With Tulu Kapi development ready to begin, is KEFI Minerals worth a fresh look?
After numerous delays, KEFI Minerals is finally ready to begin the development of its flagship Tulu Kapi project in Ethiopia alongside the country’s government and a consortium of local investors. Here, we dig into the events that have led KEFI to this stage before looking at what the future could hold as the gold price hit a 6yr high on Monday. In addition, the company highlighted recent media commentary relating to a localised foiled coup attempt in one of Ethiopia’s nine regions. The incident was in Bahir Dar, the capital of the Amhara Region, approximately 500 kilometres from the Company’s flagship Tulu Kapi Gold Project (the “Project”) KEFI current timetable remains unchanged.
KEFI Minerals is an exploration and development company focused on gold and copper deposits in the Arabian-Nubian Shield that covers Ethiopia and Saudi Arabia. According to the business, the Arabian Nubian Shield, under-developed and has the potential to be as productive as the comparable Australian shield which grew from fewer than 10tpa gold in the 1970s to more 300tpa at present. As such, it believes it has a first-mover advantage in the area. On Friday the company announced it had commenced its exploration underway at the Company’s Hawiah Exploration Licence, located in Saudi Arabia’s Wadi Bidah Mineral District which is a 120-kilometre-long copper-gold-zinc volcanogenic massive sulphide (“VMS”) belt.
KEFI is currently progressing two gold assets. The first of these is its flagship Tulu Kapi project in Ethiopia, which has a probable ore reserve of 1MMoz and mineral resources totalling 1.7MMozs. Gold production at the site is forecast to be circa 140,000oz per annum at an AISC of fewer than $800/oz over an initial seven-year open pit mine life. KEFI’s other interest, which we will not focus on in this piece, is its 30pc-held Jibal Qutman project in Saudi Arabia, which boast mineral resources totalling 0.7MMozs.
This year has seen KEFI make numerous steps towards its target of commissioning Tulu Kapi towards the end of 2020 before reaching full gold production from mid-2021. However, it is first worth highlighting the project’s significant financial backing from parties beyond KEFI. Indeed, it is held within a subsidiary called TKGM part-owned by KEFI Ethiopia (KME), the government of Ethiopia, and a local banking syndicate called ANS.
In exchange for its position, Ethiopia’s government has agreed to contribute $20m to Tulu Kapi’s development. Meanwhile, in October last year, KEFI announced that ANS had signed an agreement to invest a minimum of $30m into the project. This figure that was subsequently increased by nearly 30pc to $38m in January 2019, with leading local businessman and officials from ANS were also being appointed to TKGM’s board.
Two-thirds of ANS’ investment is for a 22pc equity interest in TKGM, and the remaining one-third is for a 20pc equity interest in KME. The rest of KME is owned by KEFI. Bearing this in mind, once all of these ‘third-party’ investments are taken into consideration, KEFI’s beneficial ownership of TKGM is c.45pc, ANS’ is 33pc, and the government of Ethiopia’s is 22pc.
Returning to Tulu Kapi itself, the first quarter saw KEFI enjoy significant progress on the permitting side of the project’s operations. Indeed, the period saw the Ethiopian federal government approve KEFI’s resettlement plan for the project, while the local government also approved compensation calculations. The regional government has now begun to trigger the follow-up steps of the resettlement programme in consultation with the community and TKGM. KEFI said the parties’ current focus is on the selection of individual land-parcels, house locations and training. This is expected to lead to compensation payments in July 2019 for the phase one move of some 60 households, with preparations being completed in the meantime.
Elsewhere, in April, KEFI said that Tulu Kapi had received all the necessary federal government consents other than some final aspects of the project finance structure which has now been endorsed by the Prime Ministry. The firm said details were being documented with the central bank, which has issued approvals for capital ratios, hedging and bank accounts and expected residual matters to be resolved shortly. In line with this, the business announced earlier this month that it had received the last remaining federal government consent for the financing and development of Tulu Kapi from the National Bank of Ethiopia.
Finally, and perhaps most critically, March saw Dr Abiy Ahmed, Prime Minister of Ethiopia, give his full support for Tulu Kapi. Alongside this, he also issued the appropriate instructions to all relevant Ethiopian Government agencies to enable the construction of the Tulu Kapi to begin.
Elsewhere, KEFI has made critical steps forward in Tulu Kapi’s project development planning this year. Indeed, contractors Lycopodium and Ausdrill have re-affirmed the project’s 24-month development schedule. This includes the 18-months that will begin in Q4 2019 after the wet season and phase one of community resettlement have completed. In preparation for this kicking off, various engineering and contractual tasks are currently in motion, including detailed scheduling and updating of front-end engineering and design.
Meanwhile, off-site project contractors Ethiopian Electrical Power Corporation and Ethiopian Roads Authority have approved budgets approvals for their work on Tulu Kapi. They are now preparing their sub-contractor tender documents for off-site infrastructure. In April, KEFI said this work has begun now because infrastructure deadlines are of critical for allowing plant commissioning to start in Q4 2021.
Finally, on the funding side of things, KEFI completed a £969k placing in February at 1.7p a share to cover its working capital requirements and those of its projects.
Good to go
The critical point here is that, after several delays that have rocked its share price, KEFI can now trigger its development program at Tulu Kapi. In its recent results, KEFI described this an ‘enviable position’, before adding:
‘This may have taken longer than we had hoped, but the management team of KEFI remain resolute in their belief that, despite the historic delays, our Tulu Kapi Project continues to be a very attractive near term production project, with significant additional upside.
‘As a consequence, KEFI now sits at the forefront of our sector in one of the world’s great under-developed minerals provinces – the Arabian-Nubian Shield. We have established a solid platform to pursue our ambition to discover and develop profitable mining opportunities in Ethiopia and Saudi Arabia and thus build shareholder value. In particular, we look forward to triggering the full development program at Tulu Kapi, with a view to starting commissioning towards the end of 2020, with full gold production from mid-2021.’
Coupled with the additional exploration work expected in Ethiopia once major works have started at Tulu Kapi, the asset’s development is sure to provide plenty of news flow over the short and medium term. If this goes KEFI’s way and captures the market’s attention, then it could give the firm the fuel needed to begin rising from its current share price and towards its historic highs.
One concern that many investors will struggle to get past is the presumed additional geopolitical risk associated with operating in Ethiopia, a country that was in a state of emergency between 2016-2018. However, KEFI says the country is undergoing a ‘remarkable transformation’ both politically and economically, reflected in Tulu Kapi’s significant backing from both the state and local investors. If you are undeterred by the prospect of investing in a business that operates in Ethiopia, then KEFI may well be worth a look now before the serious work at Tulu Kapi starts.
In February KEFI presented at the 121 Mining Investment, Cape Town 2019