We’d like to introduce you to Tsodilo Resources, a company exploring for copper and iron ore in Botswana, Africa. As Tsodilo seems to have discovered a gigantic iron ore project with an exploration target of as much as 5-7 billion tonnes of ore, one should definitely keep an eye on this company.

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We’d like to introduce you to Tsodilo Resources Limited (“Tsodilo”) (TSD.V), a company exploring for copper and iron ore in Botswana, Africa. As Tsodilo seems to have discovered a gigantic iron ore project with an exploration target of as much as 5-7 billion tonnes of ore, one should definitely keep an eye on this company. Besides the iron ore project, Tsodilo also signed a joint venture agreement with First Quantum Copper (FM.TO) whereby First Quantum has been granted the right to explore on Tsodilo’s copper tenements and gain a 51% or 70% interest depending on the eventual size of the copper resource.

Exploring for iron ore

We consider the Xaudum iron ore project in northwestern Botswana to be Tsodilo’s flagship project at this stage. The company has initially outlined a total exploration target of 5-7 billion tonnes of iron ore (Magnetite) at an average grade of 15-40%Fe. The company has completed 45,000 meter of drilling and continues drilling at the Xaudum formation in order to have a maiden resource estimate ready by the beginning of this summer. Based on our interpretations of the maps and our chat with Mike de Wit, COO of Tsodilo, we think this first resource estimate could easily exceed the 500 million tonnes mark, which would already put this project on the radars of potentially interested parties.

The company is still drilling at Xaudum, and we expect these exploration efforts to continue in the foreseeable future. Tsodilo owns two drill rigs which means its average drill cost is just $15-20/meter (excluding assaying and lab costs), which allows the company to just continue to drill.

Not grade, but infrastructure is king for iron ore projects

Infrastructure is usually the main hurdle for iron ore projects, but as there’s a proposed railway that would connect Zambia with the port of Walvis Bay in Namibia at just a few hundred kilometers from the Xaudum project, this hurdle could easily be overcome. This would very likely be the preferred route to transport the iron ore to a port, as now Tsodilo would only have to deal with just Namibia instead of railing the ore through Zimbabwe and Mozambique.

Don’t let the expected grade scare you – a comparison with Iron Road’s Central Eyre project

The main issue with large and lower-grade iron ore projects is obviously that the initial capital expenditures are usually quite high, and this won’t be different for Xaudum. But let’s have a look at an Australian ‘competitor’, Iron Road Resources (ASX:IRD). That company has a total resource estimate of 3.7 billion tonnes at an average grade of 16% Fe (which is on the lower end of what Tsodilo is expecting) and plans to produce a concentrate with an average grade of 67%Fe. This project will be quite large with an expected output of Z large with an expected output of 21.5 million tonnes of iron ore for an initial capital expenditure of $4B, but we’d like to point out the economics of this project at the current iron ore price.

The benchmark price for 62%Fe iron ore is approximately $110/t right now, and as Tsodilo will very likely produce a concentrate containing 68%Fe, there’s an additional premium of approximately $18/t resulting in a total sales price of $128/t based on the current benchmark price. The port of Walvis Bay can only service Panamax-sized vessels which means some of the economies of scale during the transportation will be lost. But even if we’d apply a shipping cost of $28/t, the received price FOB Walvis Bay would be approximately $100/t.

Let’s now move over to the production costs.

Iron Road expects a production cost of $45/t of concentrate (which includes railing the ore over a distance of more than 150km). But once again, keep in mind that company will have an average head grade of just 16%Fe whilst we expect Tsodilo to have an average grade over the mine life that will be at least 50% higher. This will obviously help to reduce the operating expenses and will result in a much lower capex as the required annual throughput will be lower.

We do believe it must be possible for Tsodilo to produce a concentrate containing 68% of iron ore for a cost lower than $45/t, but we’ll use an assumed cost of $45/t for the sake of simplicity. So now it comes down to keep the transportation cost from the mine site to the port of Walvis Bay down, and that’s why it’s so important to keep an eye on the development plans of a railway close to the Xaudum project. As railing iron ore is much cheaper than trucking it, it would be everybody’s preferred solution. Even if we’d tag a $10/t railing cost to the production cost, Xaudum’s operating margins would still be impressive as the FOB received price would be $100/t and the FOB cash cost ‘just’ $55/t, resulting in an operating margin of $45/t.
These are obviously very rough back-of-the-envelope calculations (and is definitely not an official guidance from the company), but point out that even though the Xaudum ore isn’t qualified as DSO (Direct Shipping Ore), the project could generate a very attractive annual operating cash flow. On top of that, as the mine life will very likely span out over several decades, the Xaudum project could be on the list of some major conglomerates which would like to secure a steady supply of iron ore for the next few decades.

Additionally, the company is investigating the possibility to produce pig iron, on site, instead of iron ore concentrate. As pig iron has an average iron content that is much higher than the expected concentrate grade, its sales price would obviously be much higher, thus increasing the operating margin of the Xaudum project. The Tsodilo management team is currently exploring this possibility, also considering using the local thermal coal which is in abundance in Botswana (220 billion tonnes), and we’re looking forward to hear an update on the pig iron plans later this year as we believe this could immediately catapult Tsodilo into the league of developers of a high-quality end product.

Exploring for copper

In April last year, Tsodilo announced a joint venture agreement with First Quantum Minerals, which is a senior copper producer with a market cap of in excess of C$11B. It’s obvious First Quantum found something it really liked, because it doesn’t happen very often that senior players team up with junior exploration companies in grassroots exploration, and we all know First Quantum is hunting for the big copper elephants.

As part of the earn-in agreement, First Quantum agreed to fund $6M in exploration expenses in the first two years of exploration, followed by another $9M to be spent in the subsequent two years followed by an NI43-101 compliant technical report.

If that NI43-101 report contains a resource estimate larger than 2 million tonnes of copper (roughly
4.4 billion pounds for an in-situ value of $13.2B), First Quantum will retain a 70% stake in the project. However, if that resource estimate comes in lower, First Quantum’s stake will be just 51%. This once again emphasizes First Quantum only cares about the really large deposits and effectively expects to find several billions pounds of copper on the Tsodilo licenses. Additionally, Tsodilo will be carried until construction will start.

This JV agreement is quite advantageous for Tsodilo. If First Quantum spends less than $6M on the property it doesn’t retain a single percent ownership on the asset. Should the results of the Phase I drilling be encouraging, First Quantum will spend at least $15M in total exploration work and very likely even more as Tsodilo will be carried throughout the entire exploration phase. Again, First Quantum isn’t really interested in anything smaller than 4.4 billion pounds of copper, so this should give you a good idea about the potential size of this project.

The company’s main shareholders

Of interest is the fact that International Finance Corporation (which is the financial arm of the World Bank) holds a stake of almost 15% in the company and it’s really good to see a major institution like the IFC is backing Tsodilo, which is ‘just’ an exploration company. Additionally, First Quantum Minerals also holds a 7.5% stake in Tsodilo, which was agreed upon when both companies signed the joint venture agreement on the copper licenses.

The management team holds approximately 50% of the shares with First Quantum and the IFC holding another 22.5% of the outstanding shares. This means the free float of Tsodilo is quite limited to a maximum of 25% of the shares and we can imagine this free float will be reduced further when more institutions get interested in Tsodilo after a maiden resource estimate at Xaudum.

About Botswana

Botswana is very likely one of the safest destinations in Africa, as the country has a rich mining history which was specifically oriented at the diamond industry. The country realizes that the diamond mining won’t last forever (as several of the large open-pit diamond mines will have to go underground within the next decade resulting in a corresponding production decrease), and the government is very supportive of new mining projects being developed in the country as it will provide diversification from the diamonds industry.

The country has approximately 2.1 million inhabitants and is – compared to other African countries – relatively rich as the GDP/Capita was approximately $14,700 in 2013 [source: http://bit.ly/1nU2Wgb].

As the income is relatively high, this actually reduces the risk of corruption as there’s an obvious inverse correlation between GDP/Capita and the corruption rate in a country.

Transparency International does a good job to monitor the perception of corruption in the world, and on the next image it’s clearly visible that Botswana is by far the least corrupt country in Africa and is ranked 30th out of 177 countries, which confirms the geopolitical safety of the country.

Keep in mind with the current ranking, Botswana is perceived as less corrupt than first-world countries like Spain (40), Portugal (33) and other developing countries such as Brazil (72), South Africa (72) and Colombia (94).

Management Team

James M. Bruchs – Chairman and CEO

James M. Bruchs, Esq. began his legal career with the Commodity Futures Trading Commission, the independent United States government agency with the mandate to regulate commodity futures and option markets in the United States, and spent the next decade in the specialized legal field of commodity futures regulation anda trading as general counsel with both a commodity futures exchange and a futures commission merchant. Mr. Bruchs then spent over a dozen years working with private companies in Central and West Africa in the area of mineral exploration, trading and development prior to becoming President and Chief Executive Officer of Tsodilo Resources Limited in July of 2002. Mr. Bruchs received a Bachelor of Science degree in Finance and Economics from The Ohio State University in Columbus, Ohio and a Juris Doctorate degree from the Potomac School of Law in Washington, D.C. Mr. Bruchs was appointed director in 2002.

Dr. Michiel (Mike) de Wit – President and COO

Michiel (‘Mike’) C. J. de Wit, President and COO of Tsodilo Resources Limited, has extensive experience in the diamond industry, having begun his career as an exploration geologist for the Geological Survey in South Africa prior to joining De Beers, where he worked for 29 years. Dr de Wit managed various exploration programs for De Beers in Africa which led to a number of kimberlite discoveries. Prior to his most recent appointment as general manager for De Beers in the DRC, Dr de Wit was responsible for all exploration programs for De Beers in Africa. Since leaving De Beers Dr de Wit worked on a number of diamond and base metal projects in Africa. In addition to MSc degrees in geophysics and sedimentology from the Universities of Pretoria and Reading (UK) respectively, Dr de Wit holds a PhD degree from the University of Cape Town.

Dr. Alistair Jeffcoate – Chief Geologist / Project manager

Dr Jeffcoate has spent his entire professional career with the Rio Tinto group of companies including Rio Tinto Iron Ore Atlantic and Rio Tinto Exploration. Immediately prior to accepting the position with Tsodilo, Alistair was Senior Geologist at Rio Tinto’s Simandou Project, Guinea West Africa (Iron Ore) where his key responsibilities were coordinating the activities of the large and complex resource evaluation and exploration department. This included planning, coordinating, and implementing the drilling activities on site for a fleet of up to 11 drill rigs. In addition to his extensive and multi-disciplinary work history, Dr. Jeffcoate holds a MSc Geology (University of London) and a PhD Geochemistry (University of Bristol).

Dr. Iuma Martinez – Director

Iuma is a South African citizen and has a B.Sc. (Hons) degree in Exploration Geology, an M.Sc in Geochemistry plus a PhD in Civil Engineering and GIS from the University of Cape Town. She is a professional member of the South African Council for Natural Scientific Professions which is a statutory body that monitors the ethical behaviour of its members. Membership of this body is recognized internationally for purposes of competent persons reports used in public listing documents.
As a GIS and Spatial Analyst specialist, Iuma has mostly been involved in diamond exploration and has consulted on projects in most of the Central and Southern African countries, Brazil, Australia and Indonesia.

The expected catalysts for this year

The expected catalysts for this year
The main catalyst will very likely be the maiden resource estimate at the Xaudum iron ore project which is expected by the summer. We are aiming for at least 500 million tonnes of ore with an average iron content of 25%, and after talking to Mike de Wit, COO, we are quite sure this target will be met. We strongly believe this will cause a re-rating in the Tsodilo share price as the maiden resource estimate will provide a first real tangible basis to calculate a valuation on. We are also hoping to hear more from the pig iron idea, as at first sight this would greatly enhance the economics of the Xaudum project as this would result in a more valuable end-product being produced.

We are also looking forward to see the exploration results of the drill program funded by First Quantum on the copper tenements. It will be very interesting to see what kind of grades and structures this first round of drilling by the JV partners will reveal and how this would impact the joint venture agreement.


Tsodilo is solely focused on exploration in Botswana and seems to have grabbed two potential elephants by its tail. The Xaudum project will ultimately very likely contain several billion tonnes of iron ore at an average grade of 15-40%Fe, and we expect a maiden resource estimate later this year to come in at more than half a billion tonnes. This will be the first step in validating the project as a multi-billion tonne iron ore project in a safe African region which might already spark the interest from potential offtake and/or joint venture partners.

The second elephant is the copper exploration in a joint venture with First Quantum. First Quantum isn’t looking for mediocre or large copper projects, it is exploring to find the huge ones, and this is clearly the message in the joint venture agreement. First Quantum needs to spend at least $15M in exploration expenditures and complete a NI43-compliant technical report before earning an interest of 51% or 70% in the property (depending on the size).

The potential size of the project is once again emphasized by the cutoff-size for the 70% ownership as First Quantum will only reach a 70% ownership if the project contains more than 4.4 billion pounds of copper.

We strongly believe this year will be a pivotal year for Tsodilo, as we will see exploration results from the joint venture with First Quantum and we’ll see a maiden resource estimate at Xaudum which should put Tsodilo on the map of large iron ore projects in the world.

Disclosure: The author holds a large long position in Nevada Copper. Nevada Copper is a sponsor of the website. Please see our disclaimer for current positions.

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