Greater exposure to gold price beckons

Kefi Minerals 1 February 2018 Update
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KEFI Minerals

Greater exposure to gold price beckons

Development preparations

Metals & mining

1 February 2018

Price

3.62p

Market cap

£12m

US$1.4033/£

Net cash (£m) at 30 June 2017

1.6

Shares in issue

332.7m

Free float

89.5%

Code

KEFI

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

19.1

(21.3)

(51.5)

Rel (local)

16.4

(23.4)

(55.2)

52-week high/low

10.9p

4.1p

Business description

KEFI Minerals is an exploration and development company focused on gold and copper deposits in the highly prospective Arabian-Nubian Shield, principally the 95%-owned Tulu Kapi project in Ethiopia and, to a lesser extent, the 40%-owned Jibal Qutman project in Saudi Arabia.

Next events

Final project financing

Q118

Community resettlement

Q218

Breaking ground

Q218

Analyst

Charles Gibson

+44 (0)20 3077 5724

KEFI Minerals is a research client of Edison Investment Research Limited

On 1 February, KEFI announced the appointment of David Munro, former MD of Billiton, and his two partners at International Mining Performance, to the senior management team as a prelude to triggering development and operations. This followed the announcement on 18 January that KEFI had terminated, by mutual agreement, its relationship with Oryx relating to its funding plans. Simultaneously, in its quarterly operational update, it reported that the funding approach remains unchanged, albeit with a simplified structure. KEFI also released the results of the final Tulu Kapi project models agreed by the consortium (and uploaded into the formal financing data rooms), which demonstrated some value improvements for shareholders compared with recent guidance.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15

0.0

(2.0)

(3.0)

0.0

N/A

N/A

12/16

0.0

(2.5)

(1.6)

0.0

N/A

N/A

12/17e

0.0

(2.9)

(0.9)

0.0

N/A

N/A

12/18e

0.0

(2.8)

(0.4)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.

Like-for-like project NPV8 up 15-18%

Compared to its earlier guidance of a project NPV8 of US$74m at US$1,250/oz Au and US$92m at US$1,300/oz at the start of construction, KEFI’s models now indicate a value of US$109m at US$1,300/oz. At the start of production, they indicate a value of US$175m at US$1,300/oz Au vs US$131m at US$1,250/oz Au and US$152m at US$1,300/oz, previously. The models reflect a two-year schedule set out with the contractors, to start construction in 2018, mining in 2019 and gold production in 2020.

Greater exposure to gold price upside beckons

Management advises that the simplification of the funding structure reduces operating costs, as does the honing of the project plans and management structure. These refinements are reflected in improved cash flows and NPVs.

Valuation: Clear roadway to value uplift

Our funding assumptions for KEFI remain unchanged. Otherwise, updating our financial model for these new factors (as well as our updated gold price forecasts – see Mining overview: Unlocking the price to NPV discount, published in November 2017), we estimate that Tulu Kapi is capable of generating average cash flows from operations of c £42.4m pa (vs £45.4m previously), which we value at £194.6m (cf £208.3m) or 22.0p per fully diluted share (attributable) at the start of production in 2020, or £61.6m, 13.9p per existing share, currently, using a 10% discount rate. Fully diluted at a share price of 3.75p (vs 3.50p previously), our valuation is 8.26p/share (cf 7.68p previously), based on the net present value of expected future dividends, discounted at 10% pa. This valuation then increases to 13.3p in 2023 and further, to 17.87p, in the event that KEFI is successfully able to leverage its cash flow from Tulu Kapi into other development assets in the region.

Exhibit 1: Financial summary

£'000s

2013

2014

2015

2016

2017e

2018e

December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

0

0

0

0

0

0

Cost of Sales

(927)

(2,071)

(1,634)

(2,260)

(2,692)

(2,538)

Gross Profit

(927)

(2,071)

(1,634)

(2,260)

(2,692)

(2,538)

EBITDA

 

 

(927)

(2,071)

(1,634)

(2,260)

(2,692)

(2,538)

Operating Profit (before amort. and except.)

(927)

(2,189)

(1,724)

(2,315)

(2,747)

(2,578)

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

(442)

(379)

(428)

1,944

(1,900)

0

Other

0

0

0

0

0

0

Operating Profit

(1,369)

(2,568)

(2,152)

(371)

(4,647)

(2,578)

Net Interest

4

(413)

(319)

(136)

(189)

(242)

Profit Before Tax (norm)

 

 

(923)

(2,602)

(2,043)

(2,451)

(2,936)

(2,820)

Profit Before Tax (FRS 3)

 

 

(1,365)

(2,981)

(2,471)

(507)

(4,836)

(2,820)

Tax

0

0

0

0

0

0

Profit After Tax (norm)

(923)

(2,602)

(2,043)

(2,451)

(2,936)

(2,819)

Profit After Tax (FRS 3)

(1,365)

(2,981)

(2,471)

(507)

(4,836)

(2,820)

Average Number of Shares Outstanding (m)

29.0

56.0

92.8

194.9

332.7

498.6

EPS - normalised (p)

 

 

(7.4)

(6.2)

(3.0)

(1.6)

(0.9)

(0.4)

EPS - normalised and fully diluted (p)

 

(7.4)

(6.2)

(3.0)

(1.5)

(0.9)

(0.4)

EPS - (IFRS) (p)

 

 

(4.7)

(5.1)

(2.7)

(0.3)

(1.5)

(0.4)

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

-

-

-

-

-

-

EBITDA Margin (%)

-

-

-

-

-

-

Operating Margin (before GW and except.) (%)

-

-

-

-

-

-

BALANCE SHEET

Fixed Assets

 

 

7,152

9,299

11,926

14,053

16,142

77,957

Intangible Assets

6,900

9,139

11,845

13,992

15,856

15,856

Tangible Assets

252

160

81

61

40

61,855

Investments

0

0

0

0

246

246

Current Assets

 

 

4,014

1,061

1,012

3,561

342

59,976

Stocks

0

0

0

0

0

0

Debtors

655

335

358

3,056

247

247

Cash

3,279

640

562

410

0

59,634

Other

80

86

92

95

95

95

Current Liabilities

 

 

(3,363)

(3,202)

(1,995)

(2,067)

(2,067)

(2,067)

Creditors

(3,363)

(3,202)

(1,995)

(2,067)

(2,067)

(2,067)

Short term borrowings

0

0

0

0

0

0

Long Term Liabilities

 

 

0

0

0

0

(2,203)

(99,765)

Long term borrowings

0

0

0

0

(2,203)

(99,765)

Other long term liabilities

0

0

0

0

0

0

Net Assets

 

 

7,803

7,158

10,943

15,547

12,214

36,102

CASH FLOW

Operating Cash Flow

 

 

(1,424)

(2,006)

(2,729)

(2,211)

(1,670)

(2,538)

Net Interest

4

(413)

(319)

(136)

(189)

(242)

Tax

0

0

0

0

0

0

Capex

(877)

(3,133)

(3,507)

(3,014)

(2,358)

(61,855)

Acquisitions/disposals

(1,083)

(750)

0

16

0

0

Financing

4,735

3,663

6,480

5,192

1,604

26,708

Dividends

0

0

0

0

0

0

Net Cash Flow

1,355

(2,639)

(75)

(153)

(2,613)

(37,927)

Opening net debt/(cash)

 

 

(1,924)

(3,279)

(640)

(562)

(410)

2,203

HP finance leases initiated

0

0

0

0

0

0

Other

0

0

(3)

1

0

0

Closing net debt/(cash)

 

 

(3,279)

(640)

(562)

(410)

2,203

40,130

Source: Company sources, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by KEFI Minerals and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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Germany

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by KEFI Minerals and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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