KEFI Minerals is targeting the completion of a funding package for its Tulu Kapi Gold Project in Ethiopia in 3Q18, allowing first gold production in late 2020. We have updated our valuation to reflect the finance package as currently envisaged.
Tulu Kapi Project total funding requirement of US$230m and a post-debt NPV8 of US$115m — Reserves at Tulu Kapi total 1.05Moz at a grade of 2.1 g/t. The selective open-pit operation, combined with a conventional CIL processing plant, is planned to process 1.9-2.1Mtpa and to recover approximately 130,000oz pa over a mine life of 7.5 years for total production of 980,000oz. Forecast AISC are US$793/oz. We estimate the initial project capital requirement, net of US$20m of deferred expenditures, is US$180m. Assuming a gold price of US$1,300/oz, the company estimates the NPV8 of the project after debt to be US$115m. Including expected rolled-up interest and financing charges of US$44m and a cash buffer of US$11m would increase the net
required funding to US$230m.
Innovative funding arrangement — The company plans to raise US$160m of debt through the issuance of a debenture that would have a term of nine years with an anticipated gold price-related interest rate of 7%. It also aims to secure a US$14m working capital facility against stockpiles, reducing the funding requirement to US$56m. Of this, US$20m is accounted for by the government’s planned contribution of project infrastructure to an agreed value of US$20m in return for which it will increase its stake in the project from 5% to approximately 25%. The company aims to fund the outstanding US$36m equity requirement from a number of sources, including potentially selling a 25% interest in its remaining 75% interest in the project, which would reduce
its equity interest to 56.3%.
We reiterate our BUY rating and have revised our target price up from 5.0p to 5.6p — We have raised our target price after adjusting our model to reflect updated financing assumptions, including the attractive likely bond interest rate of 7% pa. Our SotP valuation includes the company’s share of the value of Tulu Kapi based on its NPV8 assuming a long-term gold price of US$1,300/oz and a risk multiple of 0.4x. We also include estimated values for the potential value of the Tulu Kapi underground and future G&A costs. We note the company’s estimated unrisked NAV of 14p/share and would expect that — as the financing is completed — the reduction in risk would be reflected in an increase in the P/NAV from its current level of 0.19x. The valuation is also highly leveraged to the gold price, with our risked TP increasing to 8.5p at a gold price of US$1,400/oz.
Risks — We suggest that the risks to our valuation relate to the country, those associated with completing the financing as indicated and also achieving the technical and financial parameters included in our model.
