RE: Kefi research21 Dec 2016 16:12
Here we go......
21 December 2016
Yesterday KEFI published an operational update with a useful summary of its overall situation; project economics at a range of gold prices, the improving Ethiopian political situation, encouraging Saudi developments and corporate matters. It also reported it has “received formal confirmation its [£2.5m] refund is due for payment” from the Ethiopian tax authorities, this will be useful working capital.
KEFI has been very unfortunate in 4Q17 with the double whammy of political volatility and a weak gold price. However, in 2017 we anticipate these dynamics to improve, for its share price to recover, and for financing to be achieved. We currently have our price target Under Review until there is more clarity on the political situation. However, based on a range of scenarios, once the state of emergency has been lifted, we anticipate a price target above 0.75p with significant further upside once financing is in place.
Based on this update and our recent visit to Tulu Kapi, our main takeaways are:
1. Ethiopia is a relatively well developed African country with excellent infrastructure including power, roads and significant sovereign funding capacity
2. The political situation is improved and the president has made some major changes to ensure stability e.g. wholesale ministerial reshuffle in November
3. We expect the state of emergency to end in April, if not before
4. Tulu Kapi is high quality project which should become at least a 1.5Moz (current reserves c. 1Moz) gold mine
5. KEFI has an excellent owner’s team, based in country, and with the requisite experience to deliver operationally
6. KEFI has tier one contractors (Lycopodium & Ausdrill) whose involvement and investments in KEFI shares demonstrate the feasibility of Tulu Kapi
We have a positive medium term outlook due to the global cost of production, which means that very few miners can justify expansion or new mine development at current prices. We also recognise the potential for U.S. economic slowdown and a pause or reversal of the new hawkish interest rate policy. We have a medium term (2-5y) gold price forecast of $1250/oz.
We visited Tula Kapi last month and are impressed by the country, the project and KEFI’s project team (owner’s team). We saw no impact of the emergency in Addis or on site although clearly the situation delays closing project finance, at least from purely financial mining/project funds.
We have our target price Under Review but will update in 1Q17 when we have more clarity on the political situation. However, based on a range of scenarios we anticipate an initial price target above 0.75p with further upside post financial close.
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