On 6 December, KEFI announced that it had arranged for project equity funding of the Tulu Kapi gold mine project in Ethiopia for both Q119 and Q219, and that activities are progressing to this end, including government indications that the handful of outstanding permits are still expected to be granted in December to allow for community resettlement and development. The announcement also reports completion of the project due diligence for the US$160m bond/lease proposal (see previous notes) and follows KEFI’s announcement, on 28 Nov, that it had entered into an up to £4.0m secured convertible loan facility to underpin parent company working capital as it triggers the development of the project in Q119.
While KEFI continues to assemble the majority of funding for development of Tulu Kapi at the project level, it has steadied the parent company’s working capital capacity ahead of the project launch. It has also further augmented its working capital flexibility by arranging to pay some service providers in equity at 2p/share.
Before the announcement of its convertible facility, we calculated that Tulu Kapi was capable of generating free cash flow of c £41.7m a year for seven years from FY21–27, and paying average (maximum potential) dividends of 2.15p/share for the six years from FY23–28. We valued this stream of dividends at 7.21p/share (at a 10% discount rate) as at 1 January 2019, rising to 10.56p/share in FY23, when we estimated the first potential dividend could be paid. This remains ostensibly unchanged if the facility is considered as conventional debt. However, it reduces to 5.27p/share with 794.2m shares in issue assuming the drawdown and conversion of the full facility (albeit with a maximum net debt requirement reduced by almost £4.0m, from £69.4m to £65.7m, when all components of the financing are considered, whether on- or off-balance sheet). Note that this valuation rises to 9.68p if KEFI is successfully able to leverage its cash flow from the mine into its other assets in the region (vs 13.30p previously). Stated alternatively, assuming full drawdown, we estimate an investment in KEFI shares on 1 January 2019 at a price of 1.43p could generate an internal rate of return to investors of 36.7% over the 11 years to 2029 in sterling terms. A median scenario would be to assume drawdown of £3m and the conversion of half of that amount into shares, in which case our valuation reduces to 6.11p/sh with an assumed 666.7m shares in issue. Combined with the convertible facility, the planned imminent transfer of development funding obligations from KEFI down to project level is intended to provide flexibility to KEFI so that it may minimise risk as well as minimising share dilution.