KEFI Minerals (LON:KEFI), the gold exploration and development company with projects in the Kingdom of Saudi Arabia and the Federal Democratic Republic of Ethiopia, this morning announced updated financial projections reflecting the recently announced plans to expand production. In the meantime, we continue to prepare for finance closing with mandated financier Oryx Management Limited and the other consortium members the Government of Ethiopia, Ausdrill and Lycopodium.
Production plans have been re-cast and the average annual gold production in years 1-3 is estimated to expand from c. 115,000 ounces to c. 145,000 ounces per annum. At a flat $1,250/oz gold price, the payback period is about 3 years. This forecast is derived by management in consultation with its advisers and will continue to be refined as we approach start-up, during the 2018 operational readiness phase along with detailed engineering and procurement.
Set out below are comparisons with the key outputs of the 2015 Definitive Feasibility Study (“DFS”) and the 2017 DFS Update which were on an unleveraged basis. The latest estimates build in the impact of the planned finance structure and its leverage, reflecting the specifics of the Oryx detailed Heads of Terms (see announcement 17 July 2017). The latest estimates also reflect the strategy agreed with Oryx to install greater processing capacity from the outset with a view to achieving:
a) quicker cash flow from the open pit and capacity to process
additional ore from targeted satellite deposits, and
b) greater protection against downside risks by facilitating
faster processing of lower grade ore from the open pit.
Key planning assumptions which have been introduced since the 2017 DFS Update include:
-- Plant expanded from 1.5-1.7Mtpa to 1.9-2.1Mtpa, depending
on the hardness of the ore.
-- Refining the Engineering, Procurement and Construction ("EPC")
contract into a hybrid of EPC and an Engineering, Procurement
and Construction Management ("EPCM") contract whereby the
client has the protection of certain performance guarantees,
along with the transparency of open-book access to all costs
along with tighter alignment with owner-management via incentivised
target schedule and cost for the contractor (Lycopodium).
This style is also preferred by Oryx's Finance SPV, which
will own the plant and lease it to KEFI's project company.
-- The additional c. $12 million funding required for plant
and infrastructure expansion has been offset by expected
savings of capital expenditure and by Oryx offering to expand
its facility from US$135 million to US$140 million.
-- Mine plans re-cast to allow faster mining, intensified grade-control
drilling and enhanced flexibility to switch between bulk
mining and selective mining as most appropriate.
KEFI’s Executive Chairman, Mr Harry Anagnostaras-Adams, said: “The Tulu Kapi Gold Project consortium is implementing its finance closing procedures and the refined financial projections announced today reflect recently resolved expansion plans.
“Projected annual gold production has been expanded from approximately 115,000 ounces to 144,000 ounces per annum for the first three years. Measures of return have improved accordingly and indicate significant targeted value up-lift for shareholders under any modelled scenario.”
Key Points of the Tulu Kapi Expansion Plan (100% of Tulu Kapi Gold Project – Open Pit only)
2017 2Mt 2017 2015 DFS
Expansion DFS Update
Leveraged Unleveraged Unleveraged
------------------------------ ------------ ------------- -------------
Average head grade 2.1g/t 2.1g/t 2.1g/t
gold gold gold
------------------------------ ------------ ------------- -------------
Total gold production 980K oz 980K 961K oz
oz
------------------------------ ------------ ------------- -------------
Ore processing rate 1.9-2.1Mtpa 1.5-1.7Mtpa 1.2Mtpa
------------------------------ ------------ ------------- -------------
Annual gold production (1st 144K oz 115K 98K oz
3 years) pa oz pa pa
------------------------------ ------------ ------------- -------------
Cash Operating Costs US$685/oz US$684/oz US$661/oz
------------------------------ ------------ ------------- -------------
All-in Sustaining Costs US$773/oz US$777/oz US$780/oz
(excluding initial capex
& debt service)
------------------------------ ------------ ------------- -------------
All-in Costs (excluding US$948/oz US$933/oz US$906/oz
debt service)
------------------------------ ------------ ------------- -------------
All-in Costs (including US$1,051/oz N.A N.A
debt service)
------------------------------ ------------ ------------- -------------
IRR 60% 22% 28%
------------------------------ ------------ ------------- -------------
NPV at start of construction US$74M US$97M US$125M
(8% real after tax discount
rate)
------------------------------ ------------ ------------- -------------
NPV at start of production US$131M US$272M US$256M
(8% real after tax discount
rate)
------------------------------ ------------ ------------- -------------
Payback 3 years 3 years 2.5 years
------------------------------ ------------ ------------- -------------
Net Operating Cash Flow US$74M US$62M US$50M
(same as EBITDA) p.a. p.a. p.a.
(average for first 3 years)
------------------------------ ------------ ------------- -------------
The economic metrics tabulated above are for contract mining of the open pit only, based on a gold price of US$1,250/ounce flat over life-of-mine and are on an after-tax basis.
-- Summary: since assuming control of the Project
in 2014, KEFI has continually improved its
outlook based on plans developed with leading
industry specialists. The improvements announced
today have the effect of reducing operational
and financial risks as well as increasing
potential returns.
-- All-in Sustaining Costs: estimates remain
relatively unchanged at c. US$800/oz despite
the faster-track mining and processing,
because of an assumption (pending more detailed
work during the operational readiness phase
in 2018) of higher unit costs for mining
(increased grade-control drilling). All-in
sustaining costs includes all operating
costs, royalties, sustaining capital and
closure costs, but excludes initial capital,
financing costs and income taxes. This ranks
Tulu Kapi in the best (lowest) quartile
of gold producers globally.
-- All-in costs (excluding debt service): estimates
remain relatively unchanged at c. US$930/oz
for the reasons set out above as regards
All-in Sustaining Costs. All-in costs also
includes all initial capital expenditure.
This measure also ranks Tulu Kapi in the
best (lowest) quartile of gold producers
globally.
-- Net operating cash flow for first 3 years:
increased to US$74M p.a., from US$62M p.a.
in the 2017 DFS Update.
-- Project IRR: IRR has increased materially
from 22% (unleveraged) to 60% (leveraged).
-- Project NPV (leveraged after tax): the Open
Pit NPV estimates c. $74 million at start
of construction and of c. US$131 million
at start of production indicate material
value up-lift for current and new equity
investors. If one adds a risk-adjusted 50%
of the NPV for the underground project (based
on Preliminary Economic Assessment), it
adds in the order of US$20 million to the
NPV i.e. US$94 million at start of construction
and US$151 million at start of production.
-- Project funding requirements: KEFI's planned
project structure involves the following
funding components for all but a residual
amount which remains in the order of US$20
million:
o funding of mining equipment by Ausdrill
as part of the proposed mine services
agreement whereby they receive payment
per tonne of material mined.
o off-site infrastructure funded by the
Government of Ethiopia, for project
level equity
o funding of on-site infrastructure by
Oryx (for debt-style returns along with
a potential gold-linked extra interest
that has the potential to elevate its
returns from the coupon of c. 8% to
a potential 15% at a gold price of US$1,700/oz
throughout the repayment term). Yield
to maturity would be c. 10% if gold
does not exceed US$1,100/oz and it rises
proportionately up to c. 15% at a gold
price of US$1,700/oz.
-- Residual funding requirement: consistent
with KEFI's recent guidance, the residual
requirement is c. US$20M to be raised preferably
at project level (Tulu Kapi Gold Mines Share
Company Limited, "TKGM") or intermediate
company level (KEFI Minerals (Ethiopia)
Limited, "KME"). The financial forecasts
reported herein also reaffirm that the transaction
is expected to be materially value-enhancing
for current and new equity investors regardless
of how the equity investment is structured.
-- Financial sensitivity testing: has been
conducted, the principal conclusions being
that:
o On the upside, as a small indicator
of the leverage being targeted by KEFI:
-- A gold price of US1,400/oz or a throughput
lift of 10% pa lift Project IRR rises
to c. 80% and the potential value-lift
for existing and new equity investors
is lifted commensurately.
o On the downside, as a stress test:
-- all financial commitments are well
covered even:
-- at a flat gold price of US$1,100/oz
for the next 10 years, or
-- if bulk mining is utilised exclusively
without any reliance on the planned
application of targeted limited
selective mining. This would result
in the head grade being only 1.7g/t
instead of 2.1g/t gold
-- NPV and other valuation measures
show value-lift for current and new
equity investors even under these
downside cases.
