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Tlou Energy - Half-year Report

Tlou Energy Limited is an ASX, AIM and BSE listed company focused on generating power in Botswana for supply into the local and regional power market. The Company is pleased to announce its interim results for the six months ended 31 December 2019.


Managing Directors' report


The Company has recently been focused on moving the project towards first electricity sales in the near future so as to transition from an explorer to a developer. Gas fired power generation is Tlou's primary objective with a secondary objective of demonstrating best practice in integrating solar and gas as baseload power, which can be mutually beneficial for the exploitation of both resources. Tlou has already obtained full environmental approval for 20 MW gas and 20MW solar power generation. With success, this would be a first for Botswana and unlock its vast solar potential. The Company believes that gas is absolutely vital for a successful solar power generation project in Botswana and our current wells are yielding encouraging results in this regard. Details on recent developments coupled with Tlou's cleaner energy vision are outlined below.


GAS FLOWS


Objective: To flow gas at commercial rates from the Lesedi Project.


Observations : Lesedi 3P & 4P have been flowing gas at various rates since mid-2019. Flows have become more sustained in 2020 once pressures in the vertical production wells were further reduced. A risk of the wells surging (whereby large volumes of gas and water can unexpectedly surge into the vertical well and stop production) was effectively managed during this period. The Lesedi 4 lateral wells appear to be in good communication with the vertical production wells. The Company has now established that the Lesedi 3P and 4P wells can flow gas at sustained rates for extended periods of time.


However, dewatering is taking longer than originally anticipated, which is a precursor to achieving higher gas flow rates. The Lesedi pods have been drilled in a region where dewatering operations focused on the Lower Morupule Coal (LMC) seam is occurring for the first time. Removing sufficient water from the LMC via just two production pods in such a large area is taking considerable time. Based on the gas content of the LMC and demonstrable permeability, once dewatering can be achieved, gas rates should increase significantly.


Interim conclusion : Sustained higher gas rates will take more time &/or require more wells.


Potential upside : Coal permeability is good based on the observed water flows which ultimately augers well for sustained higher gas flow rates. The prospective gas area is substantial and has multiple prospective horizons.


Forward plan : Continue dewatering &/or drill additional wells with time (and subject to funding) to assist the dewatering process and consequently, flow more gas.


POWER PURCHASE AGREEMENT (PPA)


Objectives : To secure a PPA resulting from the gas to power tender submitted in Botswana, allowing the Company to commence development via grid connection. As part of the overall process, the Company aims to secure a Generation License. The Company believes that the sale of power to Botswana Power Corporation (BPC) remains the most cost-effective option to commercialise Tlou's gas in the near term.


Observations : The process is moving forward although slower than expected. Following the long silence on commencement of negotiations for the "Development of a Maximum of 100 MW of Coal Bed Methane (CBM) Fueled Pilot Power Plants in Botswana", the Government of Botswana through the office of the Permanent Secretary, Ministry of Mineral Resources, Green Technology and Energy Security (MMGE) has recently reaffirmed Government's commitment towards facilitating development of CBM in the country and seeing through the successful negotiation of a PPA with Tlou. The Permanent Secretary (PS) provided Tlou with an update that MMGE was at an advanced stage of finalising the contract for the engagement of the Transactional Advisors/Consultants that will assist with the negotiations of the project agreements. Recognising that this process has taken a long time and to further demonstrate the Government's commitment, MMGE has agreed to discuss a temporary PPA that would enable Tlou to provide power on a pilot/proof of concept approach whilst negotiations for the full PPA are ongoing. The PS further stated that BPC had been charged with the responsibility of driving the discussion and signing an agreement subject to the necessary approval and governance structures in BPC.


This is a welcome development and Tlou appreciates the Government's support and facilitation of the process.


Restrictions on providing more details : The Government (MMGE and BPC) has requested that the full PPA and the temporary PPA negotiation details remain confidential.


Company outlook : Tlou remains confident that both PPA's will be secured with time.


PROJECT FINANCE


Objective : To raise sufficient project finance to primarily connect the Lesedi Project to the existing power grid at Serowe. This will enable the Company to turn current and future gas flows into revenue by selling gas "via wires".


Recent activities : The Company has met with numerous potential financiers / investors located predominantly in Botswana.


Project finance sought will be used for : Connection to the grid, additional gas fired power generation, solar power generation (if appropriate) and additional gas production wells (subject to requirements). Further exploration, working capital and advancing Environmental, Social and Governance (ESG) objectives is also desirable.


Observations : Botswana based asset managers have significant funds under management that they are mandated to invest mainly in local projects. With their most recent investments of choice being in the finance industry and real estate development sectors, which are considered close to being saturated, the Tlou project is ideally placed to source project finance from local sources.


It is noted that Tlou's largest shareholder is the Botswana Public Officers Pension Fund (BPOPF) hence current and future pensioners of Botswana have a direct financial interest in the success of the Company. If necessary, the Company has the flexibility to reduce costs while waiting on key events to occur.


POTENTIAL SOLAR POWER


Objective : To potentially include solar in Tlou's energy generation mix. The Company recognises the enormous appetite for solar power which exists in Botswana and elsewhere. This is an extension of a global move towards cleaner power generation.


Observations : Potential investors have often requested that Tlou include solar in its generation mix. Gas and solar work very well together for reliable base load power. Solar can complement and add to the power generated by gas while flows are building and assist with Botswana transitioning to being a cleaner and greener power producer for both local consumption and export via the Southern African Power Pool (SAPP). Solar adds a potentially new value driver for the Company and shareholders (subject to meeting regulatory and other requirements). Tlou already has environmental approval for 20MW of gas and 20MW of solar power generation.


MARKET OPPORTUNITY


BPC needs locally generated power and was reported as importing over 50% (>500MWh) in 3Q19 from outside the country.


The regional power market is enormous, particularly for so-called low carbon generation options (a gas/solar mix is ideal). Once connected to the grid, Tlou could also sell electricity via the SAPP (subject to meeting membership requirements).


Eskom is the main electricity supplier into the SAPP and continues to suffer ever increasing challenges so the regional requirement for power remains strong.


ENVIRONMENTAL, SOCIAL & GOVERNANCE (ESG)


Tlou is involved in a number of ongoing community projects in Botswana adding real value to peoples' lives in a region with sparse services and where few opportunities exist for the local population. Two examples are outlined below:


· Tlou is sponsoring the Moralane Community to become self-sustaining in farming to create opportunities for self-employment and wealth creation.


· Tlou is in discussions with the Western Sandvelt Farmers Association to supply electricity and potentially water to an existing Farmers Association site that is situated very close to Tlou's Lesedi Project to potentially accommodate:


§ An abattoir;


§ A health clinic;


§ A police station;


§ A wildlife (anti-poaching) post;


§ A school for early childhood development.


Electricity could also be supplied to the local farmers from the Lesedi Project to add value and significantly improve productivity of their investments and improve their daily lives.


TLOU'S CURRENT FOCUS


· Continuing to flow gas and dewater the Lesedi gas production pods.


· Potentially drill more wells to assist in dewatering the LMC and flow more gas (subject to funding).


· Securing a PPA and generation license.


· Securing project finance with an emphasis on funds sourced from Botswana.


· Constructing electricity transmission lines to primarily connect to the existing grid.


· Producing power from gas at Lesedi.


· Progressing solar power generation as a valuable and much needed process to compliment gas.


· Develop the Mamba and Boomslang projects to add to the gas from Lesedi and provide another significant growth opportunity for the Company.


· Discussions on supplying gas to Orapa (owned by Debswana) have recently recommenced as part of another broader growth strategy. This is to supplement their cleaner power generation (including solar) objectives.


SUMMARY


Gas is being produced at Lesedi and is likely to continue.


Gas production should increase as dewatering progresses either independently of more drilling or as a result of more drilling with time.


The plan still remains to connect to the electricity grid as soon as possible and generate power.


Gas produces significantly lower carbon emissions than coal-fired power generation and provides flexibility to balance the electricity market's supply/demand profile.


Combining gas and solar power generation has the potential to significantly enhance the financial viability of the project including in the early stages while gas flows are building.


Solar is a clean and a very achievable option when combined with gas for the region.


Significant upside potential continues to exist for Tlou shareholders based on a successful development.


Local community projects currently underway can make a very positive impact on the lives of the local population and represents another way that the Company and its shareholders can make a positive impact.


Thanks to all our shareholders, staff, consultants, advisors, and management for their support during the period.


The Half-year report is available on the Company's website at www.tlouenergy.com/reports

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