Hunting for elephant scale mineral deposits: Paul Johnson on Power Metal’s push into Botswana

LSE:POWJune 2019

IntroductionHere, Power Metal’s Executive Director Paul Johnson talks MiningMaven through the deal and Kalahari Key’s unrivalled local experience before explaining why his firm has committed to pursuing ‘elephant-scale deposits’ at the MFC.

Since restructuring the board of Power Metal Resources (LSE:POW) in February, Paul Johnson and Andrew Bell have made substantial progress in their strategic and operational review of the business portfolio. Having reviewed and bolstered the business, the directors took another step forward in May by signing an acquisition and earn-in deal with a Botswana-focused Kalahari Key Mineral Exploration.

Kalahari Key is the 100%-owner of a southern Botswana-based project called the Molopo Farms Complex (MFC), which is believed to be prospective for nickel and PGM mineralisation. Here, Johnson talks MiningMaven through the details of the deal and Kalahari Key’s unrivalled local experience before explaining why Power Metal has committed to pursuing ‘elephant-scale deposits’ at the MFC.

Should Power Metal exercise its option, which it must do by 31 December 2019, it will hold an effective economic interest in the MFC of c.51%.

What’s more, the option will trigger the formation of an MFC operating committee featuring Bell, now Power Metal’s Chairman, and Kalahari Key’s Roger Key and Andrew Moore. Together, these individuals would manage the allocation of committed spend and management of operational activities at the project. Meanwhile, Johnson, would also join Kalahari Key’s board. Finally, the parties would also form a joint venture to determine strategy, operational management, and corporate structuring.

Under the terms of February’s deal, Power Metal paid a total of $194,810 for an initial 18.26% equity stake in Kalahari Key. The agreement also gives Power Metal Resources the option earn-in to a 40% direct project interest in MFC in exchange for spending $500,000 on ground exploration at MFC by 31 December 2020.

Deal Details

Established by Roger Key, Andrew Moore, Simon Bate, and Rick Bonner in November 2014, Kalahari Key is a mineral exploration and geological company registered in Botswana. The firm undertakes mineral exploration, geochemical and geophysical surveys, geological mapping, and training in the country.

Boardroom Experience

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CEO Roger Key’s distinguished career includes more than four decades spent as a mapping geologist in Africa and several years as a consultant geologist on projects in Botswana, Kenya, Liberia, Mozambique and Tanzania. These roles have seen him take the lead in critical areas like regional stream sediment geochemical mapping and core logging programmes for both exploration companies and national governments. For this work, Key was awarded a distinguished service medal from the Botswana government and made a Member of the Most Excellent Order of the British Empire (MBE) in the UK.

Chairman David Ovadia has also been awarded an MBE for his services to the natural resources sector, having spent his career in various chief executive and chairman roles across both the public and private sectors. His CV includes – but is not limited to - stints as a director at Blenheim, chief executive of junior explorer Avecco, and chairman of South East African Mining. Notable, he was also a director at the British Geological Survey, where he set up and eventually led and chaired a division called International Geoscience Services.

Alongside Key and Ovadia, Kalahari Key counts Andy Moore, the founder director of TSX-V listed Tsodilo Resources (TSX:TSD), as its project manager and Blenheim’s former chairman Christopher Ells as its financial adviser. Elsewhere, board representative Christian Schaffalitzky will be known to many UK investors as the chairman of Kibo Mining (LON:KIBO) and Eurasia Mining (LSE:EUA), and the non-exec director of MetalNRG (LON:MNRG).

Alongside the obvious geological positives attaching to the MFC and the excitement of pursuing elephant scale minerals deposits in the superb Botswana operating environment, we were particularly pleased with the quality and depth offered by the board and advisors of Kalahari Key. Having such experience on board not only de-risks the investment but materially heightens the upside potential through improved chance of discovery and robust understanding of local operating conditions and practices.

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Johnson says Kalahari Key’s experience will be invaluable as the firms ramp up their exploration activities in Botswana.

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Key Personnel

Dr Roger Key Chief executive of Kalahari Key

► 40 years of experience as a mapping geologist throughout Africa

► Consultant geologist on mineral exploration projects in Botswana, Kenya, Liberia, Mozambique and Tanzania

► Received Distinguished Service Medal from the Botswana Government in 1998 for services to the Botswana Geological Survey Department

► Received an MBE in 1999

David Ovadia Chairman of Kalahari Key

► Held various CEO and chairman roles with a proven record of achievement

► Was director at the British Geological Survey, where he set up and led International Geoscience Services

► Has carried out consultancies for the World Bank and several EU projects.

► Awarded MBE in 2010 for services to the natural resources sector

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Kalahari Key’s Molopo Farms Complex project consists of three exploration licences spanning 2,725km2 in southern Botswana. The first two permits – PL310/2016 and PL311/2016 – cover the eastern and central parts of a shear/feeder zone running through the Complex and were awarded to the firm by the country’s government in November 2016. The business then acquired a third licence, based immediately to the south of PL311/2166, early last year.

In the past, exploration at the MFC has focused entirely on identifying platinum mineralisation sharing similarities with that found within the contemporaneous – and highly prolific - Bushveld Complex of South Africa. However, while this work was able to identify limited amounts of platinum within individual drill holes, much of the mineralisation encountered eventually turned out to be laterally discontinuous.

After examining all the geological, geochemical, geophysical, and mineral exploration work undertaken across its permits before 2016, Kalahari Key decided to take a different approach to its predecessors. Indeed, the firm found that the discontinuity encountered by former operators could be explained simply by the fact that the MFC has experienced severe historical deformation from both ductile and brittle structures.

With the alteration of primary metals accompanying this deformation - notably the replacement of olivine by serpentine and magnetite - Kalahari Key saw an opportunity. It believes that these conditions are suggestive of a ‘feeder conduit’, something deemed particularly indicative of vast nickel mineralisation in models developed for the genesis of many nickel, copper, and PGE deposits. These include high-profile deposits in the likes of Voisey’s Bay in Labrador and the Norilsk Region of Russia. Despite frequent, anomalous showings of the metal in soils, borehole water, and drill core analyses, the potential for significant nickel mineralisation at the MFC was ignored repeatedly by previous operators.

With this prospectivity in mind, Kalahari Key’s primary target is nickel and platinum mineralisation in the geophysically-delineated, major shear/feeder zone through the centre of the MFC.

Botswana OpportunityThe business will also seek to identify massive or disseminated nickel sulphide deposits at the base of, or within the ultramafic zone of the MFC moving forward.

Geological map of the Molopo Farms Complex

Source: Kalahari Key Mineral Exploration presentation

Feeder/Shear Zone

Microgabbro

Karoo (Dwyka)

Transvaal Supergroup

Lobatse

Kraaipan

Undifferentiated Segwagwa Group

Fault

Dyke

Shear zone

Jwaneng-Makopong Shear zone

Werde-Kgare Shear zone

Khakhea

Keng Pan

Sekoma

Tubane

Werda

BrayB

W

T

S

KP

K

WK

JK

Undifferentiated Taupone Group

Granite

Felsite

Banded iron formation

Metavolcanic rocks

Feldspar-quartz porphyry

Banded quartzofeldspathic gneisses

Waterberg

Kukong

Molopo Farms Complex

Assorted glacial deposits

Siliciclastic sedimentary rocks

Felsite

Network of Upper Molopo FarmsComplex intrusive sheets withinTransvaal Supergroup

Variably altered gabbro,norite, microgabbro and diorite

Variably serpentinised, layeredperidotite, hazburgite and pyroxenite

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As the world advances, large-scale deposits are increasingly found in challenging environments, and/or undercover. Botswana is a superb operating environment. However the elephant deposits there are under sand cover, and there is a need for new thinking and new technologies to be applied to achieve a discovery. Comparisons to Voisey’s Bay and Norilsk are interesting, but the discovery is made through disciplined work programmes and application to detail. With the approach being taken by the Kalahari Key team, we feel that if there is a discovery to be made, they stand a great chance to make it.

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Johnson tells us he is excited by the geological opportunity MFC offers:

Kalahari Key’s efforts to strengthen its exploration case across the MFC have continued since its initial analysis of the site’s entire historical data-set. For example, it completed an orientation soil sampling geochemical programme in the eastern part of the MFC outcrop before acquiring its third licence. After reviewing the results of the orientation survey, a new sampling format will be used over drilling targets identified by all the new geophysics.

Following this, Kalahari Key stepped up the pace of MFC’s development towards the end of last year, completing a survey using New Resolution Geophysics’ Xcite Airborne Electromagnetic system. The helicopter-assisted study of 2,510-line kilometres over the MFC’s shear/feeder zone subsequently completed identified an impressive 17 potential targets for mineralisation.

Kalahari Key was quick to point out that it is unlikely that every single one of these targets will represent significant mineralisation. However, the firm also said it was encouraging to see that their geophysical signatures and structural setting are consistent with its exploration model and that many appear to be of a suitable size and depth for mining. It added that the results reinforce its belief that the MFC contains a significant resource with a geological model analogous to Voisey’s Bay.

In the wake of December’s progress, this year has seen Kalahari Key get to work on planning for the next phases of development at its licences, culminating in the initiation of ground geophysics over its targets in May. Power Metal’s committed spend – including three-quarters of its initial investment into Kalahari Key - will be put towards advancing this groundwork and drilling the four most high priority targets.

Getting to Work

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Targets identified by the Xcite survey

Source: Kalahari Key Mineral Exploration presentation

Drilling is what ultimately demonstrates the mineralisation and articulates the discovery, especially under sand cover. So, during our discussions with Kalahari Key when setting up this transaction, we were pleased when they expressed an absolute focus on getting on with drilling to answer the question of whether a large scale mineral deposit sits under one of the company’s key targets. A little patience is needed of course to finish the ground geophysics and other drill target preparatory work. But make no mistake, all the parties are eager to get the drill turning and go hunting for elephant deposits.

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TANZANIA

ANGOLAZAMBIA

NAMIBIA

BOTSWANA

ZIMBABWE

MOZAMBIQUE

MADAGASCAR

MALAWI

SOUTH AFRICA LESOTHO

SWAZILAND

ATLANTICOCEAN

INDIANOCEAN

Positive SurroundingsAside from its geological prospectivity, MFC’s potential is enhanced by its stable surroundings and supportive commodity market backdrop.

Botswana is widely recognised as a business-friendly jurisdiction, ranking above every single one of its African peers in last year’s annual survey of mining companies by the Fraser Institute. It also fared well globally, coming in position 12 out of the 83 nations included in the global study. In 2016, the country also managed to top Quantum Global’s Africa Investment Index - an industry standard for those looking to operate in Africa.

The time I have spent in Botswana has been highly positive, especially with the Metal Tiger transaction we signed in 2015 that led to the T3 discovery with MOD Resources. The country has a clear business environment, with security of operations and tenure and that is a key element for any resource exploration and development company.

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► Fraser Institute’s highest-ranked jurisdiction in Africa on policy

► A stable and democratically-elected government

► Fast growing economic based on mining, tourism, and livestock

► Good infrastructure and communications

► One of the highest incomes per capita in Africa

► Transparency International’s least corrupt jurisdiction in Africa

► Largest diamond producer in the world

► Superb climate for mining – flat terrain with open scrub cover

► Skilled labour force used to mining

When rating countries, Quantum assesses areas like economic growth, liquidity, risk, business environment, demographics, and social capital. With a long-established mining industry, plenty of infrastructure, a supportive and stable government, and a favourable tax regime, Botswana consistently scores highly in each of these categories. It should, therefore, come as little surprise that mining has accounted for roughly 85% of Botswana’s national foreign exchange earnings, one-third of government revenue, and a quarter of GDP over the last four decades. Johnson tells us he has plenty of experience working in the country:

Botswana

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Where Next?Moving on to the project’s broader macro backdrop, nickel prices are widely expected to favour operators in the sector over the coming years. The commodity is one of several being hailed as a ‘new precious metal’ thanks to its use in the next generation of batteries. Although these batteries have a variety of potential applications, the one that is most likely to create value move forward is their use in electric vehicles (EV).

The world’s fleet of EVs grew by 54% to about 3.1m in 2017 and is expected to hit 125m by 2030, according to the IEA. Likewise, JP Morgan forecasts that EVs will account for 30% of all global vehicle sales 2025 – this compares to 1% in 2016.

The majority of these EVs are expected to use different variations of what are known as Li-ion batteries, formed from the combination of lithium compounds with other materials.

With around 58% of Li-ion batteries expected to contain nickel by 2025 – up from 39% in 2016 – Wood Mackenzie expects supply constraints to force the price of the metal up to $28,700/t by 2022. For comparison, it is currently priced under $12,500/t.

The Rise of Electric Vehicles

2015‘16 ‘17 ‘18 ‘19 ‘20 ‘21 ‘22 ‘23 ‘24 ‘25 ‘26 ‘27 ‘28 ‘29 ‘30 ‘31 ‘32 ‘33 ‘34 ‘35 ‘36 ‘37 ‘38 ‘39 ‘40

500

400

300

200

100

0

million vehicles

Cumulative salesProjected annual sales

Electric vehicles would account for 35% of all new vehicle sales.

By 2022 electric vehicles will cost the same as their internal-combustion counterparts. That’s the point of liftoff for sales.

Sources: Data compiled by Bloomberg New Energy Finance, Marklines

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Lizetta II, agreement to earn into 70pc interest

Kisinka, 70pc owned and operated

Cameroon cobalt-nickel project interests, 100pc owned

Haneti, agreement to acquire up to 35 pc interest

TANZANIA

CAMEROON

CÔTE D'IVOIRE

DEMOCRATIC REPUBLIC OF

CONGO

The location of Power Metal’s other projects in Africa

Wider PortfolioAs well as marking Power Metal’s first entry into Botswana, the Kalahari Key deal is also consistent with the firm’s stated policy of seeking battery metal exposure in Africa. This strategic focus was re-affirmed by Johnson and Bell earlier this year when they replaced Power Metal’s former board.

As well as organising a successful refinancing for the business, which had been suspended pending clarification of its financial position, the pair bring a great deal of experience into operations.

Johnson is an experienced public company director who has previously served as chief executive of Metal Tiger plc (LON:MTR), Metal NRG plc (LON:MNRG), and China Africa Resources plc (LON:CAF). He has also been chairman of ECR Minerals plc (LON:ECR) and non-executive director of Greatland Gold plc (LON:GGP), Papua Mining (LON:PML), and Thor Mining plc (LON:THR). Bell, meanwhile, has worked in the natural resources sector since the 1970s and is perhaps most recognised as chairman of Red Rock Resources (LSE:RRR) and non-executive director of Jupiter Mines (ASX:JMS).

Power Metal’s exposure to MFC and Kalahari Key will form part of a portfolio that has been reviewed and expanded by Johnson and Bell since entering the firm. Indeed, it will sit alongside the company’s long-term copper-cobalt interest in the Democratic Republic of Congo and cobalt-nickel interest in Cameroon. Johnson and Bell have committed to continuing their predecessors work at these sites in the months since joining Power Metal.

The project will also complement Power Metal’s recently acquired interest in a Tanzania-based nickel project called Haneti owned by AIM listed Katoro Gold (LON: KAT). Haneti comprises tenements covering an area of around 5,000km2 prospective for nickel, platinum group-elements, cobalt, copper, gold, and lithium. Previous work has identified grades of up to 13.6% nickel at the project, and an exploration programme this year will aim to confirm the existence of disseminated or massive sulphide mineralisation in the area.

Having exercised an investment and option

agreement signed with Katoro in May, Power Metal owns a 25% stake in Haneti and a significant stake in Katoro itself. Power Metal also has the right to acquire an additional 10% position in Haneti for a further payment to Katoro of £25,000 within 12 months of exercising the option.

With so much ongoing portfolio activity, Johnson says it is a ‘pivotal’ time for Power Metal and its shareholders:

Through the acquisition of our interests in Botswana with Kalahari Key and Tanzania with Katoro Gold, alongside our longer standing West and Central African interests, Power Metal Resources has developed a powerful portfolio, each element of which is capable of delivering major upside for shareholders. It is an exciting time for our company, and our principle objectives now include continuing proactive operations and enhanced marketing/communications to raise awareness of the work we are undertaking.

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An exciting future

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