With the likelihood of hitting its exploration target of 2 billion tonnes this year being more than enough to drive share value, the potential for high-quality exports will add a nice premium to Hodges Resources.

In March this year, the company reached another phase of growth by entering joint venture agreements for two thermal coal projects in Botswana.

Managing director Mark Major told RESOURCESTOCKS that his company’s two main target areas; Morupule South and Moiyabana, offered superior returns from early-stage projects.

Hodges can earn an initial 75% in Morupule South by spending $3 million on exploration in two years, including $1 million in the first 12 months.

The company can obtain an additional 24% by paying the owner a milestone payment per tonne of JORC (Joint Ore Reserves Committee) measured and indicated resources at years two and four.

The project, which is adjacent to Botswana’s only operational coal-fired power plant, comes with a JORC compliant 414 million tonne inferred resource.

Major said previous work undertaken by the owners outlined an exploration target of 700-800Mt.

This figure is based on historical drillholes within one major coal seam, which ranges in thickness of three to 13 metres. The JORC inferred resource has an average seam thickness of 5.5m.

Early work suggests the coal would require little to no processing for use at the nearby power station.

“If you want to compare our coal to African Energy Resources or any of the other operators in the area, the raw calorific value is roughly the same, the ash content is the same, our moisture’s lower as well as the volatiles and total sulfur percentages,” Major said.

While Morupule South is providingHodges with a strong outlook and likelihood of returns, it’s the Moiyabana project, 70km west,which is shaping up to be the flagship asset.

“Moiyabana is the project we’re really excited about because all the work that’s been done is in a 50 square kilometres section located in the south-eastern area of the licence; which in total is over 590 square kilometres,” Major said.

“The initial work has indicated an extensive area which could be amenable to open cast mining.”

While it has not been subject to classification under JORC or any resources modelling, an exploration target of up to 1.3 billion tonnes has been outlined for this south eastern area.

“The owners have done a ‘back-of-the-envelope’ model, based on historical drillholes and some 14 holes that they drilled,” Major said.

“Because we’re still undertaking due diligence on this acquisition, we can’t say too much other than what has been released previously.

“We’re targeting 800 million to1.3 billion tonnes of coal at Moiyabana project in our exploration program within a year.

“That figure is based on the owner’s data and has been confirmed with our own in-house modelling, however, we are waiting on an independent report validating the model and assumptions used by the vendor.

“The owners have drilled 14 boreholes in which they carry out down hole geophysical logging and obtained coal samples for preliminary washing tests.

“They’ve identified coal with CV’s of greater than 27 megajoules per kilogram with ash content lower than 20 per cent and meaningful yields on the 1.50 float fraction.

“This is ‘grade A’ export quality coal.

“We are happy with anything with a CV of above 24 as being attractive to export, as long as you can get the ash close to or below 20 per cent.

“All very positive results for the small amount of work that has been done so far.

“That in itself has given us the motivation to go after the Moiyabana project.

“They have estimated a tonnage of nearly 700 million tonnes as open-pittable, with average strip ratio of4-to-1, which again is only over a small area of 28.5 square kilometres.

“This 700 million tonnes is what we’ve named as an open pit target.”

The year ahead will largely focus on advancement of the Moiyabana project.

“For the rest of the year, the program ahead is basically a massive drilling program with coal quality and washing,” Major said.

“We’ve got an 18 month periodin which to spend as much money as we can.

“Whatever we spend in the ground, we get taken off the $70 million purchase price after 18 months.

“Our expenditure, under theterms of the agreement, is capped at $7 million, but there is a provision that we can spend more.

“The motivation is to get as much of Moiyabana in the measured and indicated JORC category as well as undertake mining studies, with the aim of having a pre-feasibility level report by month 18.

“Between the two projects,we’d like to be on at least 2 billion tonnes, at least inferred with a quarter of that at least measured and indicated by then.

“There’s a lot of drilling to be done.

“We’ve got drill rigs lined up already to start when we hit the go button.

“The physical and environmental parameters will define the limits of what we spend this year.

“Have we got enough geos? Have we got enough service consultants like wireline logging?

“Those are going to be the limiting factors.”

The company’s outlook is strengthened by its location in the pro-mining nation of Botswana.

“Botswana’s a good area to be operating,” Major said.

“You’ve got South Africa right there, which gives us close access to expertise, equipment and labs.

“We’re actively recruiting for a senior project manager to be based in Africa.

“The key thing for us in the next 18 months is to invest as much money as we can in the Jaquar [part of Moiyabana] asset, because no matter what happens, it turns into equity in the company who has the rights on the project.”

Running concurrently with the drilling program, Hodges will commence preliminary economic studies of its new assets.

“We’re going to start the process for environmental approvals straight away,” Major said.

“We’re also going to doing alot of the washability tests and other geotechnical work while we are drilling these projects out.”

The washability tests will ultimately determine the marketability of the coal, with exports offering the highest returns.

“We obviously prefer exports because there are bigger margins, but we have to consider our social licence and the Botswana government, which is pushing coal power in country,” Major said.

“Basically, if we don’t wash it, it’s all domestic coal. The power plant that’s already there at Morupule is expanding and we are positioned right on its doorstep.

“With washability, we would be happy with 20 to 40 per cent of the coal being suitable for export, with the rest used in the local markets where various options are continuously being discussed.

“We’re going to be talking to the government and other energy sector groups once we get moving on the ground.”

Exports factor highly in Hodges’ outlook.

“The Asians love this coal, and more importantly need it,” Major said.

“Strategically I believe we’re in the right place at the right time.

“In four years time when they open the Kalahari rail line, that opens the market to Namibia, where there’s a lot of power requirements and infrastructure going to be built, including more ports and thus prospects of exports.

“Transport through Mozambique is the preferred route, as it’s closer tothe markets of Asia.

“We understand the government is actively pursuing the development of this route and it may be established faster than the trans-Kalahari option.

“As with all early stage projectsit is only through time and money spent in-ground that reveals its worth.

“We hope to expedite the time by hitting these projects hard in the next two years.

“Needless to say we are very excited about these prospects and next few years.”

*A version of this report, first published in the May 2011 edition of RESOURCESTOCKS magazine, was commissioned by Hodges Resources