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KEFI Minerals on way to locking in finance

Not many gold mining projects are moving forward at the moment, but KEFI Minerals’ Tulu Kapi gold project in Ethiopia is one of them.
KEFI Minerals on way to locking in finance
The government of Ethiopia is highly supportive

Not many gold mining projects are moving forward at the moment, but KEFI Minerals’ (LON:KEFI) Tulu Kapi gold project in Ethiopia is one of them.

A key reason is that all-in sustaining costs per ounce of gold produced are likely to come in at a very robust US$742 per ounce, allowing for significant margin even on today’s weaker gold price of around US$1,100.

Another key reason is that the government of Ethiopia is highly supportive.

And a third reason is that the KEFI team itself has brought new vigour and new thinking to an old project.

KEFI’s chairman, Harry Anagnostaras-Adams, puts this rather modestly.

“The pleasant part is that we thought we’d have 85,000 ounces of gold production per year, but we’ve revved it up to 115,000 ounces,” he says.

The truth is somewhat more dramatic.

Tulu Kapi's development had stalled, much to the ire of the Ethiopian government.

So it wasn’t just that KEFI needed to find a new mining model to make the geology and the economics work in tandem, relationships needed repairing too.

Both those tasks have now been attended to, and with such success that talks on securing the final funding package necessary to get the thing built are also well advanced.

As ever, it’s the numbers that do the talking. On the new model Tulu Kapi should deliver net cash flow after tax and all charges, including debt and gold streaming, of US$22mln per annum at the current gold price.

Given the weakness in the gold price over recent years that’s a clear win.

But the success is not altogether surprising to Anagnostaras-Adams – KEFI laid out its vision clearly two years ago when the acquisition was made.

It’s stood the test of time pretty well.

“We said then that first cash flow would be in 2017,” he says.

“That’s still the plan. We said we wanted to significantly reduce the capex by half, and we’ve done that. The capex is now almost smack on what we were targeting – US$120mln, including working capital. There’s been a mountain of work done and overall it’s actually been a bit better than what we projected.”

In the intervening period, of course, the equity markets have hardly been kind to junior miners.

But although disappointing, this is not as critical to KEFI as it might be to other junior developers, as most of its fundraising will be done outside of the equity markets.

There is an equity component, but most of that is taken up by the Ethiopian government.

“Financing is a complex task,” says Anagnostaras-Adams.

“In this market, most projects are off the table, but we’ve got a first class syndicate formed up. It’s not a done deal but everyone’s sincere and serious and there are terms on the table. We’re firming up the terms now and we’ve got four or five months now to formalise the documents and clear the regulatory requirements.”

So, given that the asset’s been re-worked, that the internal rate of return rings in at 50% on the most recent modelling, and financiers are now sitting round the table together, are there any clouds on the horizon?

One answer to that might be the gold price. It’s been relatively static at around US$1,100 for some months now and it’s a price that KEFI’s plans can easily live with, even if the original definitive feasibility work of the previous owner used a higher price of US$1,500.

“Our financial structures have been tested down to US$850 gold,” says Anagnostaras-Adams, and he speaks of the willingness of all parties to look for savings.

“With the contractors on board the squeezing’s been harder. The brains trust is larger.”

All the same, it’s a sign of the times that a certain amount of hedging is now considered appropriate for a project like this.

“It’s insurance hedging,” says Anagnostaras-Adams. “It’s not aggressive hedging. It’s about taking 10% of the reserves and locking them in. It’s about what number do you need to protect the project if the gold price fell to US$850.”

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