# KEFI Minerals plc A great platform to deliver shareholder value

- Link: https://www.directorstalkinterviews.com/kefi-minerals-plc-great-platform-deliver-shareholder-value/412752981
- Published: 2018-06-18T07:11:26+01:00
- Author: Giles Arbor

**KEFI Minerals Plc** ([LON:KEFI](https://www.directorstalkinterviews.com/company/kefi-gold-and-copper/kefi.l)),
the gold exploration and development company with projects in the Federal Democratic
Republic of Ethiopia and the Kingdom of Saudi Arabia, has today announced its financial
results for the year ended 31 December 2017.

> **Harry Adams, Chairman of KEFI Minerals Plc commented:** “2017 was a challenging
> year, but we now stand with assets, relationships and people that provide a great
> platform to deliver shareholder value by developing profitable mines in Ethiopia
> and Saudi Arabia. KEFI Minerals is at the forefront of the minerals sector in 
> one of the world’s great under-developed minerals provinces – the Arabian-Nubian
> Shield.
> “Our primary focus remains on our flagship Tulu Kapi Gold Project for which we
> have now assembled the proposed full project funding consortium including contractors,
> equity and non-equity capital. For Tulu Kapi to proceed, all stakeholders now 
> rely on closing out the remaining Government processes and approvals, along with
> completion of due diligence and formal documentation. It is planned that the financing
> of the Tulu Kapi Gold Project will be entirely at the project level, with KEFI
> retaining a beneficial ownership interest in the order of 54% and the balance 
> being held by the Ethiopian Government and other Ethiopian investors.
> “The coming months are expected to be a busy and exciting time for KEFI as we 
> move towards financial close of the Tulu Kapi project funding and I look forward
> to providing regular updates on our progress.”

**Notice of AGM and Annual Report**

The Annual General Meeting (“AGM”) of the Company will be held at 11:00am on Thursday
12 July 2018 at The Great Russell Suite, The Montague on The Gardens Hotel, 15 Montague
Street, London, WC1B 5BJ. 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(
the “AGM materials”) as well as the Annual Report and Accounts for the year ended
31 December 2017 (the “Annual Report”). The AGM materials and Annual Report are 
available on KEFI’s website at www.kefi-minerals.com.

**Ethiopian Political Developments**

Ethiopia is currently undergoing a fast, smooth and remarkable transformation both
politically and economically. Last week, the two month old government announced 
three major decisions. Firstly, it lifted the state of emergency which lasted for
three months. Secondly, it accepted the Algiers Agreement peace deal in a bid to
end a 20 year stalemate with its neighbour Eritrea. Finally, the Government announced
the liberalisation of the economy with the decision to privatise major state owned
businesses including Ethiopian Airlines, Ethiopian Telecoms and the Ethiopian Electricity
and Power companies.

**KEFI Minerals plc**

KEFI is the operator of two advanced gold development projects within the highly
prospective Arabian-Nubian Shield, with an attributable 1.93Moz (100% of Tulu Kapi’s
1.72Moz and 40% of Jibal Qutman’s 0.73Moz) gold Mineral Resources (JORC 2012) plus
significant resource growth potential. KEFI targets that production at these projects
generates cash flows for further exploration and expansion as warranted, recoupment
of development costs and, when appropriate, dividends to shareholders.

**KEFI Minerals in Ethiopia**

The Tulu Kapi gold project (“Tulu Kapi”) in western Ethiopia is being progressed
towards development, following a grant of a Mining Licence in April 2015.

The Company has now refined contractual terms for project construction and operation.
Estimates include open pit gold production of c. 140,000oz pa for a 7-year period.
All-in Sustaining Costs (including operating, sustaining capital and closure but
not including leasing and other financing charges) remain c. US$800/oz. Tulu Kapi’s
Ore Reserve estimate totals 15.4Mt at 2.1g/t gold, containing 1.1Moz.

All aspects of the Tulu Kapi (open pit) gold project have been reported in compliance
with the JORC Code (2012) and subjected to reviews by appropriate independent experts.

A Preliminary Economic Assessment has been published that indicates the economic
attractiveness of mining the underground deposit adjacent to the Tulu Kapi open 
pit, after the start-up of the open pit and after positive cash flows have begun
to repay project debts. An area of 1,100 square kilometres adjacent to Tulu Kapi
has been reserved for exploration by KEFI upon commencement of development, with
a view to adding satellite deposits to development and production plans.

**KEFI Minerals in the Kingdom of Saudi Arabia**

In 2009, KEFI formed G&M in Saudi Arabia with local Saudi partner, Abdul Rahman 
Saad Al Rashid & Sons Company Limited (“ARTAR”), to explore for gold and associated
metals in the Arabian-Nubian Shield. KEFI has a 40% interest in G&M and is the operating
partner.

To date, G&M has conducted preliminary regional reconnaissance and has had five 
exploration licences (“ELs”) granted, including Jibal Qutman and the Hawiah EL that
contains over 6km strike length of outcropping gossans developed on altered and 
mineralised rocks with all the hallmarks of a copper-gold-zinc VHMS deposit.

At Jibal Qutman, Mineral Resources are estimated to total 28.4Mt at 0.80g/t gold
for 733,045 contained ounces. The shallow oxide portion of this resource is being
evaluated as a low capital expenditure heap-leach mine development.

ARTAR, on behalf of G&M, holds over 20 EL applications. ELs are renewable for up
to three years and bestow the exclusive right to explore and to obtain a 30-year
exploitation (mining) lease within the area.

The Kingdom of Saudi Arabia has announced policies to encourage minerals exploration
and development, and KEFI Minerals supports this priority by serving as the technical
partner within G&M. ARTAR also serves this government policy as the major partner
in G&M, which is one of the early movers in the modern resurgence of the Kingdom’s
minerals sector.

**Executive Chairman’s Report**

It has been a challenging year and we now stand with assets, relationships and people
that provide a great platform to deliver shareholder value by developing profitable
mines in Ethiopia and Saudi Arabia. KEFI Minerals is at the forefront of the minerals
sector in one of the world’s great under-developed minerals provinces – the Arabian-
Nubian Shield (“ANS”). KEFI has, in the past year, begun the process of transforming
its structure in preparation for the task ahead. We now have responsibilities wider
than when we focused on exploration and we have been entrusted by the consortium
of parties now assembled around KEFI for the development of the Tulu Kapi Gold Project
in Ethiopia.

Tulu Kapi remains our primary focus and KEFI has assembled the proposed full project
funding consortium including contractors, equity and non-equity capital. For Tulu
Kapi to proceed, all stakeholders now rely on closing out the remaining Government
processes and approvals, along with completion of due diligence and formal documentation.
We work hard with the community of Tulu Kapi, the Regional Government of Oromia,
project contractors Lycopodium and Ausdrill, the infrastructure financier and our
Ethiopian investment partners – the Government of Ethiopia and also a syndicate 
of private sector investors.

Over the past 18 months, political changes in Ethiopia caused some delays and it
is today pleasing to see a rapid and smooth transition to new national leadership
with widespread support in Ethiopia and what appears to be a progressive attitude
to reform on various fronts. Throughout these recent political changes KEFI and 
our consortium for Tulu Kapi remained steadfast and took the opportunity to improve
project plans.

We improved project economics by bringing forward planned operating cash flows to
increase annual gold production from 115,000 to 140,000 ounces for the first seven
years. We also took the opportunity with our financial advisers to significantly
lower financing costs from an indicative 14% to an indicative 7% by simplifying 
the financial structure. Current indications are subject to market conditions and
to completion of due diligence.

Economic estimates for 100% of Tulu Kapi at US$1,300/oz are for average net cash
flow (after debt repayments and all other planned commitments) of $32 million per
annum. All-in Sustaining Costs (“AISC”) remain c. US$800/oz and All-in Costs (“AIC”)
c. $1,000/oz. Tulu Kapi’s Ore Reserves of 1.0 million ounces and Mineral Resources
of 1.7 million ounces have significant upside potential.

In both Ethiopia and Saudi Arabia, we have applied for regulatory permission for
exploration concurrently with the development of Tulu Kapi.

 

**Development-Ready Gold Mine – Tulu Kapi**

As part of the process of arranging funding, the project consortium refined Tulu
Kapi’s detailed development and operating plans, all incorporated into the 2018 
Plan and KEFI’s financial targets for the open-pit project now include:

· Gold production of 140,000 ounces per annum for seven years;

· At a flat average gold price of $1,300/oz for all eight years of gold production:

o All-in Sustaining Costs of less than $800/oz (ignoring financing charges);

o After-tax, leveraged IRR of 51%;

o After-tax, leveraged NPV (8% discount rate) of $115 million at start of construction;

o After-tax, leveraged NPV (8% discount rate) of $192 million at start of production;
and

o Payback of 3 years.

· A 50% increase in NPV results from either a 10% increase in gold price or a 10%
increase in plant throughput.

The 2018 Plan reflects, among other things, a fixed price, lump-sum processing plant
design and supply contract with Lycopodium and a warranted ore processing rate of
1.9-2.1 million tonnes per annum. The plant assembly aspect of the development is
planned as a reimbursable cost-based arrangement with incentives and penalties for
performance.

KEFI bases the finance structure on the numbers and schedules in the 2018 Plan which
is for the open pit only. We have also run a range of sensitivity analyses to ensure
robust debt-service coverage under a range of scenarios. The plans and numbers have
also been reviewed in detail by the Independent Technical Expert for the bond investors.

Significant value is also expected to be added from the contemplated underground
mine.

Strong Support from Ethiopian Government for Tulu Kapi Development

Responsible mine development is the overriding priority for KEFI and our partner
the Ethiopian Government. We target to bring Tulu Kapi into production as rapidly
as we prudently can whilst ensuring compliance with all relevant governance and 
quality standards.

Notably in May 2017, the Government further demonstrated its support by executing
the formal documentation for its equity capital contribution of $20 million to Tulu
Kapi’s development. This investment will increase the Government’s share of the 
project from a 5% free-carried interest to a little over 20%, depending on the final
financing structure.

Unfortunately, Ethiopia has been experiencing the strains of being one of the highest
growth countries in the world. This has resulted in two separate States of Emergency
being declared in the past 18 months, both of which have since been lifted. KEFI
Minerals’ operational activities have continued and appropriate security precautions
instituted as required although Government administrative procedures have suffered
delays.

The Government has welcomed KEFI’s plans to explore the district around Tulu Kapi
so as target a longer life to this planned development. In October 2017, KEFI received
confirmation from the Ethiopian Government that the area proposed to be explored
by KEFI has been set aside with the intention of being granted to KEFI upon commencement
of development of Tulu Kapi. This Exploration Licence Application (“ELA”) covers
an area in excess of 1,000 km2 with known gold prospects within c. 50km of Tulu 
Kapi, which is considered an economic trucking distance to the planned processing
plant.

 

**Exploration Opportunities**

The ANS has been the Company’s primary focus since 2008 when it was invited to be
the operator of an exploration joint venture in the Kingdom of Saudi Arabia. Our
experience since then has reinforced our excitement by the opportunity provided 
and we have worked hard to establish our pole position in the region.

KEFI is fortunate to have c. 3,000 km2 portfolio of exploration properties at various
stages within the highly prospective ANS. We are aiming to commence an aggressive
exploration program later this year in each country, to advance in parallel with
the development at Tulu Kapi.

We demonstrated the prospectivity of our tenements by discovering gold at Jibal 
Qutman in Saudi Arabia and quickly delineating Mineral Resources totalling 733,000
ounces of gold. Further drilling has a very good chance of increasing oxide gold
resources on the granted Exploration Licence (“EL”) and surrounding ELs.

KEFI also has a set of volcanogenic massive sulphide (“VMS”) copper-gold prospects
near Tulu Kapi in Ethiopia and in the Wadi Bidah Mineral District (“WBMD”) near 
the Hawiah prospect in Saudi Arabia. As usual since our entry into Saudi Arabia 
in 2008, the tenement applications are made by ARTAR on behalf of our joint venture
company Gold & Minerals Limited (“G&M”), which is 40% KEFI and 60% ARTAR). This 
has proved efficient for a number of reasons and KEFI has the right to instruct 
that the tenements be transferred to G&M.

At Hawiah, a huge VMS copper-gold target has been identified based on the surface-
sampling of a six-kilometre long gossan (oxidised mineralisation exposed on the 
surface) and the strong geophysical anomalies beneath the gossan.

In Ethiopia, we are also keen to test VMS prospects on our application areas under
KEFI subsidiary KEFI Minerals (Ethiopia) Limited (“KME”) in which past explorers
found high-grade copper and gold more than 40 years ago but have not been followed
up since then.

**Capital Management**
 The business model of the Company has always been to raise
equity capital to fund the next stage of exploration and development. At the same
time, KEFI has worked hard to minimise Tulu Kapi’s development funding requirements
through engineering, contracting and project finance, which have been designed holistically
to provide an economically robust project and a befitting financing plan. Nearly
all capital requirements are planned to be met at the project level.

KEFI unfortunately has also had to issue equity at the parent company level at disappointingly
low share prices. Having said that, the Company’s projections and those of the research
analysts that follow us closely show significant value generating upside to shareholders
from Tulu Kapi alone, let alone from the pipeline of less mature projects which 
we expect will yield more value-adding opportunities.

On 15 June 2018 KEFI announced a capital-raising for £5.5 million ($7.4 million)
to fund finance closing costs and early project works in preparation for full finance
drawdown and development activities targeted for implementation after the end of
the Ethiopian wet season in September 2018. The proceeds from the capital-raising
in combination with existing cash, project equity and the working capital facility
from certain existing stakeholders will ensure that the Company is fully funded 
until December 2018 and will enable KEFI to close the Tulu Kapi Project financing,
subject to approvals by all stakeholders and formal documentation.

Our Annual General Meeting will be at 11h00 on 12 July 2018 and we will introduce
some of our new senior management team, all of whom are shareholders and take much
of their remuneration in shares.

**KEFI Being Prepared for Development and Operations**
 As KEFI Minerals prepares
to develop Tulu Kapi, the Company’s senior management team was expanded in early
2018 with the appointments of:

· David Munro as Head of Operations – a mining engineer who previously was Managing
Director of Billiton BV and President Strategy and Development of BHP Billiton;

· Eddy Solbrandt as Head of Systems – the founder of GPR Dehler, an independent,
international management consultancy which specialises productivity improvement 
for mining companies worldwide; and

· Brian Hosking as Head of Human Resources and Technical Planning – originally a
geologist, he has focussed on human resources for the mining industry and has provided
remuneration advice, management assessment and executive search to a wide range 
of clients.

This expands the senior executive team with individuals providing the senior operational
leadership required for the Company to support the operating teams on the ground.

It remains an exciting time to be developing a new gold mine and many quality people
have been earmarked to join our project as the Company enters the development phase.
A recent appointment was the senior site services manager to oversee the Company’s
social performance team for community programs as part of the role.

**Outlook**
 KEFI’s vision is to capitalise on its pole position in both Ethiopia
and Saudi Arabia and, in the long term, to become a successful dividend-paying explorer
and developer in the ANS which, first and foremost, honours all its obligations 
and then proceeds to provide benefits to today’s generation within the community
in a manner which enhances opportunities for future generations.

KEFI Minerals is the operator of two potentially high-growth joint-ventures, well
positioned to pursue prudent project development whilst continuing to add value 
through targeted exploration.

Pre-works for Tulu Kapi have already commenced and our base case schedule for first
gold production from Tulu Kapi is 24 months from drawdown of the full project funding
package, with incentives to start up earlier.

Initiatives on both sides of the Red Sea reflect our conviction that the ANS has
world-class prospectivity overseen by governments that have put a strategic priority
on the mining sector. Both Ethiopia and Saudi Arabia have this year installed younger
national leaders who are demonstrably pro-development.

The KEFI team is looking forward to mine development commencing as soon as practical.
KEFI’s collaborative approach with contractors, community and other stakeholders
during the planning phase should put us in good stead to work through the inevitable
challenges as the project progresses.

We have achieved this progress with a very small team around whom we will build 
the full operating team in conjunction with the project contractors, both of whom
have over 20 years of mine building experience in Africa. We are also well supported
by a number of high calibre, quality specialist advisers also selected for their
pre-eminence in start-ups of this nature. The finance plan remains subject to completion
of all Government approvals and processes, due diligence and documentation.

You will perhaps have noticed that, whilst this Annual Report has been issued before
the end of June 2018 as required, we delayed its release so that it could capture
and duly report material recent events. On behalf of the Directors, I thank all 
staff, shareholders and other stakeholders for your patience and support and I look
forward to providing a further update on our progress at the Annual General Meeting
in London.

Harry Anagnostaras-Adams

Executive Chairman

**Finance Director’s Report**

KEFI’s strategy is to maximise shareholder value through the development of a focused
portfolio of mining operations and projects at various stages, while at the same
time managing the risks faced by companies in the exploration and development stage.

Our risk management approach places a clear focus on discovering and exploiting 
mineral wealth through multiple ventures within a focused framework, thus increasing
the odds of success. We introduce partners and contractors in certain circumstances
to minimise risk and broaden the human and financial resources available.

KEFI minimises expenses while maintaining momentum towards becoming a gold producer.
We run our corporate office in Nicosia at a fraction of what the cost would be in
London. Other than our financial controller, all staff are based at the sites for
project or finance works. In order to help reduce cash outflows and align interests,
some employees, Directors and consultants have taken, and continue to take, KEFI
shares in lieu of a significant portion of salary or fees.

**Equity Funding**
 KEFI Minerals has to date financed its activities through periodic
equity capital raisings and contributions by partners.

In March 2017, shareholders approved a fundraising comprised of:

o £0.6 million placing of equity by Brandon Hill Capital;

o £0.4 million subscription by certain of the Directors, employees and Lycopodium;
and

o £1.9 million received from Lanstead Capital during 2017.

Following the completion of the March 2017 fundraising and associated consolidation
of the Company’s capital on a 17-for-1 basis, KEFI had a total of 332.7 million 
Ordinary Shares on issue.

A key aspect of the March 2017 fundraising was that the subscription by Lanstead
was subject to a Sharing Agreement which allowed KEFI to potentially benefit financially
from positive share price performance, whilst limiting the financial downside risk
from a negative share price performance. The actual funds to be received during 
2017 and 2018 were therefore variable with respect to average share market price
in each month.

The number of Ordinary Shares issued to Lanstead under the Sharing Agreement was
fixed up-front at 82.4 million Ordinary Shares. Whilst the share price underperformed,
the Lanstead Sharing Agreement underpinned the Company’s expenditure for 2017 and
KEFI received a total of £1.9 million from Lanstead during 2017. The sharing agreement
will expire in July 2018.

The Company also received VAT refunds of c. £2.5 million from the Government of 
Ethiopia during 2017.

On 15 June 2018 the company closed a share placing of £5.5 million, which consisted
of £3million in cash and £2.5 million for the reduction of creditors and other outstanding
amounts. The placing is in two tranches. The first tranche of £1.5 million was completed
immediately (for cash) and the second tranche of £4.0 million (for cash and creditor
reduction) is subject to approval of shareholders at the General Meeting on 2 July
2018.

In addition, the company previously announced on 11 June 2018, that it had reached
agreement in principle with an Ethiopian investment syndicate for a proposed acquisition
of a 30% ownership interest in KEFI’s wholly-owned subsidiary KEFI Minerals (Ethiopia)
Limited (“KME”) and holder of the Company’s interest in the Tulu Kapi Gold Mines
Share Company Limited (“TKGM”). Under the proposed terms, which remain subject to
final documentation and government approval, the syndicate will invest US$30 million
in local currency (Birr) equivalent of which US$9 million will be invested in August
2018 and the balance upon closing of long term project finance.

**Partnering the Government in Ethiopia and ARTAR in Saudi Arabia**
 In 2017, KME
and the Government of Ethiopia formed Tulu Kapi Gold Mines Share Company Limited(“
TKGM”) as the project company for developing Tulu Kapi. The exploration projects
outside the Tulu Kapi Mining Lease area are not part of TKGM and remain 100% owned
by KME.

Based on current estimates of capital spending and capital contributions, KEFI will
be majority owner of KME. Upon closing of project finance, the ownership of the 
Tulu Kapi Gold Project via TKGM would be circa 23% by the Ethiopian Government and
77% by KME. KME would be owned 70% by KEFI (equivalent of 54% of TKGM) and 30% by
the Ethiopian investment syndicate (equivalent of 23% of TKGM).

In February 2018, the Ethiopian Ministry of Mines, Petroleum and Natural Gas formally
transferred the Mining Licence from KME to TKGM. The TKGM Board has approved the
business plan for the mine development to commence as soon as financing is implemented.
A key feature of the TKGM business plan is for local people to be trained as the
operators, with over 1,000 jobs being created through the region around Tulu Kapi
during construction.

In the Kingdom of Saudi Arabia KEFI conducts all its activities through G&M, our
joint venture company with Abdul Rahman Saad Al Rashid and Sons Limited (“ARTAR”).
KEFI is operator with a 40% interest and ARTAR has 60%. KEFI’s is fortunate to have
such a strong Saudi group as a partner and G&M has assembled a large and prospective
portfolio of exploration licences and applications, help by ARTAR on G&M’s behalf.
Having made a discovery at Jibal Qutman, the joint venture looks forward to development
and expansion in the minerals sector which the Saudi Government has made a national
strategic priority.

**Tulu Kapi Development Funding**
 The Tulu Kapi Gold Project consortium now includes
KME, the Government of Ethiopia, the project contractors Lycopodium Limited and 
Ausdrill Limited, a syndicate of Ethiopian equity investors and the infrastructure
financier.

In May 2018, KEFI announced that it formally mandated the bond arranger for the 
placement of $160 million of Listed Infrastructure Bonds (the “Bonds”), after having
worked together for some twelve months.

Upon successful completion of due diligence, documentation and private placement
of the Bond issue, the planned Luxembourg-listed Bonds will fund ownership by KEFI’s
Luxembourg-regulated Finance SPV of the gold processing plant and ancillary infrastructure
at the Tulu Kapi Gold Project for lease to TKGM.

Conditions of the funding package include:

· equity into the project of $20 million from the Government of Ethiopia (as already
formally committed);

· further equity into the project of $20-30 million (KEFI has agreed in principle
for $30 million with a local investment syndicate);

· completion of Government approvals and processes, including the financing agreements
and security arrangements and the registration by the relevant Ethiopian authorities
of the equity capital that has already been invested by KME of c. $60 million; and

· that KEFI remain controlling shareholder of TKGM and that its senior executive
team oversee the planning and controls at TKGM.

Drawdown of the infrastructure finance will be timed to accommodate project construction
activities.

The infrastructure finance Bonds are planned to have a 9-year tenor with a 2.5-year
grace period. The overall amount of the funding package provides a safety buffer
for contingencies and the Bonds can be prepaid at any time.

Annual debt-service costs during production is c. $27 million per annum versus base
case EBITDA of c. $73 million at a gold price of US$1,300/ounce. Net cash flow after
debt repayments and all other commitments is estimated at an average of $32 million
which will be available for debt prepayments, cash reserves, exploration, development
and dividends.

The plant and ancillary infrastructure will be built and its performance guaranteed
by Lycopodium Limited, which is one of the leading gold plant specialist engineering
groups and has an exemplary track-record in Africa, where it has built many such
plants for over 20 years.

The open pit mine will be built and operated by Ausdrill Limited, through its wholly-
owned subsidiary, African Mining Services Limited, which has been a leading African
mining contractor for over 25 years.

The off-site infrastructure will be built and operated by the Ethiopian Roads Authority
and the Ethiopian Electric Power Corporation, both Ethiopian Government entities.

The Ethiopian Finance Ministry and Central Bank has approved tax treatments and 
capital ratios and we await the remaining approvals.

**Statutory Accounts and Reporting**

KEFI’s financial statements for 2017 are attached and report financial results based,
among other things, on the write-off of most historical pre-development expenditure
at Tulu Kapi and the write-off of all exploration expenditure. This is not intended
to imply Directors’ view of the inherent value of Company assets, but merely reflects
conservative accounting policy.

In November 2017, KEFI reported that a court ruling by the Federal Supreme Court
of Ethiopia eliminated KEFI’s potential liability regarding a $12 million damages
claim brought in 2014 by third parties in Ethiopia relating to events which took
place between 1998 and 2006. In January 2018 KEFI reported a mutual deed of release
and settlement with Oryx which ended its involvement with the Tulu Kapi project 
financing.

John Leach

Finance Director

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