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KEFI Gold & Copper (AIM-listed junior minor) : UKInvesting


Disclaimer: I have a modest holding in this company

I would like to share some of my DD on KEFI Gold & Copper (formerly KEFI Minerals), who are an AIM-listed junior minor, currently working on the Arabian Nubian Shield with prospects in Ethiopia and Saudi Arabia. Their current market cap is £43m, made up of ~2.1bn shares at just under 1.96p. As the name would suggest, they are interested primarily in mining gold and copper, and have three main projects at varying stages of development, which I’ll talk about below. I bought into KEFI back in June (0.99p) when their main Ethiopian project, Tulu Kapi, caught my eye and made me think that the company was massively undervalued but super-risky. Since then, the risk has decreased and I’ve gradually averaged up to just under 1.65p, quadrupling my original holding.

Tulu Kapi

The project that first caught my eye is a mine that KEFI are developing in Ethiopia. They have been trying to build a mine in Ethiopia for around a decade, with the current board of management taking over ~2014/15 and have sat through a couple of states of emergency, a change of government, COVID-19 and most, recently, civil unrest in Tigray. So interesting times. But the Tulu Kapi deposit is 1.1MOz of gold and KEFI are in the final stages of finalising a funding arrangement to start building the mine. The mine is a public-private partnership with Ethiopian Government, who are heavily invested in getting this mine up-and-running. The total cost of building the mine is going to be ~$221m, and production should be 140 kOz p.a. to start, rising to 190 kOz within 3 years.

When I first looked at KEFI, the funding arrangements were such that KEFI were due to own 45% of the subsidiary company (Tulu Kapi Gold Mine, TKGM), with final funding due to be signed off by the end of October 2020. Things have been delayed, but term sheets were agreed by all parties (2 major African banks, Ethiopian Government, and unnamed ‘major international partners’) with the funding coming from a combination senior debt from the bank, project-level equity and subordinated debt from the unnamed partners linked to an off-take deal. All parties (banks, etc) completed their due diligence (hosted at the mine site by the Ethiopian Government Mining Minister) towards the end of December and things are moving toward a March closure. KEFI increased their beneficial interest to at least 65%, with local investors having until around about now to decide whether or not to get involved. If they don’t get involved, KEFI’s share will increase to 80%. At 65% with a gold price of $1700 /oz, KEFI’s interest works out at around 9p per share, net after tax cash flow, discounted 8%.

I’m expecting an RNS next week which will likely name the international partners (“$1B LSE-listed company is the only hint given so far, with unconfirmed rumours that it’s Centamin) and state whether local investors got involved (KEFI doesn’t seem to want them to get involved, but have left the door open for mostly political goodwill). On full completion of the finance, the Ethiopian Government will release a bunch more exploration licences (100% KEFI) for the surrounding areas, with the aim of turning Tulu Kapi into a mining district. The political will to get this off the ground seems intense, with KEFI involved heavily in advising government on developing their nascent mining industry.

Hawiah project, Saudi Arabia

The next major project under development is the Hawiah project in SA. KEFI operates in Saudi Arabia as a minor partner (34% stake, with Artar owning the rest) in a company called G&M (Gold & Minerals). KEFI are doing all of the drilling and operational work, while Artar provide a wodge of cash and local political influence. KEFI originally owned a 40% stake but this reduced when they couldn’t make their equity contributions to exploratory work a couple of years ago. Knowing what they do now, the KEFI director admits they should have issued more equity to maintain their holding because the Hawiah deposit is looking like it’s going to be a BEAST, with exploratory drilling ongoing.

So, the project: they’ve been drilling for less than 2 years and have found a big VMS (volcanogenic massive sulphide) ore deposit, typically mineral-rich deposits. The principal metal here is copper, which is in the deposit in a pretty high grade, and there are also decent amounts of zinc, gold and silver in there. The most recent drilling results can be found here: the primary economic assessment last year suggested a surplus cash flow of $200m before tax, etc but KEFI are carrying out infill drilling and further exploration (they still haven’t found the full extent of the deposit) with the aim of at least doubling the maiden resource estimate, which would create a surplus cash flow in excess of $500m. KEFI have really put the foot down in terms of expanding the drilling, and have applied for a bunch of mining licences in the surrounding area which, given the geology, could potentially include several deposits at least as big as this Hawiah project. Saudi Arabia has been a tricky, slow place to work but a new mining law came into effect in January 2021 to allow the government to lend up to 75% of project costs, and streamline the process of getting permits. KEFI, through Artar, believes that they are well-situated to take advantage of the Saudi government’s push to develop resources for life after oil.

Jibal Qutman, Saudi Arabia

Jibal Qutman is a project that contains ~733kOz of gold. Not a huge project but the gold can be extracted very cheaply from an open pit, heap-leach operation at a cost of $600 per Oz (currently, gold is sitting at $1778 / Oz). With the Saudi mining law and 75% government loans the total amount of cash needed from KEFI to set this up is just $5m, so this would be really cheap to get up and running. The mining licence has been applied for and could drop at any time, so this is a genuinely shovel-ready project.

Financials

Okay, so Tulu Kapi alone is worth a minimum of 9p a share, so why is KEFI so cheap? Well, the main reason is that, quite simply, they have tried and failed to deliver Tulu Kapi for several years, and as a gold exploration company, long-term shareholders have been bled for a LOT of cash, dropping from 70p a share in 2012 (higher before), and facing a 17-to-1 share consolidation back in 2017. There number of shares in issue since that consolidation is almost 10x and ADVFN has a lot of long-suffering holders who have been averaging down continuously as the company has had to issue shares to keep the lights on. The most recent (oversubscribed) placing was in November 2020, when KEFI raised ~£3m to clear all outstanding debt, pay for drilling to develop Hawiah and generally keep the lights on. Obviously, KEFI are not generating any revenue yet (first gold pour from Tulu Kapi is due at the end of 2022).

So why did I invest? Well, the board of directors have taken a lot of abuse for failing to deliver across several false dawns, and junior miners have taking a cyclical kicking in the last 10 years. But… the board have kept the lights on, gold is now rising again and copper is at a 9-year high due to dwindling supplies at a time when the world needs ever more copper as we switch to a low-carbon, electric-driven model. A small electric car requires 40kg of copper, and an all-electric bus contains almost 10x this, so copper prices may well go through the roof in the coming years. And unless bitcoin replaces gold as the main store of value, with the amount of money being printed to offset economic chaos from COVID, gold could easily climb back above $2000/ Oz in the coming months.

In terms of politics, KEFI have got the full support of the Ethiopian Government who are keen to commission the first modern gold mine in Ethiopia, due to their need to provide jobs (upcoming elections) and increase their reserves of foreign currency. Ethiopia is one of the fastest-growing economies in the world and KEFI appear well-placed to help launch a nascent minding industry.

KEFI have had many false dawns for funding the Ethiopian mine, but the banks have finally completed their DD, the consortia seems to be assembled and the KEFI CEO has played an absolute blinder in getting KEFI’s interest from 45% last summer up to potentially as high as 80%. I really believe that their time has come, just as EUA’s did last year. If Tulu Kapi funding does indeed close next month, the share price may well re-rate to 4 to 8p in the following weeks. Of course, if this is yet another false dawn, it will probably drop to 1p. But I’m feeling optimistic and, if we weren’t in the process of buying our first house, I would be buying a lot more while the shares are on sale. This post isn’t advice, as you should do your own DD, but I’ve learned a lot from lurking in this forum and wanted to try my hand at sharing my thoughts. I’ve only been investing since getting bored and finding I had spare cash in the first lockdown, so I’m still pretty inexperienced / naive with investing.



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