Edison: KEFI Minerals Blue sky and beyond

KEFI has formally mandated the placing of US$160m of Luxembourg-listed infrastructure bonds, which are expected to fund ownership by the Luxembourg-regulated SPV of the gold processing plant and ancillary infrastructure at the Tulu Kapi Gold Mines Share Company (TKGM), jointly owned by KEFI Minerals (Ethiopia) and the Ethiopian government. This initiative follows a positive draft independent technical expert’s report on the project. Subject to completion of all due diligence, documentation and government approvals, drawdown and development is planned for the end of the Ethiopian wet season, in September. While originally designed as a 1.2Mtpa operation, plant throughput at Tulu Kapi has since been increased to 1.9–2.1Mtpa for around the same overall capital cost.

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 andexceptional items.

 

Tulu Kapi project significantly upgraded

On 19 April, KEFI reported that community resettlement procedures were being formalised with local government agencies following the new government appointments arising from the appointment of a new prime minister on 2 April 2018. Compared to its earlier guidance of a project NPV8 of US$92m at the start of construction, KEFI’s models now indicate a value of US$115m (or 19c or 13.8p per existing share for a 55% interest – see page 18) at a US$1,300/oz gold price.

Valuation: 2.3x the current share price

Once developed, we calculate that Tulu Kapi is capable of generating free cash-flow of c £38.6m a year for eight years, from 2021 to 2028 (inclusive). With average (maximum potential) dividends of 2.10p/share for the five years from 2024 to 2028, this implies a valuation for KEFI of 6.38p/share (at a 10% discount rate), rising to 10.27p/sh in FY21, when we estimate that the first potential dividend could be paid (given that the majority of the proposed financing is in the form of a bond). Stated alternatively, we estimate that an investment in KEFI shares now at a price of 2.795p could generate an internal rate of return to investors of 23.3% over the 12 years to 2029 in sterling terms. Note that this valuation ignores the pipeline of other exploration and development targets in the KEFI portfolio. If KEFI is successfully able to leverage its cash flow from the mine into other assets in the region, then we estimate that a valuation of 13.02p is achievable. In the meantime, the stock is trading on an enterprise value multiple of just US$7.64 per resource ounce, which is 24.8% below our estimate of the global average discovery cost of an equivalent resource.

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KEFI Minerals Plc

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