[miningmx.com] – INVESTORS took a shine to Kibo Mining’s development agreement with China’s SEPCO, a engineering, procurement and construction company in which the two firms are to build the Rukwa coal and power project in Tanzania.
The announcement of the agreement on April 20 triggered a 33% gain in Kibo shares in Johannesburg, valuing the company at R455m, and taking gains on a rolling 12-month basis to 76%.
In the current market, that’s a strong performance, especially for a small cap, and some recognition of Kibo’s eye for opportunity as its moved into Tanzania 2008 having noticed the East African country faced a power deficit of note.
According to a report last year by Hume Capital Investment Research, Tanzania has available capacity of between 700MW and 800MW of which only 60% is considered to be reliable. Power demand is expected to grow to over 2,000MW by 2020.
As with all development firms, however, now comes the difficult bit.
The 1.48 million tonne a year coal mine will cost up to $89m, equal to about R1bn, more than double Kibo’s market capitalisation, whilst the power plant – forecast to produce between 250MW to 300MW, will cost between $640m to $760m.
These are massive numbers although Kibo Mining CEO, Louis Coetzee, thinks the quality of the project will steer it through the financing stage.
“We’re not financing the project now so market conditions can be substantially different when we start look for debt finance,” he said. “Having said that, I think we have a nice problem in that this is a robust project. There are not many like this that show the sort of returns that we demonstrated in a feasibility this year,” he added.
Annual coal sales from the Rukwa coal mine are expected to be between $37m and $44m which, after all-in cost margins of between 38% and 45%, is equal to an annual margin of $14.8m and US$19.4m. In terms of payback, that’s a bit over four years.
Payback on the power plant is estimated to be eight to nine years excluding the prospect its capacity could be doubled (and supported by the mine). Revenue over the life of the plant is thought to be $8.4bn at the upper end.
For now, however, SEPCO is to contribute $3m to a definitive feasibility study which is the paper the partners have to wave in front of financiers, possibly later this year with October the deadline for the study. All in all, the DFS for coal mine and power plant will have cost $6m.
After that, Kibo and SEPCO will set about finding the finance with the former focusing on the coal plant.
Coetzee makes no bones about Kibo’s ultimate aim, however. As a development company it will opportunistically seek an exit. “We’ve always said that the plan was to develop a project that would create optionality.
“That is why one of the reasons we took time to sign the co-operation agreement [with SEPCO] as we had to align all the stakeholders. We made sure that we get the proper recognition for value to date and perfect value for the future,” he said.
“It was done in such a way that we can exercise at any time in development any commercial opportunity that might come our way,” he said.
The nature of the agreement with SEPCO is that its $3m contribution will earn it up to 15% in a special purpose vehicle that will house the investment in Rukwa. For Kibo, that’s minimal dilution and plenty of scope to use equity – up to 30% of total – provided Coetzee can make the case for a decent premium.
He hopes institutional investors will start to walk his way too.
Right now, roughly 3% of the issued shares are held by a single entity with “reliance” on retail investors which perhaps explains the swings in Kibo’s share price, which can be wide. The stock was worth R2/share in October before plummeting to below 50c/share a month later.
