# KEFI Gold and Copper report a solid starting position for imminent growth

- Link: https://www.directorstalkinterviews.com/kefi-gold-and-copper-report-a-solid-starting-position-for-imminent-growth/4121067238
- Published: 2022-06-06T07:13:35+01:00
- Author: Giles

**KEFI Gold and Copper plc** ([LON:KEFI](https://www.directorstalkinterviews.com/company/kefi-gold-and-copper/kefi.l)),
the gold and copper exploration and development company with projects in the Federal
Democratic Republic of Ethiopia and the Kingdom of Saudi Arabia, has announced its
audited financial results for the year ended 31st December 2021.

**Notice of AGM and Annual Report**

The Annual General Meeting will be held at 10.00am on Thursday 30 June 2022 at Marlin
Waterloo, Lower Ground Floor, 111 Westminster Bridge Road, Waterloo, SE1 7HR, United
Kingdom. 

Information on the resolutions to be considered at the AGM can be found in the Notice
of AGM that has been made available to shareholders of the Company as an electronic
communication along with forms of proxy and direction as well as the Annual Report
and Accounts for the year ended 31 December 2021. The AGM Materials and Annual Report
are available on KEFI’s website at [www.kefi-minerals.com](http://www.kefi-minerals.com/).

**EXECUTIVE CHAIRMAN’S REPORT**

Due to the improvement in the local working environment in both Ethiopia (security)
and Saudi Arabia (regulatory) since late 2021, KEFI now has three (not one) advanced
projects in two countries. Combined with the recently reported excellent exploration
results at Hawiah and Al-Godeyer in Saudi Arabia, KEFI now has a much-improved position
as an early-mover in both countries and with a more balanced portfolio of advancing
projects.

We can at last focus on a sequential development path to build a mid-tier mining
company with aggregate annual production of 365,000 ounces of gold and gold equivalent,
in which KEFI will have a beneficial interest of 187,000 ounces of gold and gold
equivalent.

Our reported Mineral Resources provide a solid starting position for our imminent
growth. Since mid-2021, total Mineral Resources have increased from 3.9 million 
to 4.7 million gold-equivalent ounces. KEFI’s beneficial interest in the in-situ
metal content of our three projects now totals 2.1 million gold-equivalent ounces.
KEFI’s current market capitalisation of circa £30 million equates to only $19 per
gold-equivalent ounce compares very favourably to the prevailing gold price range
during 2022 of approximately $1,830-2000/ounce.

The underlying intrinsic value of KEFI’s assets has increased from December 2020
to December 2021 based on the three projects’ NPV (at an 8% discount rate and using
31 December 2021 metal prices). At that same deck of metal prices, NPV per share
has grown from 3 pence as at mid-2020 to 7 pence as at mid-2021 and 9 pence as at
mid-2022 (calculated on the shares in issue today).

The growth in underlying intrinsic value is due to our progress in Saudi Arabia 
in particular – at the Hawiah Copper-Gold Project and the Jibal Qutman Gold Project.
These statistics are merely illustrative indicators, but the same pattern emerges
whether one assumes prevailing metal prices or analysts’ consensus forecast metal
prices.

Our operating alliances are with the following strong organisations:

| ·    | Partners: | 
| o  | in Saudi Arabia: Abdul Rahman Saad Al Rashid and Sons Ltd (“ARTAR”) | 
| o  | in Ethiopia: | 
| § | Federal Government of the Democratic Republic of Ethiopia | 
| § | Oromia Regional Government | 
| ·    | Principal contractor for process plants in both Ethiopia and Saudi Arabia: Lycopodium Ltd (“Lycopodium”). | 
| ·    | Senior project finance lenders for Tulu Kapi: | 
| o  | East African Trade and Development Bank Ltd (“TDB”) | 
| o  | African Finance Corporation Limited (“AFC”) | 
|  |  |  |  |

**Ethiopia – Tulu Kapi**

Until a few years ago, Ethiopia had been one of the world’s top 10 growth countries
for nearly 20 years and now, having overcome its recent security issues, is demonstrating
a clear determination to expedite economic recovery and pursue its economic objectives.
Tulu Kapi will be the country’s first large-scale mining project for some 30 years
and is designed to the highest international standards. It therefore is imposing
many demands on a regulatory system which the Ethiopian Government is upgrading.
Under strong Ministerial leadership, the Government is determined to build a modern
minerals sector.

There is significant potential to increase Tulu Kapi’s current Ore Reserves of 1.05
million ounces of gold and Mineral Resources of 1.7 million ounces. Economic projections
for the Tulu Kapi open pit indicate the following returns assuming a gold price 
of US$1,591/ounce:

| ·    | Average EBITDA of $100 million per annum (KEFI’s now planned c. 70% interest being c. $70 million); | 
| ·    | All-in Sustaining Costs (“AISC”) of $826/ounce, (note that royalty costs increase with the gold price); and | 
| ·    | All-in Costs (“AIC”) of $1,048/ounce. |

The assumptions underlying these projections are detailed in the Annual Report.

We reactivated Tulu Kapi project launch preparations in early 2022. Ethiopia’s Ministry
of Mines has recently been formally advised that progress is on schedule to have
secured project finance by mid-year if the security situation is satisfactory and
if the few remaining regulatory administrative tasks are also completed punctually.

**Saudi Arabia – Jibal Qutman**

Jibal Qutman was KEFI’s first discovery in Saudi Arabia with Mineral Resources in
excess of 700,000 ounce of gold.

As a result of a new regulatory system and indications from the Saudi Arabia’s Government
that the Mining Licence would progress in 2022, development planning studies have
recommenced at Jibal Qutman.

The current gold price is considerably higher than the $1,200/ounce used in 2015
when the Company lodged its initial Mining Licence application. Another key change
is that several alternative processing options are likely to have become more attractive
since 2015.

Several consultants have recently been engaged to evaluate processing options for
Jibal Qutman and update elements of the Mining Licence application. This work includes
open-pit design and scheduling, metallurgy, processing options and updating the 
Environmental and Social Impact Assessment.

**Saudi Arabia – Hawiah**

Hawiah was discovered in September 2019 and now ranks in the:

| ·    | top three base metal projects in Saudi Arabia; and | 
| ·    | top 15% VMS projects worldwide. |

A three-year 42,000m drilling program has delineated a Mineral Resource of 24.9 
million tonnes at 0.90% copper, 0.85% zinc, 0.62g/t gold and 9.8g/t silver. As a
scale-comparison with Tulu Kapi, Hawiah’s recoverable metal is now estimated to 
be in the order of 2.2 million gold-equivalent ounces versus Tulu Kapi’s 1.2 million
ounces of gold.

The team is progressing at great speed on this exciting project which is located
close to major infrastructure. We are working towards completing a Preliminary Feasibility
Study (“PFS”) and an updated Mineral Resource in late 2022.

Two Exploration Licences (“ELs”) located immediately west of the Hawiah EL were 
granted in December 2021. Initial exploration of these Al Godeyer ELs has confirmed
similar copper-gold mineralisation to the Hawiah VMS deposit and indicated good 
continuity of the mineralised horizon.

**Conclusion**

KEFI is preparing to develop the Tulu Kapi Gold Project, advancing development studies
on the Jibal Qutman Gold Project, progressing the PFS for the Hawiah Copper-Gold
Project and testing exploration targets in Ethiopia and Saudi Arabia.

Simultaneous with the triggering of full development at Tulu Kapi, we intend to 
re-commence exploration programs in Ethiopia and expand our exploration program 
in Saudi Arabia. In Ethiopia, the initial focus will be underneath the planned open
pit where we already have established an initial resource for underground mining
at an average grade of 5.7g/t gold. We also intend to follow-up drilling which indicated
good potential for nearby gold deposits in the Tulu Kapi District. In Saudi Arabia,
further drilling is in progress at Hawiah and the adjacent Al Godeyer prospect.

Along with my fellow Directors, I am very sensitive to the need to generate returns
on investment. It is frustrating and disappointing that the pandemic and the geopolitics
of both Ethiopia and Saudi Arabia has retarded our progress in recent years and 
we have been unable to achieve targeted progress. However, our operating environment
has turned for the better in both countries and we can now progress on all fronts.

By emphasizing conventional project-level development financing, we seek to alleviate
the past responsibility of KEFI shareholders to provide all funding and therefore
more than 80% of the development capital is planned to be contributed by our partners
and other syndicate parties. However, exploration and other pre-development funding
will continue to rely exclusively on equity funding by KEFI and its in-country partners.

The Directors expect that as milestones are achieved, the Company’s share price 
should naturally narrow the gap between the Company’s market capitalisation and 
what we believe to be the significantly higher fundamental valuations of the Company’s
projects using conventional measures such as NPV.

We are indeed at an opportune moment, created by our team’s hard work, your support
as shareholders and the serendipity of markets strengthening as we launch our projects.
The Directors are deeply appreciative of all personnel’s tenacity and steadfast 
dedication and of the support the Company receives from shareholders and other stakeholders.

**Executive Chairman**

**Harry Anagnostaras-Adams**

**1 June 2022  **

**FINANCE DIRECTOR’S REVIEW**

KEFI is a first-mover within a fast-changing geopolitical environment and has been
financing its activities in the midst of a global pandemic – a challenging environment
indeed. We see the current global supply chain strains as an aftershock which will
abate but leave a legacy of cost inflation which has already impacted our projects.
We have been adjusting our planning assumptions since the pandemic began.

Successful implementation will see KEFI emerge in 2024 as a profitable gold producer
of 140,000 ounces per annum. Our growth plans in Ethiopia and Saudi Arabia are likely
to lead to much higher gold equivalent production within the following few years.

Subject to the signing of Tulu Kapi’s umbrella financing agreement in June 2022 
and its adherence over the following few months, the Company has been positioned
to commence full construction of the Tulu Kapi mine at the end of the current wet
season. Implementation of this plan provides KEFI with project ownership levels 
as follows:

| ·  | c. 70% of the Ethiopian mining development and production operation, via the shareholding in TKGM; | 
| ·  | 100% of the Ethiopian exploration projects, via the shareholding in KEFI Minerals (Ethiopia) Limited (“KME”); and | 
| ·  | 30% of the Saudi development and exploration projects, via the shareholding in G&M. |

KEFI has funded all of its past activities with approximately £72 million equity
capital raised at then prevailing share market prices. This avoided the superimposing
of debt-repayment risk onto the risks of exploration, permitting and other challenges
that always exist during the early phases of project exploration and development
in frontier markets. We do however avail ourselves of unsecured advances from time
to time as arranged by our Corporate Broker to provide working capital pending the
achievement of a short-term business milestone.

Overall, the current finance plan is shown below and caters for all planned development
expenditure at TKGM in addition to all exploration and corporate funding requirements,
estimated at c.$356 million (including the mining fleet provided by the contractor
of US$56 million, the original budget of US$240 million and provisions for cost-
inflation US$50 million) which is dependent upon final procurement price confirmations.
These estimates were made in mid-2022 and took into account cost-inflation in the
industry until then. We are now re-checking pricing for project launch and final
finance planning. The various offers and commitments are made on a non-binding basis
for finalisation as we now move to project launch. The financing syndicate has expressed
willingness to adjust and refine amongst itself when final procurement and budget
prices, expected in the coming two months, are set. It will be optimised by KEFI
and the TKGM syndicate which has already conditionally indicated the following participation
as at 31 May 2022:

| **$ M** | ** ** | 
| 56 | Mining fleet to be provided by the mining contractor | 
| 140 | Senior project debt, to be repaid out of operating cash surpluses | 
| 196 | **_ _** | 
|  | **_Equity Risk Capital_** | 
| 38 | Government and Local Investors directly into TKGM | 
| 122 | KEFI-funded component, separate and in addition to historical investment | 
| 160 | Total TKGM capital requirement, subject to final procurement clarifications | 
|  | **_ _** | 
| 356 | Total of original project budget, plus provision for cost-inflation plus mining fleet | 
|  | **_KEFI Component to be funded as follows:_** | 
| 60 | Subordinated non-convertible, offtake-linked debt | 
| 15 | Subordinated debt convertible into KEFI shares at VWAP in 3 years | 
| 20 | Subordinated convertible at a premium over market in H2-2022 | 
| 27 | Recent issues of KEFI shares and the exercise of the attached warrants | 
| 122 | Provided by KEFI |

The following needs to be carried out so as to proceed to earliest project finance
settlement:

| ·    | Field activities to demonstrate readiness to launch from a security viewpoint; | 
| ·    | Final construction and mining pricing updates confirmed; and | 
| ·    | Definitive individual party documentation to be approved with relevant Government agencies, including the Ministry of Mines and the Central Bank of Ethiopia, so that execution may proceed by all syndicate parties. Early preparatory works have commenced to give clearance to both banks to lend on same terms. |

**Ownership Value and Ownership Dilution**

An £8.0 million Placing completed in April 2022 will mainly be used to fund:

| ·    | selected development activities at Tulu Kapi,  | 
| ·    | exploration at Hawiah and the adjacent Al Godeyer prospect; and | 
| ·    | development planning at Jibal Qutman. |

This paves the way for full construction in Ethiopia from October 2022 at the end
of the local wet season, with the initial signing at end of June 2022 setting out
any residual conditions to be satisfied.

From an ownership value perspective and measuring the Company’s underlying assets
on an NPV basis, compared with the position as at the time of the last AGM, this
plan has resulted in the indicative value of KEFI’s share of its three main assets
having more than tripled from $154 million in June 2020 to c.$471 million (£348 
million) in May 2022. This is the result of KEFI raising its planned interest in
Tulu Kapi from 45% to c.70%, making a significant discovery at Hawiah and now, due
to progress with regulatory approvals, the inclusion of Jibal Qutman. The basis 
for these estimates is prevailing metal prices and other explanations provided in
the footnotes below.

From an ownership dilution perspective, successful completion of the finance plan
will necessarily increase issued capital, hopefully via the exercise of the recently
issued warrants at 1.6 pence per share. But ownership dilution will be minimised
because much of the capital is being raised at the project level and some of the
share issues by KEFI will be at prices two and three years after project finance
completion.

**Financial Risk Management**

In designing the balance sheet senior debt gearing overall, the senior debt to equity
ratio for TKGM is 47%:53% ($140 million:$160 million) excluding equity funded historical
pre-development costs and 37%:63% ($140 million:$240 million) including equity funded
historical pre-development costs.

And in structuring the TKGM project finance, a number of key parameters had a driving
influence on Company policy:

| ·    | The breakeven gold price after debt service is c.$1,107/ounce (flat) for 10 years, while over the past 10 years the gold price was under that price for only 2.4% of the time; and | 
| ·    | At current analyst consensus gold price of $1,641/ounce, senior debt could be repaid within 2 years of production start. |

It is important that we now proceed to financial completion in accordance with the
latest plans agreed with the Government. Indeed, the Government has warned of administrative
consequences if we fail to do so and all of our finance syndicate members have made
it clear that they wish to proceed according to plan subject only to normal safety
and compliance procedures.

We have conditionally assembled all of the development finance, mostly at the project
level from our small, efficient and economical corporate office in Nicosia, Cyprus.
Other than our Nicosia-based financial control/corporate governance team, all operational
staff are based at the sites for project work. This approach increases efficiency
at a lower cost. 

**Accounting Policy**

KEFI writes off all exploration expenditure in Saudi Arabia.

KEFI’s carrying value of the investment in KME, which holds the Company’s share 
of Tulu Kapi is £14.3 million as at 31 December 2021. It is important to note KEFI’s
planned circa.70% beneficial interest in the underlying valuation of Tulu Kapi is
c.£191 million based on project NPV at an assumed gold price of $1,830/ounce and
including the underground mine.

In addition, the balance sheet of TKGM at full closing of all project funding will
reflect all equity subscriptions which are currently estimated to exceed £113 million
or $156 million (Ethiopian Birr equivalent).

**_John Leach_**

**_Finance Director_**

**1 June 2022**

**_Footnotes:_**

| ·   | Long term analysts’ consensus forecast is sourced from CIBC Global Mining Group Analyst Consensus Long Term Commodity Price Forecasts 30 April 2022. | 
| ·   | NPV calculations are based on:Metal prices as at 31 December 2021 of US$1,830/ounce for gold, $9,750/tonne for copper, $3,590/tonne for zinc and $23/ounce for silver; and 8% discount rate applied against net cash flow to equity, after debt service and after tax. |

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