gold water

More gold faster and cheaper

KEFI Minerals 30 September 2015 Update

KEFI Minerals

More gold faster and cheaper

H1 results & DFS evolution

Metals & mining

1 October 2015

Price

0.53p

Market cap

£9m

US$1.5231/£

Net cash (£m) at 30 June 2015

1.0

Shares in issue

1,744.4m

Free float

89.5%

Code

KEFI

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(33.3)

(39.4)

(63.6)

Rel (local)

(31.4)

(35.1)

(61.5)

52-week high/low

1.3p

0.5p

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

Financing details

Q415

Analyst

Charles Gibson

+44 (0)20 3077 5724

KEFI’s DFS on Tulu Kapi was based on a conventional owner-operator model to estimate costs from first principles (see page 2). However, to minimise initial capex, management then invited final bids from fixed-price plant building and mining contractors. In collaboration with these, it has also been able to announce a 25% expansion of the proposed processing rate to 1.5Mtpa, such that KEFI shares now offer investors an IRR of 38.6% in sterling terms over 12 years (vs 25.9% over 17 years previously). Significantly, KEFI has also confirmed that the Ethiopian government is planning to proceed with a US$20m investment at the project subsidiary level at a valuation related toTulu Kapi’s NPV at the current gold price.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/13

0.0

(0.9)

(0.4)

0.0

N/A

N/A

12/14

0.0

(2.6)

(0.4)

0.0

N/A

N/A

12/15e

0.0

(1.8)

(0.2)

0.0

N/A

N/A

12/16e

0.0

(6.1)

(0.3)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding intangible amortisation and exceptional items.

Reduced capex and opex

In contrast to the original processing plan, the updated schedule seeks to process the same quantity of ore over 11, rather than 14 years (although the mine plan remains unchanged). As a result, there is an increase in forecast gold production in the first nine years of operations. By contrast, while there is an increase in gross costs in six of the first seven years of operations, there is a 3.1% decline overall over the full 11-year life of operations, resulting in a 2.7% decline in unit costs of production (including offsite costs and royalties), from US$761/oz to US$740/oz. In addition to the revised plant throughput schedule, KEFI is in the process of revising and optimising its capex estimates. Relative to estimates at the time of our initiation note in August, KEFI’s latest estimates indicate an 11.1% reduction in upfront capital expenditure (including working capital and community relocation costs).

Valuation: Up 34.2% to 2.59p per share

We calculate that KEFI is capable of generating average after-tax earnings of c £25m pa for eight years, from 2018 to 2025 (vs £20m pa previously) and free cash flow of £34m pa (vs £32m previously). Without taking into account the anticipated streaming deal and using a 10% discount rate, our updated estimate of the project’s NPV is £78.8m (vs £68.0m previously), or 4.5p/share (4.3p attributable) at our long-term gold prices. Whereas previously funding had been assumed to be in the form of a US$100m streaming agreement and a US$10m equity raise, it is now assumed to be in the form of streaming (US$45m), equity in the project (US$20m) and equity in the parent (US$5m), with the balance to be provided in the form of conventional debt. On the basis of these funding assumptions in particular, we now estimate that KEFI investors may expect maximum potential dividends in the order of 0.69p/share pa, which have a value over the life of operations of 2.59p/share in 2015 (using a 10% discount rate), rising to 3.79p/share in FY19.

Investment summary: Updated estimates and forecasts

With collaboration from Senet, Golders, Epoch and Snowden, KEFI completed an updated definitive feasibility study (DFS) on the Tulu Kapi project in July 2015. The DFS reflected both a complete overhaul, and an independent validation, of the Tulu Kapi geological resources and reserves, whereby KEFI inserted significant additional data and “wireframed” each individual ore lode in the system as part of a concerted programme of works to put behind it the issues raised by the intended bankers about the previous project plans under past ownership. Capex for the project in the DFS was estimated to be US$176m. However, the study was completed as if Tulu Kapi would be owner-operated. In consideration of the need to minimise initial capital expenditure, as well as the more exacting technical requirements of the selective mining campaign, KEFI instead decided to pursue a contract mining business plan, with the result that estimates for development capex initially reduced to US$141.2m (including working capital and relocation costs), which formed the basis of our initiation note, published in August 2015.

The development plan for Tulu Kapi has continued to evolve since then and, on 7 September, KEFI announced revised operational parameters for the project, based on an increased plant throughput rate. The expansion was based on the company’s ongoing discussions with potential project contractors. However, whereas the processing rate will increase, the mine plan will remain unchanged, as the original plan envisaged building up a stockpile, which would then be processed in years 11 to 14 of the project. The updated plan, by contrast, assumes a closer relationship between mining and processing rates, such that both are completed in year 11 of the project. However, based on the bids received to date, KEFI does not expect the expanded plant to increase the assumed level of funding required to develop the mine. A summary of the new processing plan and cost schedule is shown in Exhibit 1 below.

Exhibit 1: Updated Tulu Kapi mine plan and cost assumptions

2017e

2018e

2019e

2020e

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

2029e

2030e

Waste (kt)

7,281

12,922

15,446

17,368

16,688

17,091

14,120

7,462

3,728

1,740

353

0

0

0

Stripping ratio

5.2

5.2

6.3

15.3

9.2

12.1

7.3

5.2

4.7

5.2

2.8

0

0

0

Ore processed (kt)

950

1,500

1,500

1,500

1,500

1,500

1,500

1,500

1,500

1,500

943

0

0

0

Grade (g/t)

1.77

2.59

2.88

2.01

2.24

2.26

2.48

2.29

2.13

1.24

0.85

0.00

0.00

0.00

Contained gold (koz)

54.1

124.7

139.0

96.9

107.9

109.1

119.6

110.7

102.6

59.8

25.8

0.0

0.0

0.0

Recovery (%)

92.47

92.82

92.90

92.38

92.55

92.05

90.46

89.61

89.98

89.79

89.67

0.00

0.00

0.00

Recovered gold (koz)

50.0

115.8

129.1

89.5

99.9

100.5

108.2

99.2

92.3

53.7

23.2

0.0

0.0

0.0

Operating costs (US$/t processed unless otherwise indicated)

Mining (US$/t mined)*

3.69

3.09

3.25

3.17

2.97

2.99

3.29

3.08

3.23

3.63

4.76

0.00

0.00

0.00

Milling (oxide, US$/t)

9.98

9.98

9.98

9.98

9.98

9.98

9.98

9.98

9.98

9.98

9.98

9.98

9.98

9.98

Milling (fresh ore, US$/t)

7.63

7.63

7.63

7.63

7.63

7.63

7.63

7.63

7.63

7.63

7.63

7.63

7.63

7.63

Milling (hard ore, US$/t)

0.00

0.00 

0.00 

9.60

9.60

9.60

9.60

9.60

9.60

9.60

9.60

0.00

0.00

0.00

Total (US$/t)

47.90

44.02

50.90

51.22

48.71

49.16

48.32

31.75

22.71

17.97

16.26

0.00

0.00

0.00

Gold price (US$/oz)

1,347

1,408

1,483

1,467

1,409

1,404

1,389

1,379

1,398

1,423

1,431

1,439

1,409

1,395

Sustaining capex (US$000’s)

2,872

5,773

2,787

3,411

2,248

5,816

0

0

0

0

0

0

0

0

Source: KEFI Minerals, Edison Investment Research. Note: *Includes waste.

This may be compared to the assumptions used in our initiation note, which are reproduced in Exhibit 2 below.

Exhibit 2: Previous Tulu Kapi assumptions

2017e

2018e

2019e

2020e

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

2029e

2030e

Ore processed (kt)

800

1,200

1,200

1,200

1,200

1,200

1,200

1,200

1,200

1,200

1,200

1,200

1,200

193

Grade (g/t)

1.95

3.01

3.33

2.27

2.60

2.63

2.91

2.68

2.49

1.64

0.86

0.70

0.70

0.68

Contained gold (koz)

50.2

116.1

128.6

87.7

100.1

101.4

112.2

103.3

95.9

63.4

33.3

26.9

26.9

4.3

Recovery (%)

92.63

92.92

92.97

92.43

92.62

92.08

90.39

89.47

89.88

90.54

90.89

91.41

89.80

88.78

Recovered gold (koz)

46.5

107.9

119.5

81.1

92.7

93.4

101.5

92.4

86.2

57.4

30.2

24.6

24.1

3.8

Operating costs (US$/t processed unless otherwise indicated)

Mining (US$/t mined)*

2.81

3.39

3.66

2.01

2.75

2.94

3.50

4.14

4.67

5.36

4.85

3.00

3.02

9.70

Milling (oxide)

9.98

9.98

9.98

9.98

9.98

9.98

9.98

9.98

9.98

9.98

9.98

9.98

9.98

9.98

Milling (fresh ore)

7.63

7.63

7.63

7.63

7.63

7.63

7.63

7.63

7.63

7.63

7.63

7.63

7.63

7.63

Milling (hard ore)

9.60

9.60

9.60

9.60

9.60

9.60

9.60

9.60

9.60

9.60

9.60

9.60

9.60

9.60

Total (US$/t)

43.69

53.59

64.37

44.82

54.60

58.75

59.62

45.25

33.99

27.37

19.01

13.61

15.06

23.92

Gold price (US$/oz)

1,347

1,408

1,483

1,467

1,409

1,404

1,389

1,379

1,398

1,423

1,431

1,439

1,409

1,395

Sustaining capex (US$000’s)

3,054

5,927

2,649

3,350

2,248

800

0

0

0

0

0

0

0

0

Source: KEFI Minerals, Edison Investment Research. Note: *Includes waste.

As previously, additional costs include the 7% mining royalty, US$8.5m in life-of-mine offsite costs and an US$11.9m provision for closure costs. On-site general and administrative costs are forecast to be US$7.1m pa during full mining and processing operations and US$3.6m pa while reprocessing stockpiles (for the final nine months of operations only). Head office costs are assumed to amount to £2.0m pa. A carried-forward tax loss of US$60m has also been applied to future pre-tax profits before tax is payable.

The principal differences between the two plans may be summarised as follows:

the same quantity of ore and waste mined;

the same quantity of ore processed, but processed over 11, rather than 14 years (including part-years);

a decline in the head grade of ore processed in all 11 years;

an increase in gold production in the first nine years of operations, owing to increased plant throughput;

an increase in gross costs (in US$m) in six of the first seven years of operations; however, a 3.1% decline in gross costs over the full 11-year life of operations;

an increase in unit costs (as measured in US$/t processed) in only two of the first seven years of operations on account of higher plant throughput rates; and

a decrease in initial sustaining capital, but a US$4.9m increase over the life of operations.

A summary of these changes is provided in the table below in the units in which each of these parameters is reported.

Exhibit 3: Tulu Kapi mine plan and cost assumption changes

2017e

2018e

2019e

2020e

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

2029e

2030e

Ore processed (kt)

150

300

300

300

300

300

300

300

300

300

-257

-1,200

-1,200

-193

Grade (g/t)

-0.18

-0.42

-0.45

-0.26

-0.36

-0.37

-0.43

-0.39

-0.36

-0.40

-0.01

-0.70

-0.70

-0.68

Contained gold (koz)

3.9

8.6

10.4

9.2

7.8

7.7

7.4

7.4

6.7

-3.6

-7.5

-26.9

-26.9

-4.3

Recovery (%)

-0.16

-0.10

-0.07

-0.05

-0.07

-0.03

0.07

0.14

0.10

-0.75

-1.22

N/A

N/A

N/A

Recovered gold (koz)

3.5

7.9

9.6

8.4

7.2

7.1

6.7

6.8

6.1

-3.7

-7.0

-24.6

-24.1

-3.8

Operating costs (US$/t processed unless otherwise indicated)

Mining (US$/t mined)*

0.88

-0.30

-0.41

1.16

0.22

0.05

-0.21

-1.06

-1.44

-1.73

-0.09

N/A

N/A

N/A

Milling (oxide)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

N/A

N/A

N/A

Milling (fresh ore)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

N/A

N/A

N/A

Milling (hard ore)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

N/A

N/A

N/A

Total (US$/t)

4.21

-9.57

-13.47

6.40

-5.89

-9.59

-11.30

-13.50

-11.28

-9.40

-2.75

N/A

N/A

N/A

Gold price (US$/oz)

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Sustaining capex (US$000’s)

-182

-154

138

61

0

5,016

0

0

0

0

0

0

0

0

Source: KEFI Minerals, Edison Investment Research. Note: *Includes waste.

Overall, unit working costs decline 3.1% under the updated processing schedule (from US$40.77/t processed to US$39.50/t). By contrast, total unit cash costs of production, which include unchanged offsite and royalty cost assumptions, decline 2.7%, from US$761/oz to US$740/oz.

In addition to the revised plant throughput schedule, KEFI is in the process of revising and optimising its capital expenditure estimates. Updated capital cost estimates, including their evolution since the release of the original BFS in July, and projected savings are provided in Exhibit 4 below.

Exhibit 4: Tulu Kapi initial capex estimate evolution, July 2015 to present

Capital expenditure

Original BFS

Original contract mining estimates*

Updated contract mining estimates and savings

Mining

39,742

10,586

15,586

Processing

79,908

72,300

65,614

Infrastructure

21,748

17,800

16,748

Tailings

7,088

8,200

7,088

Indirect (EPCM, contract mining etc)

0

10,800

14,294

Owners Cost

8,854

7,604

7,604

Independent Technical Experts’ (ITE) review

5,717

0

5,717

Working Capital

0

6,100

6,579

Other

12,543

0

13,291

Subtotal

175,600

133,390

152,521

Relocation & livelihood restitution

8,330

7,800

8,330

Total

183,930

141,190

160,851

Deferred payment of EPC contractor

-10,417

Further savings in mining, tailings, access roads etc

-10,448

Targeted savings in civils

-11,478

Further targeted EPC savings offset by expansion costs

-3,000

Total after savings

125,507

Source: KEFI Minerals, Edison Investment Research. Note: *As used in our August 2015 initiation note.

Note that the US$10.4m reduction in the retainer payable to KEFI’s EPC contractor is presumed to be a deferral only, ie it is assumed that a payment for the same amount will occur, but later in the life of the mine’s operations, such that it will not be a part of initial capital expenditure and will therefore be payable out of cash flows, rather than adding to KEFI’s initial funding requirement.

On the basis of these updated estimates, overall, pre-production capex equates to US$1,203 per annual oz of average gold production at full capacity (vs US$1,396 previously), or US$83.67/t of ore processed (vs 112.6/t previously).

Valuation

KEFI has recently announced that it intends to source US$20m in funding for the project “as minority equity investment in the project subsidiary” and that this will “be priced at a valuation reflecting Tulu Kapi’s net present value of c US$100m at current gold prices.” On this basis, a US$20m investment in the project subsidiary would confer a 16.7% interest in the project on the investor and KEFI has confirmed that the government of Ethiopia is now planning to proceed with such an arrangement, which is self-evidently a positive development.

Whereas previously funding had been assumed to be in the form of a US$100m streaming agreement and a US$10m equity raise, it is now assumed to be in the form of streaming (US$45m), equity in the project (US$20m) and equity in the parent (US$5m), with the balance to be provided in the form of conventional debt.

On the basis of the above assumptions alone and converting at the prevailing foreign exchange rate of US$1.5231/£ (vs 1.55/£ previously), we calculate that KEFI is capable of generating average after-tax earnings of c £25m pa for eight years, from 2018 to 2025 (vs £20m pa previously) and free cash flow of £34m pa (vs £32m previously) on a 100% basis. Without taking into account the anticipated streaming deal and using a 10% discount rate, our updated estimate of the project’s NPV is £78.8m (vs £68.0m previously), or 4.5p per existing share (4.3p attributable). The project’s internal rate of return increases from 26.1% to 29.5%.

Over the period since our initiation note, KEFI’s share price has fallen from 0.78p to 0.53p. However, to the extent that this implies a proportionate increase in dilution (although the amount of equity to be raised is now lower), this is more than offset by the fact that dividends will be paid out over a shorter, earlier timespan (notwithstanding the increased minority interest), with the result that investors in KEFI’s shares may expect maximum potential dividends in the order of 0.69p/share pa (vs 0.46p/share previously). Therefore, whereas the net present value of this dividend stream was 1.93p/share previously (when discounted at 10% pa), it is now 2.59p – an increase of 34.2%. This valuation then rises to 3.79p/share (vs 2.82p/share previously) in FY19, being the year of the first (potential) substantive dividend payment. As a result, an investment in KEFI shares at a price of 0.53p per share will therefore generate a return to investors of 38.6% in sterling terms over 12 years (vs 25.9% over 17 years previously).

Exhibit 5: Edison estimate of life-of-mine KEFI EPS and (maximum potential) DPS

Source: Edison Investment Research. Note: DDF = discounted dividend flow.

Sensitivities

Quantitatively, our DDF valuation of 2.59p is most sensitive to the gold price, cash costs and the discount rate, as shown in Exhibits 6 and 7 below.

Exhibit 6: Discounted dividend valuation sensitivity to gold prices and costs

Valuation (pence per share)

Gold price

Spot price*

-20%

-10%

Base case

+10%

+20%

+20%

0.00

0.00

0.45

1.35

2.29

3.23

+10%

0.10

0.14

1.03

1.97

2.91

3.85

Cash costs

Base case

0.68

0.72

1.64

2.59

3.53

4.48

-10%

1.27

1.32

2.26

3.21

4.16

5.11

-20%

1.88

1.93

2.88

3.83

4.79

5.75

Source: Edison Investment Research. Note: *US$1,128/oz.

A 10% change in the gold price from our long-term forecasts therefore results in a c 0.94p per share change in our KEFI valuation, whereas a 10% change in cash costs (excluding royalty and offsite costs) results in a 0.62p per share change.

Exhibit 7: Discounted dividend valuation relative to discount rate

Discount rate (%)

0%

5%

10%

15%

20%

25%

30%

Valuation (pence)

6.21

3.94

2.59

1.75

1.22

0.87

0.63

Source: Edison Investment Research

Financials

KEFI’s financial results for the half year to 30 June 2015 were consistent both with what investors should expect from a junior mining company and our forecasts. As at 30 June, the company had cash of £1.0m on its balance sheet (cf £0.6m on 31 December 2014) after a cash burn of £3.6m
(cf £3.8m in H114 and £6.3m in FY14). For the purposes of our valuation (and in line with company guidance), we have assumed one further equity raise of US$5m in FY15 via the issue of an additional 619.4m shares (vs 859.4m previously) at a price of 0.53p/share.

On the basis of these assumptions, we estimate that KEFI will have a maximum funding requirement (likely to be satisfied predominantly by debt) of £40.0m (excluding streaming) in FY17 (see Exhibit 8).

Streaming will create an additional contingent liability in KEFI’s accounts, which we estimate in the order of £28.1m at its maximum extent in FY17 (see above and also Exhibit 8). However, streaming is associated with less risk than debt (and is not considered as debt by the lending banks), as it has neither debt-service covenants nor a fixed repayment schedule.

Exhibit 8: Financial summary

£'000s

2013

2014

2015e

2016e

2017e

December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

0

0

0

0

40,859

Cost of Sales

(927)

(2,071)

(1,697)

(1,971)

(31,850)

Gross Profit

(927)

(2,071)

(1,697)

(1,971)

9,010

EBITDA

 

(927)

(2,071)

(1,697)

(1,971)

9,010

Operating Profit (before amort. and except.)

(927)

(2,189)

(1,857)

(5,850)

2,584

Intangible Amortisation

0

0

0

0

0

Exceptionals

(442)

(379)

(200)

0

0

Other

0

0

0

0

0

Operating Profit

(1,369)

(2,568)

(2,057)

(5,850)

2,584

Net Interest

4

(413)

10

(292)

(3,364)

Profit Before Tax (norm)

 

(923)

(2,602)

(1,847)

(6,143)

(780)

Profit Before Tax (FRS 3)

 

(1,365)

(2,981)

(2,047)

(6,143)

(780)

Tax

0

0

0

0

0

Profit After Tax (norm)

(923)

(2,602)

(1,847)

(6,143)

(780)

Profit After Tax (FRS 3)

(1,365)

(2,981)

(2,047)

(6,143)

(780)

Average Number of Shares Outstanding (m)

493.4

952.4

1,799.6

2,363.8

2,363.8

EPS - normalised (p)

 

(0.4)

(0.4)

(0.2)

(0.3)

(0.1)

EPS - normalised and fully diluted (p)

(0.4)

(0.4)

(0.1)

(0.3)

(0.1)

EPS - (IFRS) (p)

 

(0.3)

(0.3)

(0.1)

(0.3)

(0.0)

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

-

-

-

-

22.1

EBITDA Margin (%)

-

-

-

-

22.1

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

-

-

-

-

6.3

BALANCE SHEET

Fixed Assets

 

7,152

9,299

15,791

61,313

79,460

Intangible Assets

6,900

9,139

10,688

9,800

8,912

Tangible Assets

252

160

3,879

50,289

69,324

Investments

0

0

1,224

1,224

1,224

Current Assets

 

4,014

1,061

508

3,679

6,849

Stocks

0

0

0

1,702

3,405

Debtors

655

335

422

1,890

3,358

Cash

3,279

640

0

0

0

Other

80

86

86

86

86

Current Liabilities

 

(3,363)

(3,202)

(2,296)

(2,300)

(2,456)

Creditors

(3,363)

(3,202)

(2,296)

(2,300)

(2,456)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

0

0

(2,658)

(45,247)

(68,076)

Long term borrowings

0

0

(2,658)

(15,702)

(40,000)

Other long term liabilities

0

0

0

(29,545)

(28,076)

Net Assets

 

7,803

7,158

11,345

17,445

15,777

CASH FLOW

Operating Cash Flow

 

(1,424)

(2,006)

(2,690)

(5,138)

5,995

Net Interest

4

(413)

10

(292)

(3,364)

Tax

0

0

0

0

0

Capex

(877)

(3,133)

(7,540)

(50,289)

(25,460)

Acquisitions/disposals

(1,083)

(750)

0

0

0

Financing

4,735

3,663

6,922

13,131

0

Dividends

0

0

0

0

0

Net Cash Flow

1,355

(2,639)

(3,298)

(42,588)

(22,829)

Opening net debt/(cash)

 

(1,924)

(3,279)

(640)

2,658

45,247

HP finance leases initiated

0

0

0

0

0

Other

0

0

0

0

0

Closing net debt/(cash)

 

(3,279)

(640)

2,658

45,247

68,076

Source: Company sources, Edison Investment Research

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