Kibo Mining – Why the punters have got it all wrong

The key misconception behind the chat board ‘projections’  for Kibo MIning is a failure to understand the disconnect between a ‘project’ and the company ‘owning’ it. But this also stems from a failure to understand the concept of a project’s net present value (NPV). These commentators (and even the house broker’s headline – before hiding the caveats in the small print) have suggested a target value for Kibo’s shares based on MCPP’s NPV divided by current shares in issue. Or alternatively that MCPP can be ‘sold’ for its NPV.

The former is nonsense because it ignores the fact that MCPP will have no value until the funds are raised – when current shares will suffer the dilution to project value caused by loan interest and by the substantial extra equity (whether in Kibo Mining (LON:KIBO) itself, or in the MDC, or in the MCPP) which will detract from its own share.

That the second notion is nonsense can be seen from the formula for NPV – which is Long Term Profit (P) less cost to build (C). This is a crude approximation because in practice the timescale for uneven costs and profits is taken care of by discounting the cash flows year by year. But to simplify one can use NPV=P-C

If someone were to ‘buy’ the project for its NPV he would still have to meet the capex to build. In which case he ends up with its NPV (P-C). In return for his purchase cost (P-C + C), he ends up with C, which he has had to pay out. Result: no profit – so no point in buying, and no scope for the owner to sell. (That does not mean that a partner can’t be brought in. But he would have to meet his share of the capex in return for a share of the profit.)

An unfunded project might be saleable if it is exceptionally profitable, in which case a buyer could make his own profit from the margin between its profits and the cost of funding. Then, he could pay something (but still not the full NPV) to buy it and still make some profit.

But for coal-to-power projects there is only a limited margin between profit and the cost of funding. Profitability is limited by the host government (who calls the shots through licensing so as to pay as little as possible for the power) to a level just enough to attract the international lenders and investors to provide the funds. At present that limit equates to an IRR of around 21%, so that any buyer for such a project would have no scope to make a profit on any margin between its IRR and the cost of funding, which will be the same for him as for anyone else.

As already mentioned, what does have a value that could be sold, is work that has been done on the project, in Kibo’s case by the MDC which has spent on planning and gaining approvals and prospective partners to build and finance the MCPP.

Having withdrawn its original promise to help funding, Kibo’s prospective partner, China’s Sepco III (not the same as Ncondezi Energy‘s (LON:NCCL) partner who is an operator as well as a builder), has agreed to pay Kibo half what MDC has spent in return for having first go at tendering for the construction. Paying the owners’ planning costs is normal in the industry because otherwise a contractor has to meet those costs itself before bidding.

At present, some keyboard warriors are ‘hoping’ that this ‘back cost’ will be substantial (up to $20m, which is about half Kibo’s market cap so would be a useful chunk of cash). But that is pure speculation, whereas Kibo’s accounts show clearly that by now it will likely have spent only some £5m (over and above the original purchase of the coal mine, for which there is no logical reason for Sepco to pay anything) plus whatever has been spent by some advisors who have deferred their fees in the face of Kibo’s lack of funds to pay them.

Sepco has so far paid $1.8m of these ‘back costs’, with the rest to be agreed in the coming week and it is hope for a substantial payment that appears to be buoying the shares. My expectation is for a payment of little more than needed to pay the deferred consultants, as well as to plug the £1.5m hole in Kibo’s balance sheet revealed in its latest interim results (apparently unnoticed by anyone). I therefore expect the shares to fall on the announcement.

That fall will come after another of the chat board hopes for value crystalisartion was dashed on 23rd September through the announcement of the hiving off of Kibo’s only project with any solid value, its Imweru gold resource in Tanzania’s Lake Victoria Goldfield. Chat board estimates (taking no account of the cost to develop) ‘projected’ that resource to be ‘worth’ around 5p per Kibo share – the same as the then share price.

But Imweru is now being hived off into a new company ‘Katoro Gold Mining’ which is planned to list on AIM to raise the first tranche of the necessary funds to establish a more solid resource and economic study, before further funds to develop any mine will be able to be raised. While Kibo will have 60% of the shares, their value will be diluted by the £1.2m (minimum) cash raise, and my estimate is that its holding will be ‘worth’ no more than 1p per current Kibo share. As a paper value and unless it manages to sell its holding, it won’t provide the cash Kibo needs to progress any of its other projects. Although Kibo says Katoro will eventually ‘deliver substantial value’ for shareholders, that will only be after raising development funds which will further dilute any value to them.

That leaves MCPP as the only real value in Kibo – likely to be no more than my estimated 15p per share in issue – but only in three years’ time when the project is built and running – although that value per share might be anticipated in the market at financial close (when debt providers, contractors, the Tanzania authorities, and equity investors, have all signed up). This has been continually delayed since Kibo first promised, in late 2014, that it would be achieved H1 2015. Now, given that Kibo has yet to sign up anyone to provide the funds, or to build and operate the plant; has yet to agree a power tariff with Tanzania’s electric power co; and has yet to obtain a mining licence (whereas Ncondezi has all those things in place yet is still not expecting financial close before H2 2017), none of the facts to properly value Kibo’s shares look like being available before mid 2017 at the earliest. Even when the bankable feasibility study is published, it will only be one component of financial close.

At a later date I will explain why Ncondezi Energy looks the better value. Edenville Energy (LON:EDL), though a long way behind in its own coal to power project, seems in a position to sell its surplus coal earlier, which is why its shares have perked up. But, buoyed as they are by misconceptions, Kibo shares look vulnerable, although investors’ excitement as they await the BFS, irrelevant though it will be to a valuation, might keep them afloat for a bit longer.