KEFI Minerals — Update 30 November 2015

KEFI Minerals — Update 30 November 2015

KEFI Minerals

Written by

Lord Ashbourne

Director of Content, Mining

KEFI Minerals

One more down

Equity funding

Metals & mining

1 December 2015

Price

0.33p

Market cap

£6m

US$1.5009/£

Net cash (£m) at 30 June 2015

1.0

Shares in issue (post funding)

2,621.6m

Free float

89.5%

Code

KEFI

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(13.3)

(56.7)

(70.5)

Rel (local)

(13.5)

(57.4)

(69.6)

52-week high/low

1.33p

0.28p

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

December

JORC resource update

December

Jibal Qutman mining licence application

December

Analyst

Charles Gibson

+44 (0)20 3077 5724

KEFI Minerals is a research client of Edison Investment Research Limited

KEFI’s announcement that it has conditionally placed 877.2m shares at 0.3p/share to raise US$4.0m (£2.6m) substantially completes the company’s planned equity funding ahead of the development of the Tulu Kapi project. The fund-raising was notable for the commitment shown by directors, management, contractors (Ausdrill) and Odey Asset Management (which has now increased its shareholding in KEFI to 26%).

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)

(0.1)

0.0

N/A

N/A

12/16e

0.0

(6.3)

(0.3)

0.0

N/A

N/A

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

Four out of six partners committed…

The news of KEFI’s equity fund-raising follows that of the government of Ethiopia confirming its plan to invest US$15-20m at the project level in return for an additional 20-25% interest in the project, leaving US$105-110m to be financed from debt and streaming. As such, four of KEFI’s six key partners (equity shareholders, Ausdrill, Sedgman and the government of Ethiopia) are now committed to the project, with a remaining two expected to be named before the year end. On the basis of these assumptions, we estimate that KEFI will have a maximum funding requirement of £41.1m (vs £39.7m previously) in FY17. Streaming will create an additional contingent liability in KEFI’s accounts of c £28.5m at its maximum extent in FY17. However, streaming is not considered as debt by the lending banks as it has neither associated debt-service covenants nor a fixed repayment schedule.

Valuation: Equity IRR 44.1% vs 43.6% previously

In our note of 11 November, we valued KEFI at 2.34p/sh, based on the net present value of (maximum potential) dividends payable to shareholders as a result of an investment into the company at the prevailing share price, discounted at 10% pa. However, this was based on an assumed US$5m raise and with the government of Ethiopia taking an additional 16.67% interest for its additional US$20m investment. Adjusting for the updated parameters above, our valuation moderates to 2.09p/share in FY15. However, the equity IRR rises from 43.6% to 44.1% in sterling terms over 12 years. Moreover, the equity fund-raising self-evidently removes one element of risk from the valuation. Hereafter, the valuation should continue to rise, to an estimated 3.05p/sh in FY19, when the first potentially substantive dividend is payable. This 3.05p valuation equates to a resource multiple of US$58.26 per attributable in-situ resource ounce. However, KEFI estimates that its cost of discovery of resource ounces is less than US$10/oz overall and less than US$5/oz in Ethiopia. As such, its strategy is to selectively leverage its cash flow into exploration. Contingent on its being successful, we estimate that KEFI’s valuation could rise as high as 5.01p in FY19 (which would put it on an undemanding contemporary P/E ratio of 3.0x FY19 EPS and an average of 4.4x FY18-26 EPS).

Exhibit 1: Financial summary

£000s

2013

2014

2015e

2016e

2017e

Year-end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

0

0

0

0

41,464

Cost of Sales

(927)

(2,071)

(1,697)

(1,971)

(32,292)

Gross Profit

(927)

(2,071)

(1,697)

(1,971)

9,172

EBITDA

 

(927)

(2,071)

(1,697)

(1,971)

9,172

Operating Profit (before amort. and except.)

(927)

(2,189)

(1,857)

(5,908)

2,652

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)

(5,908)

2,652

Net Interest

4

(413)

10

(367)

(3,489)

Profit Before Tax (norm)

 

(923)

(2,602)

(1,847)

(6,275)

(838)

Profit Before Tax (FRS 3)

 

(1,365)

(2,981)

(2,047)

(6,275)

(838)

Tax

0

0

0

0

0

Profit After Tax (norm)

(923)

(2,602)

(1,847)

(6,275)

(838)

Profit After Tax (FRS 3)

(1,365)

(2,981)

(2,047)

(6,275)

(838)

Average Number of Shares Outstanding (m)

493.4

952.4

1,928.5

2,621.6

2,621.6

EPS - normalised (p)

 

(0.4)

(0.4)

(0.1)

(0.3)

(0.0)

EPS - normalised and fully diluted (p)

(0.4)

(0.4)

(0.1)

(0.3)

(0.0)

EPS - (IFRS) (p)

 

(0.3)

(0.3)

(0.1)

(0.2)

(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.) (%)

-

-

-

-

6.4

BALANCE SHEET

Fixed Assets

 

7,152

9,299

15,849

62,057

80,485

Intangible Assets

6,900

9,139

10,688

9,800

8,912

Tangible Assets

252

160

3,937

51,033

70,349

Investments

0

0

1,224

1,224

1,224

Current Assets

 

4,014

1,061

508

3,729

6,949

Stocks

0

0

0

1,728

3,455

Debtors

655

335

422

1,915

3,408

Cash

3,279

640

0

0

0

Other

80

86

86

86

86

Current Liabilities

 

(3,363)

(3,202)

(2,296)

(2,300)

(2,492)

Creditors

(3,363)

(3,202)

(2,296)

(2,300)

(2,492)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

0

0

(3,339)

(46,602)

(69,784)

Long term borrowings

0

0

(3,339)

(16,620)

(41,293)

Other long term liabilities

0

0

0

(29,982)

(28,491)

Net Assets

 

7,803

7,158

10,721

16,884

15,158

CASH FLOW

Operating Cash Flow

 

(1,424)

(2,006)

(2,690)

(5,188)

6,143

Net Interest

4

(413)

10

(367)

(3,489)

Tax

0

0

0

0

0

Capex

(877)

(3,133)

(7,598)

(51,033)

(25,836)

Acquisitions/disposals

(1,083)

(750)

0

0

0

Financing

4,735

3,663

6,299

13,325

0

Dividends

0

0

0

0

0

Net Cash Flow

1,355

(2,639)

(3,979)

(43,263)

(23,182)

Opening net debt/(cash)

 

(1,924)

(3,279)

(640)

3,339

46,602

HP finance leases initiated

0

0

0

0

0

Other

0

0

0

0

(0)

Closing net debt/(cash)

 

(3,279)

(640)

3,339

46,602

69,784

Source: Company sources, Edison Investment Research

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Schumannstrasse 34b

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Germany

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280 High Holborn

London, WC1V 7EE

United Kingdom

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245 Park Avenue, 39th Floor

10167, New York

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