COMPANIES
KEFI MINERALS†
LON:KEFI | 5.75p | US$25m | Buy | TP : 10.5p
Agreement on Ownership Structure with Ethiopian Government
KEFI Minerals has announced that, based on the latest project cost estimates, the Government of Ethiopia will receive 20% of Tulu Kapi Gold Mines Share Company Limited (TKM) in exchange for spending US$20m on project infrastructure, as well as a 5% free carry. This would leave KEFI with a 75% ownership stake, in line with our previously-stated expectation. The final ownership stakes remain subject to change should KEFI’s contribution to initial capex differ from those projected.
COMMENT: This agreement adds to a series of positive developments with the Ethiopian Government. KEFI recently announced that resettlement arrangements had been triggered for the Tulu Kapi community and that the first tranche of the VAT refund had been received. While the final compensation amounts remain outstanding, the property survey will form the basis of determining these levels. These announcements show material progress, as well as a strong working relationship with the government.
Combined with the ruling from the Federal Supreme Court of Ethiopia that reduced a damage claim from US$12.0m to US$0.6m, the attractiveness of KEFI has materially improved over the last two weeks. The key issues remaining are the financing package and the Ethiopian State of Emergency, which we believe are closely related.
We maintain our Buy rating on KEFI and target price of 10.5p.
Tulu Kapi is an attractive gold development project with planned production of 980,000oz over a ten-year mine life at LoM average AISC of US$779/oz — Reserves at Tulu Kapi stand at 1.05Moz, grading 2.1 g/t. This conventional open-pit and CIL-based project is expected to have a competitive operating cost structure, with estimated average life-of-mine AISC at US$779/oz. Including contingencies and overheads, the total funding requirement is US$155m, equivalent to an attractive capital intensity of US$158/oz of life-of-mine production. The project is planned to produce 115,000oz pa on average over the first eight years of operation. Assuming a gold price of US$1,200/oz, management estimates that the open-pit project has an NPV8 of US$77m and an IRR of 47%.
The government’s 25% interest remains subject to KEFI’s contribution to initial capex — The Government of Ethiopia is receiving an equity stake in the project based on its contribution of costs incurred to reach the production stage. Based on the government’s 20% interest, the total costs to bring the project to production are implied to be US$95m, with US$75m being KEFI’s share. Since the company has previously stated it intends to raise US$20m through equity or mezzanine financing, we take this to mean that KEFI has spent US$55m and has US$20m remaining. We have assumed that, should KEFI raise corporate-level mezzanine debt, the related cash contributed to the project would go towards KEFI’s share of costs, while any project-level financing would not.
The company is working towards commencing construction of the project in 2H17 — Key items remaining to complete the process include:
• Resettlement plan and associated compensation — On 26 April 2017 KEFI announced that, along with the Government of Ethiopia, it had triggered the resettlement arrangements for the Tulu Kapi community. The company had previously re-confirmed with the government the methodology for determining the compensation for resettlement in order to ensure the compliance of all parties with Ethiopian law and World Bank guidelines. The property survey now underway will go towards finalising the compensation amounts to be paid for resettlement.
• Project funding, currently estimated at US$155m, is a focus for KEFI — The company has been working with potential co-lenders to satisfy their due diligence requirements. KEFI previously announced that it would be able to announce a co-lender to coincide with the scheduled end of the Ethiopian State of Emergency, but this has since been extended. Although the final make up of project financing will not be known until the package has been finalised, recent indications are that the company has been seeking finance from a number of sources, such as:
o The government — It will invest US$20m into the project in return for increasing its direct interest from 5% to up to 25%, with the final level dependent on KEFI’s equity contribution. The government is contributing US$20m in the form of funding project infrastructure requirements, including road and power lines.
o Senior secured debt of ~US$100m — Negotiations with the Development Bank of Ethiopia were recently reported to be at an advanced stage. The company is engaging with other potential lenders to the project, many of whom are already active in the region.
o Mezzanine or equity finance of ~US$20m — To be provided through some combination of mezzanine debt, off-take finance and equity.
o Cost overrun facility of ~US$15m.
We continue to rate the shares as a Buy and have a target price (TP) of 10.5p — Our TP is based on a risked sum-of-the-parts valuation and the pre-consolidation share count, and assumes a long-term gold price of US$1,350/oz. It includes the Tulu Kapi Project on the basis of an NPV8 to which we have applied a risk multiple of 0.5x. We have added values for potential from the underground development of Tulu Kapi and from the company’s Jibal Qutman Gold Exploration Project in Saudi Arabia, and have adjusted for corporate G&A and net cash.