REG - Kefi Gold and Copper - Tulu Kapi Gold Project Finance Update

KEFI Gold and CopperAnnouncement

23/01/2023 07:00

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RNS Number : 4707N  Kefi Gold and Copper PLC  23 January 2023

23 January 2023

 

KEFI Gold and Copper plc

 

("KEFI" or the "Company")

 

Tulu Kapi Gold Project Finance Update

 

Final Steps Requested from Government and Being Addressed

 

KEFI (AIM: KEFI), the gold exploration and development company with projects
in the Federal Democratic Republic of Ethiopia and the Kingdom of Saudi
Arabia, is pleased to provide an update following the Company's announcement
on 21 November 2022 in which we reported that the finance plan for the
c.US$320 million financing of the Tulu Kapi Gold Project ("Tulu Kapi" or the
"Project") had been agreed in principle by the lenders so that draft
definitive agreements could be finalised for approval by syndicate members and
regulators.

 

We are now pleased to report that all lead contracting and equity investment
parties have agreed their draft agreements and confirmed their intention to
sign. Likewise for nearly all Government agencies which have to also sign
agreements within the syndicate.

 

For their part, the lenders have re-affirmed the financing plan in principle
and have formally set out their indicative terms and conditions which include,
as expected, satisfaction by all parties of their respective conditions and
the receipt of all the necessary remaining Ethiopian Government ("Government")
approvals. To this end, during the last months of 2022 the various relevant
regulatory agencies were advised of the specific conditions and clarifications
required from them in order that progress can be made with the financing and
definitive documentation signed.

 

Whilst the Government is clarifying the outstanding regulatory matters, it is
also reorganising its systems around the Project, including for upgraded
security and for preparing the community for resettlement.

 

Following the completion of these steps, and the receipt of final credit
committee approval by the lenders, KEFI will call a General Meeting of KEFI
shareholders to seek formal shareholder approval of the transaction, in
particular any convertibility rights (into KEFI shares) embedded in the
financings at the KME level by regional investors as previously outlined.

 

The Company expects all outstanding issues to be addressed imminently, the
exact timing of which will largely be driven by the Government process, so
that final lender documentation can be completed, and signing can take place,
enabling the KEFI General Meeting to be called, funds to flow and full Project
launch to proceed.

 

The Company and the full syndicate remain focused on achieving full Project
launch as soon as practicable. KEFI remains focused on achieving full
production from the open pit operations in 2025 and from the combined open
pit-underground operation a few years later for combined gold exports of near
200,000 oz per annum (KEFI beneficial interest 80% or near 160,000 oz per
annum).

 

The Company is pleased to provide more details of the key syndicate members as
follows:

 

           Contractors, all of whom have completed updated detailed pricing and
           scheduling:
 ·         Process plant construction - Lycopodium
 ·         Mining Services - PW Mining, recently appointed after the re-tendering of the
           contract in light of recent global cost-inflation
 ·         Electricity supply and maintenance - Ethiopian Electric Power Company
 ·         New access road - Ethiopian Roads Authority

           Debt Finance (US$190 million), including both senior and
           mezzanine-offtake-linked subordinated loans:
 ·         Eastern and Southern African Trade and Development Bank ("TDB"); and
 ·         Africa Finance Corporation ("AFC")

           Equity Finance (US$130 million, in addition to historic investment of US$80
           million):
 ·         Subscribers to new share issues by Tulu Kapi Gold Mines Share Company
           ("TKGM"):
 ·         Government: Ethiopian Ministry of Finance; Oromia Regional Government
 ·         Ethiopian Private Sector: Whilst this financial arrangement is small in
           quantum it ranks as very significant for aligning corporate and community
           interests and agendas
 ·         KEFI's wholly owned subsidiary KEFI Minerals (Ethiopia) Limited ("KME") which
           is the primary sponsor having provided all historic funding and assembled all
           the development finance
 ·         Regional Private Equity Financiers of KME, other than KEFI itself:
 ·         Subscribers to KME Redeemable or Convertible (at KEFI's election) Loan -
           subsidiaries of several major international groups. None of these parties is
           intended to have any involvement in the Project at an operational level, but
           all have a longstanding presence in, and support of the region

 

Commenting, KEFI senior management said:

 

Finance Director, John Leach:

"It is very pleasing that we are finalising the US$320 million financing of
the Tulu Kapi Gold Project. This is a large complex transaction in a
challenging working environment, against a backdrop of turbulent equity
markets and progressive political reforms in Ethiopia. KEFI is therefore
delighted with the first-class syndicate we have established to make the
long-standing Tulu Kapi Gold Project an operational reality.

 

"Our Tulu Kapi financing package is predominately at the Project or subsidiary
level. This is also as planned for our Saudi project developments, the first
of which, Jibal Qutman Gold, is smaller than Tulu Kapi and now expected to
start construction around the end of 2023 and the second of which, Hawiah
Copper-Gold, is bigger than Tulu Kapi and expected to start construction after
production has commenced at Tulu Kapi and Jibal Qutman."

 

Chief Operating Officer, Eddy Solbrandt: "We have already launched key initial
aspects of the Tulu Kapi Project development and intend to continue our staged
build up to full launch in full collaboration and support of all key
stakeholders. In Saudi Arabia during 2023 we focus on the Definitive
Feasibility Study and project financing for Jibal Qutman, the Pre-Feasibility
Study for Hawiah and the regional exploration programme.

 

"KEFI's first eight years after the IPO was prospecting which led to, since
2013, our assembly of five million ounces of JORC resources. In KEFI's second
eight years, we collaboratively assisted to unclog in-country obstacles that
held back mining for all, and we assembled our finance. In a few years we
expect to be a significant gold producer and, shortly thereafter, also
copper."

 

Executive Chairman, Harry Anagnostaras-Adams: "The Board is very proud of the
teams in Ethiopia and in Saudi Arabia. It has taken a huge effort over a much
longer period than we had anticipated in both countries to deal with
innumerable frontier market (for mining) challenges and we greatly appreciate
the patience and support of all stakeholders and, in particular, of our host
governments and communities, our partners and of course our financiers and
shareholders.

 

"Ethiopia's first modern mining development will include our large Tulu Kapi
project which today would be the largest single export-generator for the
country. We are looking forward to working with the newly appointed Minister
for Mines, H.E. Habtamu Tegegn who was already supporting the project from his
previous role as head of the Ethiopian Roads Authority.

 

"In the Kingdom of Saudi Arabia, after some fourteen years of patient
ground-work, the rate of our progress there has taken off at a remarkable pace
- with our two advanced projects being at the forefront of ambitious minerals
development plans in that country which are being vigorously supported by the
Government locally and have been just recently recognised internationally."

 

Additional Information on the Tulu Kapi Gold Project

 

Final Steps to Financial Close

 

As with any project financings, standard conditions precedent and subsequent
must be satisfied (before and after) the signing of definitive agreements by
all parties, including but not limited to there being no material adverse
change in markets, completion/registration of all documents with the various
government agencies, opening international project bank accounts (in Ethiopia
requiring collaboration with the National Bank of Ethiopia), placing
insurances internationally (in Ethiopia requiring local agents), registering
loan-security, receiving confirmations of tenure for mining and for
exploration and the lenders' independent experts' confirmation that security,
community and environmental conditions on the ground are conducive to the
planned operations and compliant with IFC World Bank Performance Standards
(which in Ethiopia involves significantly upgraded security and community
compensation processes in the field).

 

Such conditions are normal for all mining project finance transactions
regardless of commodity, country or company. Tulu Kapi was designed with our
Government partners as a show-case project per the latest international
standards. All syndicate members are leaders in their field and naturally
require completion of due process.

 

The remaining Government regulatory steps comprise commitments and
clarifications as follows, which are required for the definitive agreements to
be signed:

 ·    Ethiopian Ministry of Finance and National Bank of Ethiopia (central
 bank) confirmations so that finance agreement details provide the same
 protections for both banks and comply with international practice for mining
 project finance; and
 ·  Ethiopian Ministry of Mines completion of endorsement of historical
 investment, confirmation of tenure for production and exploration, and direct
 agreements with lenders.

It should be noted that the huge effort over the past few years by the
Ethiopian Government and its agencies has resulted in only very few regulatory
actions and clarifications now remaining, which are being addressed. We
greatly appreciate this intense effort which has involved extensive local and
international consultations, policy revisions and many other steps taken to
facilitate the development of a modern mining sector in the country. KEFI
believes there are no grounds to think all clearances and assurances will not
be received.

 

Uses and Sources of Funds

 

(excludes mining fleet and historic investment)

 

 SOURCES
                                           US$ m  £ m

 Debt (Senior and Subordinated)            190    165
 Equity
     Government and private local          28     24
     KEFI                                  102    89
 Total                                     320    278

 KEFI Sources

     Regional Private Equity               c.85   c.74
     Cash Refunds and Public Equity        c.17   c.15
                                           102    89

 USES

 Item                                      US$ m  £ m
 Mining                                    36     31
 Processing plant                          161    140
 Infrastructure                            20     17
 Bulk Earthworks                           15     13
 Social and Environment                    28     24
 Owners' Costs, including Working Capital  35     30
 Finance Costs                             25     22
                                           320    278

 Development Costs, to be spent            320    278
 Pre-Development Costs, already spent      80     70
 Total Costs                               400    348

 

Notes to planned sources and uses:

 

 ·    The Tulu Kapi Project financing has been designed by KEFI to ensure
 that all net operating cash flow from the open pit only, at a flat break-even
 gold price of c.US$1,200/oz, is sufficient to fully service debt finance,
 which is provided pari passu by the lenders. This break-even gold price was
 selected because market prices exceeded that level for 87% of the past decade,
 it is approximately US$730/oz or 38% below the current spot price of
 c.US$1,930/oz, is US$450/oz or 27% below analysts' long term consensus
 forecast (CIBC Global Mining Group Analyst Consensus Long Term Commodity Price
 Forecasts 1 December 2022) of US$1,641/oz, and because it approximates the
 global average industry All-In-Sustaining-Costs (which is operating costs only
 and less than All-In-Costs including financing charges).

 ·    Debt has a tenor of seven years (comprising two years' grace period
 during construction followed by five production years), is priced at a
 commercial margin over SOFR (Secured Overnight Funding Rate), is protected by
 'Debt Service Reserve Accounts' and a cash flow sweep mechanism to expedite
 its repayment if cash flows permit.

 ·    Equity issues (percentage ownership) at TKGM are based on the
 relative proportion of total capital provided by each share subscriber,
 calculated in Ethiopian Birr at the time of the investment. Total TKGM
 subscribed capital will end up at approximately US$210 million after taking
 into account all actual pre-development and projected development expenditure,
 other than c.US$12 million which may be left remaining owing to KEFI. On this
 basis (after taking into account the Government's 5% free carried interest)
 KEFI now expects to own approximately 80% of TKGM.

 ·    The Redeemable Convertible Loans issued by KEFI's wholly owned
 subsidiary KME may, at KEFI's election, be repaid or converted into KEFI
 shares at average stock market prices from 2026 onwards. Either way the
 dilution impact for KEFI shareholders is preferred to the alternative of
 raising public equity at today's KEFI share price. The corporations which are
 assembled for this form of investment are large international groups with
 experience in Ethiopia, who see this as an opportunity to deploy their
 investable local funds into a well-structured internationally gold-backed
 project designed to the latest international standards, managed by the
 first-tier team assembled by KEFI and which supports Ethiopia's priorities for
 economic development.

 ·    TKGM owes KEFI c.US$12 million via KME due to historic advances by
 KEFI. At the signing of the definitive agreements KEFI will, with its
 Syndicate partners, determine whether it be repaid by TKGM in cash or
 converted to TKGM shares, as the residual equity requirement for the project
 financing will then be clear. All Project equity will need to have been
 subscribed prior to debt drawdown in 2024. KEFI's top-up of the equity
 contributions arranged via KME is designed to be covered by the exercise of
 outstanding warrants in KEFI.

 Tulu Kapi Statistics - 2023 Mine Plan
 At Gold $1,641/oz  At Gold $1,930/oz
 Production Profile
 Material Mined (Thousands Tonnes per Annum)                                   18,846             18,846
 Ore Mined (Thousands Tonnes per Annum)                                        2,629              2,629
 Waste Mined (Thousands Tonnes per Annum)                                      16,217             16,217
 Strip Ratio                                                                   6.17               6.17

 Average Grade Delivered to Plant (grammes per tonne)                          2.15               2.15
 Average Quantum Processed (Thousands Tonnes per Annum)                        1,989              1,989
 Average Recovery in Plant                                                     93.73%             93.73%

 Production Thousands Ounces per annum first 7 years                           144.3              144.3

 IRR & Valuations Based on 2021 Resources Only
 Leveraged NPV8% @ Construction Start (1) (USD Millions)                       145.9              307.1
 Leveraged NPV8% @ 2026 (USD Millions)                                         356.6              540.9
 EBITDA (Average of first 7 production years) (USD Millions)                   126.7              171.3
 Enterprise Valuation @ 3.5x Average EBITDA (USD Millions)                     443.5              599.4

 Cash Cost Metrics (all of which include Government Royalties)
 All In Sustaining Costs (AISC US$/oz)                                         935                955
 All In Costs (AIC US$/oz)                                                     1,177              1,197
 Breakeven Cost - inc everything e.g. debt repayment, taxes (US$/oz)           1,210              1,285

 Qtrly Ratios Senior Debt (Pre-Sweep)
 Loan Life Coverage Ratio Min                                                  3.72x              4.68x
 Loan Life Coverage Raitio Ave                                                 6.48x              8.23x

 Balance Sheet / P&L Ratios
 Net Debt to EBITDA Max                                                        1.41x              0.77x
 Free Cash Flow to Interest Min                                                3.76x              5.02x

 Reserve Tail Against Open Pit Only
 Reserve Tail Ratio - All Debt (Pre-Sweep)                                     22%                22%
 Reserve Tail Ratio - All Debt (Post-Sweep)                                    50%                59%

 Cash Balances & Inventory
 Cash Built up in TK over life of mine  (USD Millions)                         508.1              755.8
 Cash at Bank plus gold in ore stocks in TKGM at end of Year 3 (USD Millions)  180.3              277.2

 Taxation Metric
 Corporate Income Tax paid by TK (USD Millions)                                76.8               160.6
 Royalties paid by TK (USD Millions)                                           136.3              160.4
 Total Taxes (excluding social & taxes) (USD Millions)                         213.0              320.9

·

·

(1) Excludes Saudi.

 

Notes:

 

Planned Tulu Kapi Project summary economics.

 

Please note that some of these statistics have improved since they were last
published due to the 2023 Mine Plan integration of some underground production
and the increased KEFI planned beneficial interest, in addition to some
exchange rate movement. The per share statistics are based on Tulu Kapi only
(Saudi assets excluded from this Ethiopia-focused analysis) and KEFI
fully-diluted shares in issue as at 31 December 2022 of 5,034 million.

 

 ·         At the December 2022 average long-term consensus gold price of US$1,641/oz,
           KEFI's beneficial interest in:
 o                                                  After-debt NPV at start of construction is US$118 million (£99 million or 2.0
                                                    pence per share) and in 2026 after start of production is US$288 million
                                                    (£242 million or 4.8 pence per share)
 o                                                  EBITDA average for first 7 production years is US$103 million (£86 million or
                                                    1.7 pence per share)

 ·         At current gold spot price of c. US$1,930/oz, KEFI's beneficial interest in:
 o                                                  After-debt NPV at start of construction is US$247 million (£208 million or
                                                    4.2 pence per share) and in 2026 after start of production is US$435 million
                                                    (£366 million or 7.3 pence per share)
 o                                                  EBITDA average for first 7 production years is US$137 million (£119 million
                                                    or 2.4 pence per share)

 

·    The 2023 Mine plan, as summarised herein assumes:

o  mining of ore is at the rate of 2,629,000 tonnes per annum

o  processing is at the rate of 1,989,000 tonnes per annum which is the
warranted design nameplate

o  as regards the ore available for mining. there is some upside potential
because it is expected that:

§ in-fill drilling during plant construction will increase Mineral Resource
and Ore Reserve of the open pit by including mineralisation which is already
identified but not yet drilled to sufficient density for inclusion in
Resources

§ the underground mine feasibility study to be completed during plant
construction will demonstrate the feasibility of extracting more than the
assumed c. 200,000 ounces from underground resource of c. 600,000 ounces

o  as regards the processing rate, it is expected that there is potential
flexibility around the assumed rate which is based simply on contractually
warranted minimum design-capacity. Minor capital expenditure during production
could allow :

§ a 10-15% per annum higher processing rate

§ a reduced rate in later years if desired in order to extend mine life for
smaller throughput rates after depleting the open pit, by mining from
underground or potential satellite pits

 

Market Abuse Regulation (MAR) Disclosure

This announcement contains inside information for the purposes of Article 7 of
the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law
by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is
disclosed in accordance with the Company's obligations under Article 17 of
MAR.

Enquiries

 KEFI Gold and Copper plc
 Harry Anagnostaras-Adams (Executive Chairman)                        +357 99457843
 John Leach (Finance Director)                                        +357 99208130
 SP Angel Corporate Finance LLP (Nominated Adviser and Joint Broker)  +44 (0) 20 3470 0470
 Jeff Keating, Adam Cowl
 Tavira Securities Limited (Joint Broker)                             +44 (0) 20 7100 5100
 Oliver Stansfield, Jonathan Evans
 WH Ireland Limited (Joint Broker)                                    +44 (0) 20 7220 1666
 Katy Mitchell, Andrew de Andrade
 IFC Advisory Ltd (Financial PR and IR)                               +44 (0) 20 3934 6630
 Tim Metcalfe, Florence Chandler

 

KEFI Gold and Copper plc

 

KEFI is focused primarily on the advancement of its three development projects
in Ethiopia and Saudi Arabia, plus its pipeline of highly prospective
exploration projects in these two large jurisdictions of the under-explored
Arabian-Nubian Shield.

 

KEFI targets that production in Ethiopia (at Tulu Kapi Gold) and in Saudi
Arabia (at Jibal Qutman Gold and then Hawiah Copper-Gold) will, in aggregate,
generate cash flows for capital repayments, further organic growth and,
ultimately, dividends to shareholders.

 

KEFI operates these projects via joint venture operating companies Tulu Kapi
Gold Mines S.C in the Federal Democratic Republic of Ethiopia (TKGM) and Gold
and Minerals SLA in the Kingdom of Saudi Arabia ("GMCO"). These operating
companies are technically guided and supported by KEFI so that each of these
operating joint venture companies as soon as possible builds the local
organisational structure suitable for long term production as well as
exploration and future development opportunities. We have already appointed
some of the key senior management into TKGM and GMCO and the teams are being
built up as we move forward.

 

Historically KEFI and its partners have spent over US$80 million in Ethiopia
and US30 million in Saudi Arabia. These programs have led to Mineral Resources
in excess of 5 million ounces gold-equivalent (at analysts' long-term
consensus forecast - CIBC Global Mining Group Analyst Consensus Long Term
Commodity Price Forecasts 1 December 2022) being assembled and reported since
2013, 1.7 million ounces gold in Ethiopia and approximately 3.3 million ounces
gold-equivalent in Saudi Arabia. KEFI's aggregate beneficial interest is
approximately 2.7 million ounces gold equivalent.

 

KEFI Gold and Copper in Ethiopia (planned to be c. 80% KEFI-owned)

 

Ethiopia is currently undergoing a remarkable transformation both politically
and economically.

 

The Tulu Kapi gold project in western Ethiopia is being progressed towards
development, following a grant of a Mining Licence in April 2015. No other
mining project of this scale in Ethiopia has been brought to Tulu Kapi's stage
of advancement during recent years and Tulu Kapi will be the first industrial
scale mine development in Ethiopia in over 30 years. It has taken years of
extensive technical re-design of the project, years of overhaul by the
Ethiopian authorities of financial policies which previously hindered mining
project finance and the patient and cautious traversing by the Company of
recent well-publicised events within the country. The project has imposed many
demands on a regulatory system which the Ethiopian Government continues to
upgrade, determined to build a modern minerals sector. KEFI is honoured to
play its part in this process and has assembled a first-tier syndicate of
international industry expert management, contractors, banks and investors.

 

The Company has now refined contractual terms for construction and operation
of the open pit mine. Management has also developed preliminary plans to
develop the underground mine once open-pit production has started.

 

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. The underground project is defined based on internal
PEA-level analyses which have yet to be subjected to DFS-level investigation
and independent review, which is planned to be carried out during the
construction of the open pit.

 

KEFI remains keen to re-commence its exploration of the additional prospects
it has successfully identified within the Tulu Kapi district exploration area
from within which the mining licence was duly excised as a result of the
successful discovery of the Tulu Kapi deposit. Whilst most historical drilling
was naturally of the Tulu Kapi deposit, there was significant work done on
many further prospects which await follow-up. Regulatory clarifications are
awaited as regards our exploration areas.

 

Whilst awaiting regulatory permission to re-activate the Company's Ethiopian
exploration, which is critical for long term planning for all stakeholders in
the community as well as the Company, the exploration focus has been
successfully switched to Saudi Arabia.

 

KEFI Gold and Copper in the Kingdom of Saudi Arabia (planned to be c. 30%
KEFI-owned)

 

In 2009, KEFI formed Gold & Minerals Limited ("GMCO") in Saudi Arabia with
local Saudi partner, ARTAR, to explore for gold and associated metals in the
Arabian-Nubian Shield. KEFI has a c. 30% interest in GMCO.

 

ARTAR, on behalf of GMCO, and GMCO directly held Exploration Licence ("EL")
applications pending the introduction of the new Mining Law. These new
regulations have recently been proclaimed and the licences are being
transferred to GMCO. GMCO has had fourteen new licences issued in the past
twelve months - more licence grants than in the previous 14 years and all
highly prospective and strategically important for GMCO, ELs are renewable for
up to five years and bestow the exclusive right to explore and to obtain a
30-year exploitation (mining) licence within the area which is now 1,035
square kilometres.

 

In addition, GMCO has a Mining Licence Application over the Jibal Qutman Gold
Project which recent informal indications by the authorities provide some
confidence that the licence will be granted.

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