainty when interest rates fall, DB pensions increase in value. Conversely property prices are more likely to fall. How Brexit will play out and affect the industry, well, I guess we’ll just have to wait and see".

Refilwe Modise- Actuarial Analyst       


E n e r g y M a r k e ts

Lindiwe Mafavuneh Founder & CEO LCM Capital

I s C o a l A g a i n s t t h e W a l l ? | Pa g e 1 3

2019 was not a good year for coal as more calls to action were expressed from all corners of the world in a dire effort to reduce the impact of climate change. The world was captivated by a sixteen year old Swedish environmental activist and 2019 Time Magazine Person of the Year Greta Thunberg's bravery and boldness as she inspired and influenced global leaders and citizens to take proactive action in taking care of the environment for future generations. Her call to action inspired young global activists in Botswana under the Global Change Gaborone hub initiative who dedicated a few minutes to show her infamous video clip at the 3rd International Research Conference under the theme of climate change and the built environment to dare the youth to lead through innovative volunteerism in order to sensitize other young people to be at the fore front of the climate change debate. Climate change has been a silent topic over the years in Botswana but in 2019 it became a buzzword that could not be ignored  and was trending on social media and on local  news.  The fact that the country was experiencing severe drought and low rainfall reinforced the sentiments of Greta and other environmental activists whose message had fallen on deaf ears over the years to take action. For a country that is highly dependent on thermal coal for 99% of  power generation, abandoning coal remains a far fetched dream that will take decades for the country to wean itself from fossil fuels. However, the international forces and the power of those with the deep pockets continues to be felt as foreign direct investment inflow for coal projects continue to dwindle. Global funds with $11 trillion assets under management continue to divest from coal projects as Environmental, Social and Governance principles take prominence and form an integral part of investment decision making in an effort to be better custodians of the environment and to promote sustainable investing. The largest development bank in Africa, the African Development Bank also pulled out of a 1,050 megawatt coal plant in eastern Kenya to focus more on renewable energy projects and also to reduce stranded assets on their balance sheet.


I s C o a l A g a i n s t t h e W a l l ? | Pa g e 1 4

E n e r g y M a r k e ts

Asia Growing Appetite for Coal Country

Coal Capacity 2010 MW

Coal Capacity 2018 MW

% Change

China

630,238

972,514

+54%

India

100,037

220,670

+121%

Other Asia

127,515

191,088

+50%

Source: Visual Capitalist

The risk of investing in an asset that will no longer be commercially viable in the forceable future is what is driving western banks and global multinationals from divesting from coal. It is evident to see that demand for coal is dying a slow death in developed countries, however Asian countries appetite for coal has been growing over the years as shown on the above table. Between 2010 and 2018 India consumption of coal has grown by 121% followed by China at 54%. This high demand for coal by Asian countries presents alternative market for countries that are still holding on to the "stranded asset". Botswana alone has 212 billion tonnes of coal that it has been struggling to capitalize and commercialize. The three listed coal junior miners with a market capitilization of US$108 Million on the Botswana Stock Exchange Limited with stock price trading between P0.80- P1.10 had major developments during the year ended 2019 that impacted their share price.  Minergy with backing from a development finance institution and institutional investors for the export of coal saw its share price appreciate by 3.77%. In Q4 the only privately owned coal miner announced the delay for dual listing on the London Junior AIM Stock Exchange citing 37% decline in coal prices between March and September 2019, looming Bexit and failure to secure off take agreemets in the Southern African market as the drivers of the decision.


INTERESTING FACT: Botswana has Approx. 212 Billion Tonnes of Coal


E n e r g y M a r k e ts

I s C o a l A g a i n s t t h e W a l l ? | Pa g e 1 5

Despite the many challenges that the coal industry continue to face there are some optimistic entrepreneurs that believe the asset will be around until 2050 and continue to seize divestment opportunities to be owners of coal mines especially in South Africa. According to the Guide to Business and Investment in Mpumalanga Province, Mpumalanga accounts for 83% of South Africa's coal production and is the third largest coal exporting region in the world. Over the past year the province has attracted investment into the coal mining sector. Arnot coal mine became South Africa's first majority worker-owned mine after Exxaro Coal Mpumalanga's 50% stake transfer to mineworkers at no cost.  Another coal deal was the Nkomati Anthracite, which was revived after an investment from Unicorn Capital Partners with up to 400 jobs created in the past two years.

Exxaro has committed R3.8 Billion to the Belfast project, which will create 1,160 jobs and R39 million GDP impact 


E n e r g y M a r k e ts

I s C o a l A g a i n s t t h e W a l l ? | Pa g e 1 6

South African Export Coal Price US$ Per Metric Ton 95 90 85 80 75 70 65 60 55 Jan

Feb

Source: Index Mundi

Mar

Apr

May

Jun

Monthly Price

Jul

Aug

Sep

Oct

Nov

According to Index Mundi the export coal price decreased by 19% between January to November 2019.

2020 Outlook Brent crude is showing signs of recovery in December trading at $68.03 usd/bbl aligned with the South African export price positive trend line since the lowest August export trade price of $60.43 per metric ton. The coal market remain susceptible to geopolitical risks,  trade wars and climate change narrative that is calling for zero carbon strategies. Renewable energy growing appeal and low cost to capital will continue to attract investment from the $11 trillion Global Funds and multinational corporations. The troubles of South Africa main power utility Eskom will force neighbouring countries like Botswana to look for alternative ways to augment their energy supply and enhace their energy security. The high demand for coal by Asian countries will drive coal thermal projects in Africa, coal export. and foreign direct investment However, the cost of export of coal outside the Southern African market to the Asian market remains execessive due to the fragmented logistics and underdeveloped infrastructure and rail. We predict that oil and gas projects will continue to attract attention from investors.  Renewable energy primarily solar energy will continue to back coal against the wall in 2020 as the world move towards zero carbon emissions by 2030. 


P r e c i o u s M e ta l s

T h e G o l d Ru s h A g a i n s t M a r k e t V o l a t i l i t y | Pa g e 1 7

Late December 2019 CNBC Africa aired a recap of an interview with the world renowned author and entrepreneur Robert Kiyosaki on the World Economic Forum: Lessons on Financial Education and relevance to people. Unconventional insights from the candid interview on where investors should invest their money in the chase for an attractive alpha were shared. Robert Kiyosaki recommended investing in gold and silver as a sure bet to achieving attractive returns cognizant of turbulent global equity markets and overpriced stocks. Fast forward to the 1st week of 2020 the global community is bombarded with climate change crisis, the inferno that is causing havoc in Australia and the killing of Iran's elite military official which has caused volatility in oil prices. Based on the geopolitical risks, trade wars and climate change is gold the best bet and hedging asset?

According to Goldman Sachs Commodity strategists Gold is a stronger hedge than oil for investors seeking safe returns amid the escalation of tensions between the U.S. and Iran. The strategists predict that fears of Iranian retaliation on oil assets led oil prices to their highest levels since the assault on two Saudi Arabian production facilities last September 2019. But absent a major supply disruption, Goldman projected that the risks are skewed to the downside in the coming weeks, with a fair value of $63 per barrel. Gold has rallied by $100 over the past month to hit $1,550 per troy ounce (toz), heading towards Goldman’s three-month target of $1,600/toz, boosted by a weaker dollar, rising inflation expectations and still weak economic growth. Spot gold was trading up by around 1.6% on 6 January 2020 at $1,576, having earlier hit a seven-year high of $1,579.72 (CNBC Africa).


P r e c i o u s M e ta l s

T h e G o l d Ru s h A g a i n s t M a r k e t V o l a t i l i t y | Pa g e 1 8

2019 Precious Metals ETF Flows Add short body of text By Type in US$ (BN)   0.7% 0.6% 0.1% 2.1% 8.3%         88.2%       Gold 130.92 Silver   Platinum 3.05 Palladium   Precious Metals Basket 0.94 Other

12.31 1.08 0.12

Source: Bloomberg Commodity Outlook

According to Bloomberg Commodity Report November 2019 edition the annual ETF Asset Under Management (AUM) for commodities was US$173.15 Billion with precious metals accounting for 85%. Further drill down to the asset allocation shows that gold is the most sort after precious metal as shown on the above chart, leading the pack with an allocation of US$130.92 Billion representing 88.2% of the overall precious metals AUM.The BCOM 3 Months implied volatility for Gold was 12.2% compared to crude oil which had a volatility of 31.9%, showing  gold stability against price fluctuations compared to oil. This narrative will continue to play out in Q1 of 2020 as geopolitical risks between the USA and Iran continue to heighten  causing oil volatility to increase.  How will these macroeconomic factors affect oil dependent countries like Botswana that often find themselves on the reactive side of the commodity markets? Will more investments be allocated towards gold in an effort to cushion against oil fluctuations that are projected to occur in the first half of 2020?

The good news is that Botswana is also a gold producing country, although it is well known for being the world second largest producer of diamonds. With gold prices predicted to continue thier positive trajectory amidst the geopolitical tussles, Botswana gold mine , Mupane Gold Mine might find its way to the top of the investors list. Mupane Gold mine is owned by Galane Gold, a greenstone gold producer with extensive experience operating challeneging mining operations and onwers of two assets, the Botswana mine and Galaxy Gold located in South Africa.  Mupane mine has produced over 700,000 ounces with annual production forecast of over 30,000 ounce per year with a forecast of approximately $1,050 an ounce. Galaxy gold  has historically produced over 1 million ounces  and restarted  it's fully funded plan  early 2019 to take production up to 60,000 per annum at an All-in Sustaining Cost (AISC) of $700 per ounce.  


P r e c i o u s M e ta l s

T h e G o l d Ru s h A g a i n s t M a r k e t V o l a t i l i t y | Pa g e 1 9

10 Year Commodity Returns Gold, Oil and Coal 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% 2010 Source: Visual Capitalist

2011

2012

2013

Gold

2014

2015

Oil

2016

2017

2018

2019

Coal

At the end of the decade which commodity is the fairer amongst all? According to the Visual Capitalist Analyst the broad commodity market finished up 17.6%with performances of individual commodities all over the map. The best performing commodity in 2019 was palladium for the third straight year at 54.2% return. Gold was the come back kid in 2019 recovering from a 2018 1.58% loss to a healthy return of 18.31% in 2019. Oil also showed steady recovery in 2019 closing the year with a return of 34.46%, outpeforming both gold and coal. Coal on the other hand continued its downward spiral in the negative zone finishing the decade with a loss of 18.02%.


P r e c i o u s M e ta l s

T h e G o l d Ru s h A g a i n s t M a r k e t V o l a t i l i t y | Pa g e 2 0

BSEL NEWGOLD ETF

p161.25 9% APPRECIATION SINCE 8 JAN 2020 


2 0 2 0 Ou t l o o k

2019 was a game changer for Environmental, Social and Governance (ESG) principles as Botswana local fund managers endorsed and embraced ESG as critical and crucial to their day to day investment decision making process. In Q4 of 2019 Kgori Capital and other local Fund Managers sponsored the Responsible Investing Seminar held in Gaborone to raise awereness of best practices and standards as well as to promote sustainable investing within the finance fratenity. Local fund managers now understand the importance of environment stewardship in the pursuit of attractive returns for their clients.  It is a well known fact that mining activity causes soil degradation that requires remediation to correct soil pH to the normal state. As Botswana embarks on a green energy revolution and  plans to be the hub for green energy technology there will be an increase in mining activity and exploration in communities with these sort after precious metals. How do junior exploration companies manage and control the risk of destroying the environment? Experienced mining companies have enviromental charters through  corporate social responsibility (CSR) initiatives that continuoulsy strive to have a lasting impact in the development of the communities they operate in. Last year Debswana was very active in community outreach and showcased key intiatives in health and energy via social media platforms. Since the discovery of diamonds and mining of these precious stones for the past 50 years, one cannot imagine the damage to the soil over time. The good news is that there are solutions to reverse soil erosion by incorporating biomass components to the soil. 

E S G I n s i g h ts | Pa g e 2 1

A scientific research paper by Chinese research team; Amjad Ali, Di Guo, Yue Zhang, Xining Sun, Shuncheng Jiang, Zhanyu Guo, Hui Huang, Wen Liang, Ronghua Li and  Zengqiang Zhang titled "Using bamboo biochar with compost for the stabilization and phytotoxicity reduction of heavy metals in minecontaminated soils of China", provides insights that can be used to reduce the effects of soil erosion in Botswana. According to the scientific research paper the rapidly growing population, industrial progress and technical innovations have increased the concentration of heavy metals (HMs) around the globe. HMs pollution can be hazardous to soil, plant and human health through the soil–crop–food chain. The major sources of HMs are textile, energy and power, mining and smelting, coal combustion for energy purposes in large industries, agricultural practices (fertilizers and pesticides) and municipal wastes.  Biochar is a carbon-rich biological charcoal, produced under slow pyrolysis (limited oxygen) of organic residues (crop straw, animal litter, wood chips) at a high temperature to improve soil fertility and plant productivity by improving the soil physicochemical and biological properties. Biochar has a high surface area, nutrient and water holding capacity, resists decomposition in soil and retains specific effects for a longer time. It has alkaline pH and enhanced carbon sequestration, making it an efficient adsorbent for soil HMs, mitigating climate changes by reducing CH4 emission and reducing environmental pollution.


2 0 2 0 Ou t l o o k

E S G I n s i g h ts | Pa g e 2 2

"The stabilization of HMs in polluted soil is an appealing research area and promising technology for restoring degraded soils and reducing phytotoxicity. However, the remediation process of mining sites is inuenced by the presence of a variety of HMs and soil conditions" Â


2 0 2 0 Ou t l o o k

E S G I n s i g h ts | Pa g e 2 3

The most cited significant constraint for most fund managers in the adoption of ESG principles is the lack of reliable and consistent data. This problem is amplified when it comes to the quantification of biomass usage and activity in Botswana. Hence, the importance of benchmarking with countries that have succesfully integrated ESG in their investment processes and systems. Biochar holds key to unlocking value not only in mining activities but in the agriculture sector. As Botswana continues to implement strategies of increasing food security and reducing the food import bill, concerted efforts will be directed towards solutions that will result in high production yields and the reduction of the effects of climate change. ESG will continue to be a focul point in 2020 as activities in mining take momentum and economic diversification through non-mining sectors such as agriculture and hospitality and tourism takes shape.


2 0 2 0 R e n ew ab l e E n e r g y P o l i c y V i s i o n

According to the Bloomberg Renewable Energy Outlook report, clean energy investments flourish in countries with well constructed enabling environment. The definition of an enabling environment in renewable energy context means markets with liberalized power markets and policies supporting renewables that are clear, consistent and sufficiently funded. It is also highly recommended that renewable energy targets must be accompanied by more specific policies that ensure stakeholders have suffcient incentives to act. For example Botswana government aims to add 30% of renewable energy capacity to the national energy mix by 2030. On the Bloomberg report, India has one of the most ambitious renewable energy targets in the world and aims to reach 175 GW clean energy capacity by 2022 and 500 GW by 2030.  For countries that have historically shied away from investing in renewable energy projects the most effective ways to accelerate the crossover between clean energy and fossil fuel-fired plants are listed below.  Key Green Energy Growth Drivers Lowering cost of capital: The cost of finance  for renewable energy projects for wind and PV projects in 2017-18 in emerging markets ranged from 4.4%-15% in comparison to OECD countries with weighted average cost of capiral between 2.0%-7.1%.  Lowering the cost of capital will be a great incentive for investors to act. Subsidies & tax incentives-remain the most significant drivers in reducing the cost of investment for renewables and also in attracting investors to particpate in projects. Unbundled power market-open markets to private sector participation continue to be the most prefered destinations for renewables projects over the past five years. Botswana is gradually transitioning to an unbunbled power market were power generation will be managed separetely from power transmission and distribution.

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2018 CLEAN ENERGY FDI

$24.4bn 9% GROWTH IN INVESTMENT   2018 New Build Clean Energy Asset Finance   Emerging Markets by Technology ($BN)   $80   $60   $40   $20 Add short body of text $0   Solar Wind Biomass Geothermal   & Waste   Investment Source:Bloomberg

Strong clean energy policies: the renewable energy outlook reports assert that transparent policies are fundamental to facilitating renewable energy investment flows to emerging markets. Auctions were the most preferred choice in securing power contracts in nearly half of the emerging markets surveyed. It is reported that over the past ten years, 13.3 GW of clean energy capacity in power purchasing agreements were awarded through competitive auctions. One forth of this was contracted in 2018 calendar.    Will 2020 be the year that the green energy projects are realized? Evidence on the ground suggest the vision will be realized this year, but first the policy has to become a reality.


2 0 2 0 R e n ew ab l e E n e r g y P o l i c y V i s i o n

Impact investors are holding on to the edges of their seats in 2020 in anticipation of the enactment of climate change policy and Botswana's first renewable energy programme. Many are wondering if 2020 is the year that will spearhead the green energy agenda in Botswana. The grassroots climate change campaigns that were prevalent in 2019 received tangible results as the target audience being policy makers, change agents and society at large were out and about debating and exchanging ideas on mitigating climate change. The inferno that is ravaging through Australia killing and destroying anything that is on it's trail is a classical case of why every nation should take a proactive role in the climate change agenda. Action should not be left to policy makers but should be inspired and motivated from an individual level starting with the youth.

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Precedent to a successful green energy strategy and policy is full buy-in and collaboration from policy makers who have the political muscle to ensure the policy receives the green light in parliament. In order to receive buy-in from those with the political muscle and influence, there needs to be reasonable assurance accorded to those with vested interest in coal not to perceive green energy as a threat to their industry but a complement to the establishment. The change agent should be driven by the need to augment the national energy mix, reduce the import bill and most importantly create new industries that will generate jobs for the unemployed educated youth of Botswana. The debate should graduate from coal versus renewable energy and a new vision should be adopted that is motivated by the need and desire to solve unemployment and climate change.


The Blue Economy

Being born in a landlocked country has never deterred me from exploring beyond my border. In fact it intensified the excitement of self discovery and exploration of different cultures, races and religions. This quest for knowledge and willingness to discover what was there beyond Gaborone Dam which I often visited as a child, resulted in me enrolling for an Oceanography course during my time at Rider University in the United States of America in an effort to find out more about the ocean. The first time I saw the blue ocean was in Miami,during my early college years at the University of Miami. It was a marvel to see the vast blue atlantic ocean, sea shells, crabs and jelly fish which we were warned about its terrible sting. The State of Florida is where majority of Batswana students along the coast started acquiring the taste of sea food and allowing our taste buds to adjust to this new addition to our food pallete. Post University I have had the priviledge to visit more coastal cities and towns in Africa and abroad, from Miami to the Jersey Shores to Malahide Beach, the French Riveira, a small Spanish coastal town of La Pineda to Cape Town and just recently Durban. I have even lived closed to a decade on the Emerald Isle, Ireland. To every coastal city that I have visited I have always been astonished by the level of activities, whether recreational or business and the impact to the economic development of those cities. All these activities now have a label; the blue economy.  According to the World Bank definition the blue economy is sustainable use of ocean resources for economic growth, improved livelihoods and jobs, and ocean ecosystem health.

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80%

of international goods are transported by sea.

The many activities that are part of the blue economy as explained by the World Bank include; Renewable Energy: sustainable marine energy. Fisheries: marine fisheries which contribute more than US$270 billion annually to global GDP. Maritime transport: over 80% of international goods are transported by sea. Tourism: it is estimated that costal, least developed countries and small island developing states receive more than 41 Million visitors per year. Climate Change-impact of climate change in ocean current patterns and the importance of oceans in sinking carbon to help mitigate climate change. Waste Management: 80% of litter in the ocean is from land based sources. Better waste management on land can help oceans recover. During my January 2020 visit to uShaka Marine

World which is situated on Durban’s Golden Mile, in South Africa, the young and old visitors from near and far were sensitized about good waste management practices for the health of the ocean and marine life during a live dolphin show which was fully attended. Re-Use, Reduce and Recycle was the message echoed throughout which I believe will encourage visitors to be proactive about taking better care of the environment.


The Blue Economy

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"Waste management regulation and policies that reinforce good waste management practices will accelerate adoption rate at an individual level" Lindiwe Mafavuneh, LCM Capital


The Blue Economy

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Can landlocked countries participate in the blue economy? Of course, more landlocked countries are strategically building alliances with countries with access to the port for easy access to regional and international markets. Landlocked countries can also tap into their own "brown economy", which is the utilization of resources in their dams and rivers for fisheries and recreational activities. More emphasis has been on blue economy but there are opportunities in using rivers for water sports and other activities that can attract tourism in those areas.


D i a m o n d C o n f e r e n c e 2 0 1 9 i n P i c t u r es

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Source : DeBeers Group


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Future Trends

Botswana RE Target 30% BY 2030

Lindiwe Mafavuneh Founder & CEO LCM Capital Research & Analytics With the clock ticking towards 2030 United Nations Sustainable Development Goals (SDGs), can Botswana catch up to her ambitious goal of adding 30% green energy capacity to the national grid? With a decade now left to reach the finish line focus now in 2020 will be on the approval and implementation of the renewable energy policy which is yet to be tabled in parliament. The success of the policy will boost investor confidence who are eager and willing to invest in Botswana green energy projects. The tumultuous geopolitical tension between the USA and Iran is already being reflected in crude oil prices and with commodity experts predicting continued volatility in the coming months.

Since Botswana is 100% dependent on oil imports any change in price will be felt by the downstream energy market, which will tickle down to the end consumer. The annual inflation rate in November 2019 as reported by Statistics Botswana was 2..19%, a steady drop of 0.3% from October 2019 of 2.4%. Consumer Price Index (CPI) on the other hand was 102 in November, showing a slight increase of 0.1% from the prior month, while electricity, gas and other fuels 12 months CPI change was 0.3%, reflecting stable prices in the electricity, gas and other fuels category in 2019.  There has been a slight improvement of 16% in local electricity generation from the 732MWH coal thermal plants. However, imported electricity volume continues to spike, with Q3 2019 report showing a 119.7% increase from 229,427MWH in Q3 2018 to 504,155MWH.

We expect to see a continued downward trend in imported electricity as improvements to the main power plant continues and curtailment of imports is continued with expectation of adding renewable energy to the national grid in 2020. Energy is not the only commodity that is on the watchlist of many fund managers. Fund managers also have a keen interest on agriculture commodities as the last two months the country has been showered with plenty of rainfall. It will be interesting to see if 2020 will be a good year for the only listed agriculture company Seed Co, after reporting subdued results in 2019 due to climate change. Coal exploration and beneficiation will continue to dominate the local market, with all eyes on Minergy to see if it will secure an off-take sales agreement in 2020. Alternative investments allocation which is below 5% continue to trail behind local equities and bonds maybe it is high time in 2020 that fund managers consider increasing its allocation for attractive returns.


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