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KEFI Minerals plc: THE INVESTMENT CASE

Finance package for Tulu Kapi burnishes KEFI Minerals' appeal

Harry Adams, KEFI’s executive chairman, said a development funding approach was more appropriate for start-up purposes than bank debt
picture of mine
INVESTMENT OVERVIEW: KEFI The Big Picture
Tulu Kapi will produce at 115,000 oz per year at first

KEFI Minerals PLC (LON:KEFI) has taken a major step towards the construction of its Tulu Kapi gold mine in Ethiopia.

Infrastructure specialist Oryx is to put up US$135mln in new debt through a lease and payback arrangement that will also see it become the processing plant operator.

Mining will be carried out by contractor Ausdrill.

New vehicle to be set up

The package will see a new special purpose vehicle set-up for the mine to be 75% owned by KEFI.

Harry Adams, KEFI’s executive chairman, said a development funding approach was more appropriate for start-up purposes than bank debt due to its  9-year term and as repayments start 30 months after first drawdown.

At a gold price of US$1,250/oz, Tulu Kapi's robust project cash flow projections, combined with the innovative financing proposal from Oryx, looks to well serve KEFI's objective to rapidly repay debts whilst implementing our targeted exploration programs and commencing dividends during the early production years.”

Due diligence still has to be carried out and KEFI said the door is still open for other finance offers but added the Oryx proposal had significant advantages.

WATCH: Kefi Minerals 'cracks the back of Tulu Kapi financing' - Exec chair Harry Adams

READ: KEFI Minerals boosts cash flow projections from Tulu Kapi in new study

These include low start-up capital, minimal equity dilution and the nine year term.

Coupon on the debt is 8% and KEFI believes that on cash flow projections already published it can repay the US$135mln within four and half years at a gold price of US$1,250.

KEFI will need to find a further US$30mln to fund the project completely and is looking at either a loan from the Ethiopian Development Bank, new equity or a project level investment into the special purpose vehicle.

Work is expected to start on the mine before the end of 2017.

 

Finance package confirms broker optimism

RFC Ambrian suggests there is at least 100% upside in the Ethiopia and Saudi Arabia-based gold junior.

Tulu Kapi will be a 115,000oz per annum (pa) gold project with life–of-mine estimates close to a million ounces.

Government support for the project is high with US$20mln of direct investment already committed for off-site infrastructure requirements. 

Tweaks to the 2015 definitive feasibility study suggest all-sustaining very competitive costs of US$761/oz, with low grid power costs and capital efficiency (build cost)  of US$158/oz.

 

Gold price helpful

Tulu Kapi should also enter production in a strong gold price environment.

“The gold price has risen 9% year to date and has the potential to move higher as the likelihood of major revisions to US fiscal policy falls.

“On the downside, the US Fed has begun hiking interest rates and may look to accelerate, although this has become less likely. “

Ethiopia too was ranked as the eighth most favourable mining jurisdiction in Africa, but regional tensions have since exploded in to violence and prompted the state of emergency.

 

Expansion potential

On the mining side, a scoping study on a potential underground resource at Tulu Kapi suggests the production rate can rise from 115,000oz pa to 150,000oz pa from Year 4, which RFC Ambrian says would boost net present value (an estimate of future cash flows) by US$28mln at a gold price of US$1,250/oz.

In addition, KEFI has identified more satellite targets within trucking distance of the mine site.

 

Jibal Qutman still developing

In Saudi, KEFI has a 40%-stake in the Jibal Qutman project where feasibility work is scheduled to start later this year or in 2018.

 

Value undemanding says broker

The current share price is a modest 0.2 times net asset value on an unrisked basis says RFC Ambrian.

Adding in risk factors brings the price target down to 10.5p, but that should rise once the state of emergency has ended and financing is secured. Shares today were up 25% to 5.35p.

 

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