KEFI MINERALS†
LON:KEFI | 4.2p | US$19m | Buy | TP : 5.6p
Agrees US$30m Project Equity Investment into Local Subsidiary
KEFI Minerals has agreed an investment of US$30m into its KEFI Minerals Ethiopia (KME) subsidiary from an Ethiopian investment syndicate in return for a 30% interest, subject to final documentation and government approval. The investment will be in the form of local currency, with the initial portion, equivalent to US$9m, planned to be invested in August 2018 and the remainder on closing of the project finance.
The main elements of the project finance have now been identified. The government will contribute infrastructure to the project to a value of US$20m (in return for an 18% project interest, taking its total interest to 23%), the local investment syndicate will provide a further investment to the value of US$30m and the company recently mandated a bond arranger for the placement of US$160m of listed infrastructure bonds. KEFI has also referred to the potential to fund up to US$34m through deferred contractor payments and also a local working capital/stockpile-based loan. On completion, together these arrangements could provide US$244m of the project’s US$250m total funding requirement, including an estimated cash buffer of US$11m.
The company also noted the positive political developments taking place in Ethiopia. The new government has lifted the three-month old state of emergency, has made moves to improve its relationship with neighbouring Eritrea and has announced moves to liberalise its economy.
COMMENT: This is another significant step by KEFI towards the financing of its Tulu Kapi gold mine in Ethiopia. On completion of the project on the terms outlined above, KEFI would retain a 54% equity interest in the operating company, which would have short-term and long-term debts of US$194m. The company is working towards drawing down the project finance, along with the commencement of the community resettlement programme and the mobilisation of contractors, in September this year.
The share price has reacted very positively to the news, it is trading at 4.2p/share at the time of writing, giving the company a market cap of £14m/US$19m. We reiterate our Buy rating and target price of 5.6p. We expect that progress towards construction — planned for September — will be reflected in a reduction of the current deep discount to its estimated NAV. Our SotP valuation includes the company’s share of the value of Tulu Kapi based on its NPV8 assuming a long-term gold price of US$1,300/oz and a risk multiple of 0.4x. We also include estimated values for the potential value of the Tulu Kapi underground and future G&A costs.
We note the company’s estimated unrisked NAV of 14p/share and would expect that — as the financing is completed — the reduction in risk would be reflected in an increase in the P/NAV from its current level of 0.35x. We anticipate that the next major uplift in the value of the company will be on the completion of the bond financing. The valuation is also highly leveraged to the gold price, with our risked TP increasing to 8.5p at a gold price of US$1,400/oz. To view our latest, more extensive report on the company, please click here.