Energy and Mines Magazine - Issue 29

Issue

29

April

2021

Paving the Way for Large-Scale Renewable Projects with African Mines The Road to Bankability for Mine Energy Projects Q&A with Resolute Mining COO on the Syama Project ENERGY AND MINES MAGAZINE

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The road to bankability for mine energy projects MELODIE MICHEL REPORTER Energy and Mines

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enewable energy projects are undeniably growing in popularity in the African mining sector. Among recent announcements, Anglo American revealed its intention to expand solar generation at the Mogalakwena platinum mine from 80 MW to 300 MW, and Gold Fields received preliminary approval for a 40 MW solar plant at the South Deep gold mine, both in South Africa.

In general, the mining sector’s drive to decarbonize energy sources is met with great enthusiasm from lenders, who are also pushing their own sustainability agenda. “There’s a big drive to select green projects, and if you were to come as Gold Fields wanting to do 40 MW of solar PV, there’s not a single bank that would not jump on the chance to finance you,” says Lungile Mashele, Energy Specialist at the Development Bank of Southern Africa (DBSA).

But the reality is that despite this common appetite, the road to bankability is not always straightforward for renewable energy projects at African mines. There are many reasons for this disconnect, among which regulatory inefficiencies and a certain lack of clarity

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from miners about what is needed for an energy project to reach financial close.

Rentia van Tonder, Head of Power, Corporate and Investment at Standard Bank notes: “In many cases we found that the mining companies themselves have questions related to the power sector, they’re trying to be a power player but it’s extremely difficult for them to be comfortable with the process and risk allocation.”

“One of the stumbling blocks in these discussions is around risk allocation: normally the mining companies want flexibility.”

RENTIA VAN TONDER HEAD OF POWER CORPORATE AND INVESTMENT

In its efforts to support the energy transition, Standard Bank conducted 100 stakeholder interviews last year to identify pain points and business opportunities. The resulting customer insights document outlines a few clear concerns for offtakers: regulation, security of supply, and their own lack of education and skills around power projects.

And yet, there is one clear advantage in being a mine wanting to explore self-generation, according to Marco Lotz, Sustainability Carbon Specialist at Nedbank: “The advantage of a mining area is that in many cases it has already had approval for mining and industrial activities and expansion, so it can be easier to do renewable energy projects at mines compared to using land currently used for agriculture. Furthermore many mines have got ample space, so between space and already having some environmental impact approvals in place, it is easier to do some of these renewable energy developments at mines.”

STANDARD BANK

TARIFF AND OWNERSHIP TRANSPARENCY So how can miners overcome this education barrier and make sure they build a bankable project from the start? The first thing is to properly investigate their own power needs and the 4

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(often numerous) offers they get from renewable developers or independent power producers (IPPs). “Many mines are enticed by offers from developers but by the time we knock out the tariffs and say: ‘are you aware that you’re going to be paying 40 cents more than what you pay in the grid?’, the mine wants out of the deal all of a sudden,” says Mashele. Electricity costs can make or break a mine operation, she adds, and while some miners are willing to pay a little more for green power, it is crucial that all understand their tariffs in detail.

In the case of a power purchase agreement (PPA), miners, IPPs and lenders should work to align their expectations, which can be a difficult exercise. “One of the stumbling blocks in these discussions is around risk allocation: normally the mining companies want flexibility. From a funding point of view we will require a take-orpay agreement with very clear obligations on the offtaker,” states van Tonder.

Because they allow miners to decarbonize their power sources without taking their attention away from their core business, PPAs are a popular option in the market. But from a lender’s perspective, it may be easier to support a project that is on the miner’s balance sheet.

“As a lender, I would prefer for the mine to own the asset, and with that give me a company guarantee, and that’s only because should something happen to this asset I need access to the mine’s entire balance sheet to be able to get my funds from the other operations” Mashele points out.

“In many cases we found that the mining companies themselves have questions related to the power sector, they’re trying to be a power player but it’s extremely difficult for them to be comfortable with the process and risk allocation.”

RENTIA VAN TONDER HEAD OF POWER CORPORATE AND INVESTMENT STANDARD BANK

In this case, due diligence is rather straightforward, since the lender takes a risk on the overall company. However, issues may arise around ownership: Mashele notes that a lot of mining companies in Africa are either state-owned or owned by a group of politicians, which presents a political risk in case these are not ENERGY AND MINES MAGAZINE

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“There’s a big drive to select green projects, and if you were to come as Gold Fields wanting to do 40 MW of solar PV, there’s not a single bank that would not jump on the chance to finance you,”

LUNGILE MASHELE ENERGY SPECIALIST

THE DEVELOPMENT BANK OF SOUTHERN AFRICA (DBSA).

re-elected. “This is why you’ll see a preference for blue-chip mines, because their ownership is straightforward. Small-scale or junior minors might not enjoy that same benefit,” she adds. In any case, transparency around who owns the mine is crucial.

In terms of funding structures, an interesting new development in South Africa is wheeling, whereby the owner of the power project at the mine — whether the miner, IPP or a special purpose vehicle — could sell electricity to a third party, potentially even the lender itself. “What if the lender can become the offtaker,” asks Lotz. “If a mine generates electricity, can one potentially buy it from them when it closes?” While the market is not quite there yet (see box-out on the deregulation of South Africa’s power sector), wheeling could be an interesting way to make a project more viable in the future, from a lender’s perspective.

DETERRING FACTORS FOR LENDERS Of course, not all projects are equal in the eyes of the financier, and some risks are harder to take than others. For instance, it would be very difficult to fund a renewable energy project at a coal mine, since decarbonizing targets often involve getting rid of coal completely. “If you are a coal company that made a decision three years ago to have a renewable energy plant on site, you might not be around for the duration of that PPA. It’s about looking at the commodity of the mine itself and whether that’s a risk you’re willing to take, and of course, different commodities attract different interest rates,” says Mashele.

Another potential issue is country risk: mines located in countries or regions that are currently experiencing conflicts, such as Northern Mozambique, will find it hard to get support from lenders. Similarly, a country with political or financial instability, such as Zimbabwe, may not be the most attractive market for

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lenders. “In places where there are conflicts or political issues you may not be able to get your money out of the country, which is a big problem for lenders. That’s why you see that certain territories are not really supported for certain technologies,” she adds.

Then, there is the issue of tenors: renewable energy projects, whether on or off balance sheet, generally require long-term financing, but regulations introduced since the financial crisis of 2008 have imposed strict capital requirements on commercial banks, making it more difficult to offer long tenors.

At Standard Bank, van Tonder explains that tenors are an issue both for on balance sheet projects — corporate loans tend not to exceed five or six years — and for PPAs. “The ability of the developer to secure a longer tenor debt offering will immediately have a positive impact on the PPA tariffs the developer can offer to the mining company. But it’s very difficult for commercial banks to offer long tenors due to Basel compliance and obligations, so for us it’s been critical to understand the underlying mining company. We’ve also developed an approach where we look at partnering with development finance institutions like DBSA, the International Finance Corporation, the African Development Bank and others to support tenor extensions to these debt structures.”

“As a lender, I would prefer for the mine to own the asset, and with that give me a company guarantee”

LUNGILE MASHELE ENERGY SPECIALIST

THE DEVELOPMENT BANK OF SOUTHERN AFRICA (DBSA).

PARTNERSHIPS FOR THE WIN As is often the case in mining decarbonization, partnerships can make all the difference. While banks partner with development finance institutions to solve the tenor issue, miners can partner with consultants and their own lenders to make their project as

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solid as possible, from the start.

“You need to have clarity about the key drivers and objectives: is the project driven by ESG goals, reliability or sustainability of the power supply, cost security or a combination of these? It’s critical to define those objectives upfront and involve partners as funders, technical solution providers and consultants that can assist in running a credible transparent process upfront,” says van Tonder.

For Mashele, the biggest benefit in involving financiers from the beginning is that it makes

What the deregulation of South Africa’s power sector means for miners When thinking about electricity in South Africa, the only name that generally comes to mind is Eskom, the state-owned utility that controls about 95% of the domestic market. But over the past few years, the government has taken steps to open up its power sector to new players. One such measure is the Renewable Energy Independent Power Procurement Program (REIPPP), which allows

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renewable IPPs to submit bids to design, develop and operate large-scale generation facilities across the country.

The program has been very successful in attracting private investment to develop the renewable sector: Nedbank alone has supported 42 transactions for a total of R37bn (US$2.42bn) since the initiative started in 2011. At the same time, the National

Energy Regulator of South Africa (NERSA) is attempting to streamline the licensing process for self-generation: anything below 1 MW doesn’t require a license, and for larger projects, the process is meant to take no longer than three months.

The reality may be slightly different: the application for Gold Fields’ South Deep generation license, granted in February 2021, was submitted in June 2020. “There’s been quite a lot of criticism in the media around the government not being

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it easier to build a bankable project. “Some of the projects we receive are not funding-ready: as soon as you ask questions about load profile or irradiation studies, they haven’t done that yet.

Lenders come with a suite of technical specialists who are able to advise you and set everything up for funding. It also helps in terms of risk: if the project doesn’t work out, we both take a knock,” she notes.

There is no perfect recipe for renewable project success in the African mining sector, but a few considerations can really tip the balance of bankability: clarity about the mine’s technical requirements and renewable resource; transparent information about electricity tariffs and mine ownership; and the early involvement of funding partners. open enough in creating an enabling environment to fast-track these types of projects and generally the slow processes in awarding licenses. Regulation is still a key consideration, but most mining companies in South Africa remain bullish that the market will open up and licenses will be issued,” says Rentia van Tonder, Head of Power, Corporate and Investment at Standard Bank.

She recommends looking for advisers that can assist with the process, since it can be difficult to understand exactly what NERSA requires.

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This market opening is creating new questions for miners wanting to selfgenerate electricity in South Africa. “The big talking point becomes whether mines will be producing renewable energy on their own site for own use only or whether (or when) electricity will be added to the Eskom grid to export to the rest of the country,” notes Marco Lotz, Sustainability Carbon Specialist at Nedbank.

Because electricity generation for the national grid is still heavily regulated, miners currently tend to

“The advantage of a mining area is that in many cases it has already had approval for mining and industrial activities and expansion”

MARCO LOTZ SUSTAINABILITY CARBON SPECIALIST NEDBANK

prefer using their own isolated microgrids to avoid extra regulatory hurdles.

But mining companies need to remember that their operations have an end date, which often comes sooner than their power assets’ end of life. “What if we build a plant now to serve the mine’s needs but that is connected in such a way to the national grid that when the mine life ends, it becomes a small little power plant or utility as opposed to a mining site?

All of a sudden, mine closure becomes a much different ballgame,” suggests Lotz.

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DAYS

ATTENDEES

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EXPERT SPEAKERS

HOURS OF CONTENT

Paving the way for large-scale renewable projects for African mines MELODIE MICHEL REPORTER Energy and Mines

D “The mining industry currently has an estimated market cap of US$752bn.”

DAVID MANNING DIRECTOR GLOBAL HYBRID JUWI RENEWABLE ENERGY

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espite certain regulatory hurdles, African miners are actively pursuing renewable energy opportunities for their operations. David Manning, Director, Global Hybrid at juwi Renewable Energy, shares the company’s lessons learned from working on large-scale projects in Africa and beyond, and gives some insights as to what’s next for the mining industry’s energy transition.

Energy and Mines: How would you describe the opportunities for doing business with African mines?

David Manning: The mining industry currently has an estimated market cap of US$752bn. After another year of solid performance and confidence in the long-term market outlook, the Top 40 mining companies continued to invest in their future and focus on ESG. Capital expenditure increased ENERGY AND MINES MAGAZINE

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“Large-scale mining companies are now under pressure to set, track and report against environmental, social and governance targets.”

DAVID MANNING DIRECTOR GLOBAL HYBRID JUWI RENEWABLE ENERGY

for the second consecutive year, up 11% from 2018 to US$61bn. Capital projects were largely financed through cash generated from operations and debt financing. With hybrid and renewables becoming a standard energy solution in the mining sector, there is a significant opportunity for companies like juwi to continue to develop opportunities in Africa. PV, wind and storage are now a viable option for almost every mine site. In the last 12 months there has also been a shift in the carbon reduction targets coming from boardrooms, where a number of top tier miners leading the market (e.g. Rio Tinto, BHP and others) have implemented ambitious plans for net-zero emissions by 2050. This has translated to a focus of mine development and operations teams on the deployment of renewable energy at their sites with the target of significantly reducing reliance on fossil fuels.

E&M: Do you see opportunities for larger-scale mining hybrids combining various technologies on the scale of the Agnew project in Australia in Africa?

DM: Large-scale mining companies are now under pressure to set, track and report against environmental, social and governance targets. Over the last few years, stakeholders have ramped up their expectation, and ESG is now a fundamental part of energy supply decisions. In January 2020, BlackRock, the world’s largest fund manager, said it would divest from any company earning more than 25% of revenue from thermal coal. It warned

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“Hybrid solutions with wind, solar and storage are now well proven, cost effective and reliable.”

DAVID MANNING DIRECTOR GLOBAL HYBRID JUWI RENEWABLE ENERGY

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it would continue to evaluate sectors with high ESG risk and vote against management and directors who don’t meet its standards. Hybrid solutions with wind, solar and storage are now well proven, cost effective and reliable. We don’t see a limit on the scale of projects. There are several large mining operations looking at hybrid solutions well over 50 MW, with renewable energy fractions in excess of 70%.

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“Getting to site, evaluating geophysics and putting together delivery schedules is difficult during times of uncertainty.”

DAVID MANNING DIRECTOR GLOBAL HYBRID JUWI RENEWABLE ENERGY

E&M: What are the main hurdles still delaying or preventing projects from progressing?

DM: COVID has made project development and execution a challenge over the last year. Getting to site, evaluating geophysics and putting together delivery schedules is difficult during times of uncertainty. In the South African region, NERSA regulations, whilst continuing to improve, are still a hurdle.

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“The biggest issue facing mine sites and IPPs is the time and difficulty of obtaining a generation licence, particularly for projects over 10 MW. NERSA currently has over 2,000 MW of applications under evaluation.”

DAVID MANNING DIRECTOR GLOBAL HYBRID JUWI RENEWABLE ENERGY

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E&M: Can you provide us with an update on juwi’s project with Pan African Resources to construct its 9.975 MW solar project at Evander Mines?

DM: juwi South Africa has commenced construction on the project, with system design, procurement of key equipment and site works well underway. Engagement with Eskom for the grid connection infrastructure is advanced and going well. This will be another project that breaks down the NERSA barriers and will further reduce Elikhulu’s environmental impact . Pan African Resources are fully committed to producing highmargin ounces in a safe and efficient manner, while investing in local communities and minimizing the environmental impact of operations.

E&M: How is the market evolving in South Africa for larger-scale renewable energy projects with mines looking to self-generate?

DM: The biggest issue facing mine sites and IPPs is the time and difficulty of obtaining a generation licence, particularly for projects over 10 MW. NERSA currently has over 2,000 MW of applications under evaluation. Recently Gold Fields received approval from NERSA for the construction of a 40 MW solar power plant at its South Deep gold mine in South Africa. This is a big step forward, and hopefully the first of many. Renewable energy options, including storage, will provide mine sites with a cheap and reliable energy source, that will ultimately lower cash operating costs, and provide better value to their shareholders

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E&M: juwi South Africa has built eight utility-scale solar plants totaling 400 MW under the South African Government’s Renewable Energy Independent Power Producers Programme — how is that experience informing your approach with mining companies there?

DM: The REIPPP experience has given juwi significant knowledge and skills to develop and deliver projects in challenging environments. Working with remote communities, connecting into the Eskom grid, and working with large-scale investors has not only been rewarding, but will allow us to undertake future projects with confidence and efficiency.

E&M: What are you looking forward to at the upcoming Energy and Mines Africa Virtual Summit, May 4-6?

DM: As always, Energy and Mines provides an excellent platform for juwi to meet with our peers, discuss renewable energy options with potential clients and most of all, opens the door for the sharing of knowledge, in such a dynamic, and rapidly growing market. It has been interesting to see the list of attendees at Energy and Mines events growing over the last few years, and more importantly, seeing tier one mining companies not only attending, but contributing in many ways. There is little doubt that renewables will be the core focus for mining executives when making energy decisions.

“Energy and Mines provides an excellent platform for juwi to meet with our peers, discuss renewable energy options with potential clients and most of all, opens the door for the sharing of knowledge, in such a dynamic, and rapidly growing market.’

DAVID MANNING DIRECTOR GLOBAL HYBRID JUWI RENEWABLE ENERGY

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Q&A with Resolute Mining COO David Kelly on the Syama Project ADRIENNE BAKER DIRECTOR Energy and Mines Energy and Mines: Can you please give us a brief update on solar hybridization for Syama?

“The new facility will initially provide 30 MW of power and will incorporate an additional 10 MW Y-cube battery storage system.”

DAVID KELLY COO

RESOLUTE MINING 20

David Kelly: The development of a new hybrid power station is being completed in 2 stages. The first, the construction of a new modular HFO thermal generation and battery storage system is nearly complete, and commissioning is under way. By the time of the conference in May it will be up and running. The thermal generation is based on Wärtsilä 32 engines, which are being installed in partnership with Aggreko and Wärtsilä, using new Modular Block technology and design. The Wärtsilä modular units utilise ISO containers to construct a modular powerhouse.

The new Modular Block units will be fuelled using a refined heavy fuel oil (IFO 180) and also have the capability to run on diesel. Replacing existing diesel thermal generation at Syama with modern intermediate fuel oil thermal generation is expected to increase efficiency by approximately 30% and reduce overall power costs by approximately 40%. Each modular unit contains a single Wärtsilä W20V32 HFO Generator and has an at-generatorterminals output of approximately 10 MW. The new facility will ENERGY AND MINES MAGAZINE

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“The solar array will enable the 10 MW battery storage system to manage the solar power contribution to the overall Syama power system and smooth out fluctuations in solar power output to facilitate integration into the hybrid system.”

DAVID KELLY COO

RESOLUTE MINING

initially provide 30 MW of power and will incorporate an additional 10 MW Y-cube battery storage system.

EandM: What are the next steps for driving further energy and emissions reductions for the site?

DK: Stage 2 will include a 20 MW solar array which will be constructed on the surface of the existing Syama Tailings Storage Facility (TSF) thereby maximising positive environmental outcomes and augmenting Resolute’s rehabilitation program. The solar array will enable the 10 MW battery storage system to manage the solar power contribution to the overall Syama power system and smooth out fluctuations in solar power output to facilitate integration into the hybrid system. The timeline on commencement of the solar component will depend on the decommissioning of the existing TSF and is expected to be completed during 2023.

EandM: Where are the gaps in the market for energy services and suppliers - what energy challenges are not being fully addressed?

DK: Our assessment is that the market is increasingly well served by experienced operators, and that an integrated solar thermal solution such as the one implemented by Resolute can be secured from proven operators with extensive experience in remote locations.

In the recent past this was not the case. Undoubtedly the key challenge or gap is to improve battery storage options to the point where a 24 hour per day/365 day per year power supply can be secured exclusively from renewable sources.

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