On 5 August, KEFI announced the restructuring of its £4m working capital convertible loan facility (of which £3.1m remained undrawn) into a new £1.5m facility, with £1.6m of the original convertible facility still remaining available to it. Importantly, neither the original loan facility nor the new loan facility will henceforward have any security attached to them, which will allow KEFI maximum flexibility in structuring the remaining portion of Tulu Kapi’s funding, which could now potentially ‘include a larger initial Project equity investment by Ethiopian private sector investor, ANS Mining Share Company’.
Apart from the terms of the new (unsecured) convertible loan facility (for which, see page 2), in updating our valuation, we have made three material changes to our erstwhile assumptions: 1) we have adjusted our gold price assumptions to those set out in our recent report Portents of economic weakness: Gold – doves in the ascendant, published on 14 August 2019, 2) we have adjusted the forex rate downwards from US$1.2706/£ to US$1.2112/£ and 3) we have adjusted KEFI’s share price – which affects the price at which conversion of the new loan facility is presumed to occur – from 1.53p to 0.90p
Assuming the full drawn down and conversion of KEFI’s new £1.5m convertible loan facility (as well as the successful financing and execution of the project), we calculate that Tulu Kapi is capable of generating free cash flow of c £53.9m a year for seven years, from 2021 to 2027 inclusive (cf £48.0m pa previously). This, in turn, drives average (maximum potential) dividends of 1.11p/share for the nine years from 2021 to 2029 (cf 0.95p/share previously), which values KEFI at 5.50p/share (cf 4.70p/share previously) when discounted back to FY19 at a 10% discount rate. This implies a value for KEFI of £48m, or US$58m, based on the dividend potential of Tulu Kapi alone. However, this ignores the exploration and development of the pipeline of targets in the KEFI portfolio. In the event that KEFI is ultimately successful in leveraging its cash flow from the mine into its other assets in the region, our valuation increases to 10.03p/share (cf 8.53p/share previously). Stated alternatively, we estimate an investment in KEFI shares currently at a price of 0.90p could generate an internal rate of return to investors equivalent to 85.5% per annum over 11 years to 2029 in sterling terms (cf 36.8% previously). In the meantime, investors can purchase shares in KEFI at a price that equates to just US$7.65 per resource ounce (even after its minority partners’ investment into the asset at project level).