KEFI Minerals — Update 9 March 2016

KEFI Gold and Copper (AIM: KEFI)

Last close As at 20/11/2024

GBP0.01

0.03 (5.08%)

Market capitalisation

GBP36m

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Research: Metals & Mining

KEFI Minerals — Update 9 March 2016

KEFI Minerals

Lord Ashbourne

Written by

Lord Ashbourne

Director of Content, Mining

Metals & Mining

KEFI Minerals

Going underground

Underground PEA

Metals & mining

10 March 2016

Price

0.41p

Market cap

£11m

US$1.4199/£

Net cash (£m) at 30 June 2015

1.0

Shares in issue

2,621.6m

Free float

89.5%

Code

KEFI

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

20.6

32.3

(61.0)

Rel (local)

10.7

32.7

(57.0)

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

JORC resource update

Q116

Complete financing syndicate

June 2016

Analyst

Charles Gibson

+44 (0)20 3077 5724

KEFI Minerals is a research client of Edison Investment Research Limited

KEFI’s announcement of the results of a preliminary economic assessment (PEA) of an underground operation at Tulu Kapi indicates a project with an estimated NPV8 of US$44m, based on a gold price of US$1,250/oz and 100% ownership (cf US$156m for the open-pit project on the same basis). The project envisages producing 50koz of gold pa (in addition to that from the open pit) over four years, at a cash operating cost of US$664/oz and all-in sustaining costs (AISC) of US$845/oz.

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 amortisation of acquired intangibles and exceptional items.

Operating estimates

The PEA is based on a June 2014 (JORC-compliant) resource estimate of 1.65Mt at an average grade of 6.26g/t, containing 330,000oz, which converted into a ‘reserve’ (albeit subject to additional drilling) of 1.3Mt at 5.17g/t, containing 216,000oz. Processed at a rate of 325kt a year, this will support production of 50,000oz a year at a recovered grade of 4.79g/t, implying a 92.6% metallurgical recovery rate (vs 91.5% for the open pit). Mineralisation increases in grade and thickness at depth. In addition, it remains open at depth (as well as along strike to the north). A capex estimate of US$37m equates to a capital intensity of US$740 per annual ounce of production, which is relatively cheap compared to the usual US$1,000/oz benchmark. In the meantime, cash operating costs of US$664/oz equate to US$102.15/t milled (Edison calculation).

Valuation: From 2.39p/share to 2.99p/share

KEFI anticipates commencing development of the underground mine only after the open-pit mine has begun to generate positive cash flows and is repaying development finance. As such, it does not anticipate introducing production from this source until around the third year of the open-pit operation, ie around 2020 after a two-year construction period in 2019-20. In our note of 11 February, we valued KEFI at 2.39p/share, rising to c 3.18p/share in FY19 (equating to a depleted resource multiple of US$69.83/oz). A US$44m NPV8 based on 100% ownership equates to US$30.8m assuming 70% ownership, or 1.2 US cents (0.83p) per share. By contrast, our updated valuation of KEFI, based on the assumptions considered above, is 2.99p/share, reflecting a 0.60p/share uplift, roughly equivalent to 0.83p discounted at 10% a year for four years (as expected). This valuation rises to 4.36p in FY20, when the first substantive dividend is payable (equivalent to US$99.35 per depleted resource oz). In the event that KEFI is successfully able to leverage its cash flow from Tulu Kapi into the development of other assets in Ethiopia and Saudi Arabia, our valuation then rises further, to 6.58p (vs 5.22p previously), putting it on a contemporary P/E ratio of 5.5x FY20e EPS.

Financial summary

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

43,829

Cost of Sales

(927)

(2,071)

(1,697)

(1,971)

(34,021)

Gross Profit

(927)

(2,071)

(1,697)

(1,971)

9,808

EBITDA

 

(927)

(2,071)

(1,697)

(1,971)

9,808

Operating Profit (before amort. and except.)

(927)

(2,189)

(1,857)

(5,908)

3,140

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)

3,140

Net Interest

4

(413)

10

(367)

(3,654)

Profit Before Tax (norm)

 

(923)

(2,602)

(1,847)

(6,275)

(514)

Profit Before Tax (FRS 3)

 

(1,365)

(2,981)

(2,047)

(6,275)

(514)

Tax

0

0

0

0

0

Profit After Tax (norm)

(923)

(2,602)

(1,847)

(6,275)

(514)

Profit After Tax (FRS 3)

(1,365)

(2,981)

(2,047)

(6,275)

(514)

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 (%)

-

-

-

-

22.4

EBITDA Margin (%)

-

-

-

-

22.4

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

-

-

-

-

7.2

BALANCE SHEET

Fixed Assets

 

7,152

9,299

15,849

64,968

84,723

Intangible Assets

6,900

9,139

10,688

9,800

8,912

Tangible Assets

252

160

3,937

53,944

74,587

Investments

0

0

1,224

1,224

1,224

Current Assets

 

4,014

1,061

508

3,924

7,341

Stocks

0

0

0

1,826

3,652

Debtors

655

335

422

2,012

3,602

Cash

3,279

640

0

0

0

Other

80

86

86

86

86

Current Liabilities

 

(3,363)

(3,202)

(2,296)

(2,300)

(2,634)

Creditors

(3,363)

(3,202)

(2,296)

(2,300)

(2,634)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

0

0

(3,339)

(48,949)

(73,188)

Long term borrowings

0

0

(3,339)

(17,257)

(43,071)

Other long term liabilities

0

0

0

(31,692)

(30,116)

Net Assets

 

7,803

7,158

10,721

17,644

16,242

CASH FLOW

Operating Cash Flow

 

(1,424)

(2,006)

(2,690)

(5,383)

6,725

Net Interest

4

(413)

10

(367)

(3,654)

Tax

0

0

0

0

0

Capex

(877)

(3,133)

(7,598)

(53,944)

(27,310)

Acquisitions/disposals

(1,083)

(750)

0

0

0

Financing

4,735

3,663

6,299

14,085

0

Dividends

0

0

0

0

0

Net Cash Flow

1,355

(2,639)

(3,979)

(45,610)

(24,239)

Opening net debt/(cash)

 

(1,924)

(3,279)

(640)

3,339

48,949

HP finance leases initiated

0

0

0

0

0

Other

0

0

0

0

0

Closing net debt/(cash)

 

(3,279)

(640)

3,339

48,949

73,188

Source: KEFI Minerals sources, Edison Investment Research

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Germany

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280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

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US

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