Honing in on production

KEFI Minerals 6 December 2018 Update
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KEFI Minerals

Honing in on production

Convertible issue

Metals & mining

 

6 December 2018

Price

1.4p

Market cap

£8m

US$1.2761/£

Net cash (£m) at 30 June 2018

0.5

Shares in issue

552.7m

Free float

94.8%

Code

KEFI

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(8.7)

(23.2)

(61.6)

Rel (local)

(8.8)

(16.1)

(58.9)

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 Tulu Kapi project in Ethiopia and, to a lesser extent, the Jibal Qutman project in Saudi Arabia.

Next events

Closing of project equity investment

December 2018

General meeting

17 December 2018

Community resettlement

Q119

Engineering and procurement

Q119

Construction start

H119

Analyst

Charles Gibson

+44 (0)20 3077 5724

KEFI Minerals is a research client of Edison Investment Research Limited

On 6 December, KEFI announced that it had arranged for project equity funding of the Tulu Kapi gold mine project in Ethiopia for both Q119 and Q219, and that activities are progressing to this end, including government indications that the handful of outstanding permits are still expected to be granted in December to allow for community resettlement and development. The announcement also reports completion of the project due diligence for the US$160m bond/lease proposal (see previous notes) and follows KEFI’s announcement, on 28 Nov, that it had entered into an up to £4.0m secured convertible loan facility to underpin parent company working capital as it triggers the development of the project in Q119.

Year end

Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

Yield (%)

12/16

0.0

(2.5)

(1.6)

0.0

N/A

N/A

12/17

0.0

(3.6)

(1.2)

0.0

N/A

N/A

12/18e

0.0

(3.8)

(0.9)

0.0

N/A

N/A

12/19e

0.0

(11.6)

(0.9)

0.0

N/A

N/A

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

Overall funding plan

While KEFI continues to assemble the majority of funding for development of Tulu Kapi at the project level, it has steadied the parent company’s working capital capacity ahead of the project launch. It has also further augmented its working capital flexibility by arranging to pay some service providers in equity at 2p/share.

Valuation: 7.21p, or 5.27p with full facility conversion

Before the announcement of its convertible facility, we calculated that Tulu Kapi was capable of generating free cash flow of c £41.7m a year for seven years from FY21–27, and paying average (maximum potential) dividends of 2.15p/share for the six years from FY23–28. We valued this stream of dividends at 7.21p/share (at a 10% discount rate) as at 1 January 2019, rising to 10.56p/share in FY23, when we estimated the first potential dividend could be paid. This remains ostensibly unchanged if the facility is considered as conventional debt. However, it reduces to 5.27p/share with 794.2m shares in issue assuming the drawdown and conversion of the full facility (albeit with a maximum net debt requirement reduced by almost £4.0m, from £69.4m to £65.7m, when all components of the financing are considered, whether on- or off-balance sheet). Note that this valuation rises to 9.68p if KEFI is successfully able to leverage its cash flow from the mine into its other assets in the region (vs 13.30p previously). Stated alternatively, assuming full drawdown, we estimate an investment in KEFI shares on 1 January 2019 at a price of 1.43p could generate an internal rate of return to investors of 36.7% over the 11 years to 2029 in sterling terms. A median scenario would be to assume drawdown of £3m and the conversion of half of that amount into shares, in which case our valuation reduces to 6.11p/sh with an assumed 666.7m shares in issue. Combined with the convertible facility, the planned imminent transfer of development funding obligations from KEFI down to project level is intended to provide flexibility to KEFI so that it may minimise risk as well as minimising share dilution.

Project update

On 6 December, KEFI announced that it has arranged for project equity funding of the Tulu Kapi gold mine project in Ethiopia for both Q119 and Q219, and that activities are currently progressing apace, including government indications that the handful of outstanding permits are still expected to be granted in December in order to allow community resettlement and development activities to commence. The announcement also reported completion of the project due diligence for the non-equity project finance of the US$160m bond/lease proposal.

Overall funding plan

While KEFI continues to assemble the majority of funding for the development of Tulu Kapi at the project level, it has also steadied the parent company’s working capital capacity as it prepares to launch the project (see £4m secured convertible loan facility, below). New project equity of US$50–58m has been committed by Ethiopian partners, the government and ANS Mining. Non-equity funding has been conditionally arranged with a bond arranger for US$160m and Ausdrill for in excess of US$50m of mining equipment. KEFI itself has also arranged some additional working capital flexibility by arranging to pay some service providers with shares at 2p/share as well as by arranging the secured convertible loan facility.

£4m secured convertible loan facility

KEFI’s update follows its announcement, on 28 November, that it had entered into an up to £4.0m secured convertible loan facility with a longstanding institutional shareholder with c 1.11% of the company’s equity. The loan facility will underpin KEFI by providing much needed flexibility in managing the working capital of the group, while triggering the development of the Tulu Kapi Gold Mine (TKGM) in Ethiopia at the start of FY19.

While community resettlement and initial development jobs are to be funded at the project level by KEFI subsidiary TKGM share issues to local Ethiopian investors, this proposed, parent company working capital arrangement provides capacity for the group. Among other things, it will provide KEFI with the hard currency funds to enable the parent company to fund the procedural and documentary closing of the US$260m project financing package for TKGM. Any amounts drawn under the secured loan must be repaid upon drawdown of the TKGM project finance debt.

Otherwise, all that remains for the project to proceed is the conclusion of the remaining Ethiopian government processes and approvals during December, so that the project can commence, and formal documentation of the debt so that it can close – all of which KEFI reports to be “proceeding well”.

Terms and conditions

KEFI is not obliged to draw down the facility. On account of the fees paid by KEFI in shares at 2p or higher, any amount drawn down is not subject to interest payments. Amounts drawn are repayable after one year or, by agreement with the lender, 18 months. KEFI has the right to repay the facility at any time in cash. By the same token, the lender has the right to convert any amounts outstanding into shares at a price of 2p and, if KEFI moves to repay the loan itself, the lender has the right to ask for 50% of the repayment to be in shares at 2p, rather than cash.

In the worst case scenario, we calculate this would involve the issue of an additional 241.5m shares (£4.0m outstanding all converted at an equity price of 2p plus £830,000 in fees, again all converted at 2p).

KEFI management has indicated that it is targeting drawdown of the full project financing in Q219 and it will therefore repay any loan outstanding at that point. This could result in the issue of up to 114m new shares (Edison calculation), based on KEFI’s drawing £3m of the loan and repaying it at end-Q219, half in shares and half in cash plus £0.78 in fees paid in shares.

Valuation: 7.21p, or 5.27p with full facility conversion

Before the announcement of its convertible facility, we calculated that Tulu Kapi was capable of generating free cash flow of c £41.7m a year for seven years from FY21–27, and paying average (maximum potential) dividends of 2.15p/share for the six years from FY23–28. We valued this stream of dividends at 7.21p/share (at a 10% discount rate) as at 1 January 2019, rising to 10.56p/share in FY23, when we estimated the first potential dividend could be paid. This remains ostensibly unchanged (except for slight dilution by shares issued for fees) if the facility is not drawn down or if it is fully repaid in cash (ie it is considered as conventional debt).

The worst case scenario would be to assume the drawdown of all £4m and the conversion of the entire amount into shares, in which case our valuation reduces to 5.27p/share with an assumed 794.2m shares in issue (albeit with a maximum net debt requirement reduced by almost £4.0m, from £69.4m to £65.7m, when all components of the financing are considered, whether on- or off-balance sheet).

A median scenario would be to assume drawdown of £3m and the conversion of half of that amount into shares, in which case our valuation reduces to 6.11p/sh with an assumed 666.7m shares in issue.

Note that our worst case 5.27p/share valuation rises to 9.68p if KEFI is successfully able to leverage its cash flow from the mine into its other assets in the region (vs 13.30p previously). Stated alternatively, assuming full drawdown and conversion, we estimate an investment in KEFI shares on 1 January 2019 at a price of 1.43p could generate an internal rate of return to investors of 36.7% over the 11 years to 2029 in sterling terms.

Exhibit 1: Financial summary

£000s

2013

2014

2015

2016

2017

2018e

2019e

2020e

December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

0

0

0

0

0

0

0

33,150

Cost of Sales

(927)

(2,071)

(1,634)

(2,260)

(3,522)

(3,204)

(3,365)

(25,994)

Gross Profit

(927)

(2,071)

(1,634)

(2,260)

(3,522)

(3,204)

(3,365)

7,157

EBITDA

 

 

(927)

(2,071)

(1,634)

(2,260)

(3,522)

(3,204)

(3,365)

7,157

Operating Profit (before amort. and except.)

(927)

(2,189)

(1,724)

(2,315)

(3,546)

(3,210)

(3,371)

7,150

Intangible Amortisation

0

0

0

0

0

0

0

0

Exceptionals

(442)

(379)

(428)

1,944

(2,359)

(91)

0

0

Other

0

0

0

0

0

0

0

0

Operating Profit

(1,369)

(2,568)

(2,152)

(371)

(5,905)

(3,301)

(3,371)

7,150

Net Interest

4

(413)

(319)

(136)

(75)

(589)

(8,200)

(10,626)

Profit Before Tax (norm)

 

 

(923)

(2,602)

(2,043)

(2,451)

(3,621)

(3,799)

(11,571)

(3,476)

Profit Before Tax (FRS 3)

 

 

(1,365)

(2,981)

(2,471)

(507)

(5,980)

(3,890)

(11,571)

(3,476)

Tax

0

0

0

0

0

0

0

0

Profit After Tax (norm)

(923)

(2,602)

(2,043)

(2,451)

(3,621)

(3,799)

(11,571)

(3,476)

Profit After Tax (FRS 3)

(1,365)

(2,981)

(2,471)

(507)

(5,980)

(3,890)

(11,571)

(3,476)

Average Number of Shares Outstanding (m)

29.0

56.0

92.8

194.9

315.3

442.7

673.5

794.2

EPS - normalised (p)

 

 

(7.4)

(6.2)

(3.0)

(1.6)

(1.2)

(0.9)

(0.9)

(0.2)

EPS - normalised and fully diluted (p)

 

(7.4)

(6.2)

(3.0)

(1.5)

(1.1)

(0.8)

(0.9)

(0.2)

EPS - (IFRS) (p)

 

 

(4.7)

(5.1)

(2.7)

(0.3)

(1.9)

(0.9)

(0.9)

(0.2)

Dividend per share (p)

0.0

0.0

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

16,275

18,835

29,754

110,116

Intangible Assets

6,900

9,139

11,845

13,992

16,232

18,518

18,518

18,518

Tangible Assets

252

160

81

61

43

41

10,960

91,322

Investments

0

0

0

0

0

276

276

276

Current Assets

 

 

4,014

1,061

1,012

3,561

1,047

164,573

160,366

88,917

Stocks

0

0

0

0

0

0

0

1,381

Debtors

655

335

358

3,056

94

258

0

182

Cash

3,279

640

562

410

466

163,828

159,879

86,867

Other

80

86

92

95

487

487

487

487

Current Liabilities

 

 

(3,363)

(3,202)

(1,995)

(2,067)

(2,852)

(2,852)

0

(1,928)

Creditors

(3,363)

(3,202)

(1,995)

(2,067)

(2,852)

(2,852)

0

(1,928)

Short term borrowings

0

0

0

0

0

0

0

0

Long Term Liabilities

 

 

0

0

0

0

0

(125,392)

(142,074)

(152,534)

Long term borrowings

0

0

0

0

0

(125,392)

(136,039)

(147,603)

Other long term liabilities

0

0

0

0

0

0

(6,034)

(4,931)

Net Assets

 

 

7,803

7,158

10,943

15,547

14,470

55,164

48,046

44,570

CASH FLOW

Operating Cash Flow

 

 

(1,424)

(2,006)

(2,729)

(2,211)

(51)

(3,380)

(5,959)

7,522

Net Interest

4

(413)

(319)

(136)

(75)

(589)

(8,200)

(10,626)

Tax

0

0

0

0

0

0

0

0

Capex

(877)

(3,133)

(3,507)

(3,014)

(2,625)

(2,776)

(10,925)

(80,369)

Acquisitions/disposals

(1,083)

(750)

0

16

0

0

0

0

Financing

4,735

3,663

6,480

5,192

2,807

44,715

4,444

0

Dividends

0

0

0

0

0

0

0

0

Net Cash Flow

1,355

(2,639)

(75)

(153)

56

37,970

(20,640)

(83,473)

Opening net debt/(cash)

 

 

(1,924)

(3,279)

(640)

(562)

(410)

(466)

(38,436)

(17,805)

HP finance leases initiated

0

0

0

0

0

0

0

0

Other

0

0

(3)

1

0

0

10

0

Closing net debt/(cash)

 

 

(3,279)

(640)

(562)

(410)

(466)

(38,436)

(17,805)

65,668

Source: KEFI Minerals, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by KEFI Minerals and prepared and issued by Edison, in consideration of a fee payable by KEFI Minerals. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved 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.

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New Zealand

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. 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 (i.e. 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.

United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

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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

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10017, New York

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Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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General disclaimer and copyright

This report has been commissioned by KEFI Minerals and prepared and issued by Edison, in consideration of a fee payable by KEFI Minerals. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved 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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

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US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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