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Kefi a buy at 5.5p worth 26p says broker Cantor Fitzgerald analyst Asa Bridle

By Tom Winnifrith | Friday 11 August 2017

Disclosure: Financial Investigative Media Limited, which is not owned by Tom Winnifrith but by a trust for his dependants, owns shares in companies mentioned in this article. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

I see a note about how this research is only meant for funds with $100 million under management but as it is house broker, so clearly not impartial, Cantor's job is to promote the stock so I am sure it will not mind me giving it a wider airing. As it happens, analyst Asa Bridle is no fool so I am not ignoring what he says completely. We own the shares and think they should be trading at 13p+. But 26p? Over to the expert...

KEFI continues to derisk its Tulu Kapi gold project in Ethiopia which should result in more of the project’s value being crystallised in the company’s share price. Today’s release outlining a 25% reduction in the remaining capital required to complete the project’s financing comes on the back of the news earlier in the week that the State of Emergency in Ethiopia had been lifted, and the news in mid-July that an innovative, US$135m project finance package had been secured. In addition, the news that KEFI is considering completing this final financing piece with a working capital facility and project level equity should please the equity market as dilution will be minimised. We reiterate our BUY recommendation and 26p TP.

Reducing the balance - In its recent release outlining the US$135m project finance package offered by Oryx, KEFI stated that the residual financing required for the Tulu Kapi mine, after the Ethiopian Government have invested US$20m in new infrastructure, would be US$32m. The company also stated that it was working to reduce this balance which included various contingency elements. This work has now been completed and the residual funding requirement has been reduced by 25% to US$24m, based on refinements to planned capital expenditure and contingency provisions.

Financing the gap - KEFI is now focusing on sourcing part of this residual requirement from a separate finance facility against ore stockpiles which are estimated to include US$15m of contained gold at start-up of production and part of the remaining requirement from project-level equity, negotiations for which have commenced. It remains KEFI's preference to retain majority ownership and control of the Project. The company hopes to complete the financing in 4Q17. If this can be achieved, commissioning of the mine is scheduled to occur in late 2019. Latest estimates for annual gold production are c. 120,000oz pa and All-in Sustaining Costs less than US$800/oz.

Valuation - In our initiation note (see: Ancient lands, new opportunities, 15 June 2017) we showed that KEFI was trading at a significant discount to a peer group of companies with gold projects at a similar stage of appraisal (post Bankable Feasibility Study, pre-construction) across a range of metrics. Applying the average of these metrics to Tulu Kapi's parameters gave a US$73m (17.4p) valuation for the project. Applying the same method to the potential underground development project at Tulu Kapi and the Jibal Qutman gold project in Saudi Arabia added a further US$34m (8.1p) to give a total valuation for the company of US$108m (26p). For reference the US$20m investment by the Ethiopian Government in the Tulu Kapi project for a 20% stake implies a US$75m for KEFI's 75% stake, in line with our own valuation for the initial project.

Risks - As a junior mining company, risks associated with KEFI include operational risk, commodity pricing and foreign exchange exposure.

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