Kefi's golden promise

State-controlled mining company Ma'aden has already discovered 8m ounces of gold in the country's deserts over the past 10 years; it currently operates two underground and three open-cut gold mines producing a combined 148,000 ounces of gold a year. Yet the relatively underexplored region is starting to open up to foreign investment for metals exploration, too - thanks in large part to high prices and increased interest from the Saudi authorities. Canada's largest mining company, Barrick Gold, operates a copper mine there, while London Mining (LOND) owns an advanced iron ore project.

Kefi was one of the earliest international companies to apply for exploration licences for precious metals in the Kingdom. It spent years trying to navigate the country's complex political and administrative system, largely without success. Yet by ultimately partnering with a well-connected local company – Abdul Rahman Saad Al-Rashid & Sons, a leading Saudi construction and investment group - Kefi has found an effective workaround and cemented its first-mover advantage.

Kefi began drilling its first two licences, Selib North and Jibal Qutman, this summer and early results from both properties have been promising. Drilling costs are surprisingly cheap and the company has since decided to increase its fleet from one to three rigs.

At Selib North, Kefi has intersected high-grade gold in a series of steeply dipping rock formations. It's still too early to tell, but geophysical surveys suggest they may converge in a large parent stock - think of it as a big, high-grade blob of mineralization - deeper underground. The company plans to drill the target shortly.

Meanwhile, at Jibal Qutman, Kefi has discovered a swath of historic mine dumps surrounding long, gold-bearing quartz veins and associated stringer veins. The company is currently carrying out diamond drilling to test the length of the veins and establish whether or not the system is big enough to support a potential open-pit mining operation.

Kefi expects to continue drilling both properties into early 2013 and hopes to have a maiden resource estimate for one of them sometime in the first half. It is also planning first-pass drilling at two other licences, Hikyrin and Hikyrin South, later in the second quarter.

But Kefi isn't stopping there. With the help of its joint venture partner, the company has lodged applications for another 19 exploration licences targeting gold, silver and copper. All of the licence areas contain ancient workings for gold and sometimes base metals. Management expect a few of these licences to be granted in 2013, allowing further field work that will in turn generate more drill targets.

All this work will require money, of course. Kefi had approximately £2m in its treasury as of mid-December, which it expects will last most of 2013. But if it wants to keep drilling new targets, the company will eventually have to raise more money. And if 2012 is anything to go by, capital markets may be difficult to tap.

That said, exploration costs are kept reasonably low by Kefi's joint venture agreement with its local partner. Kefi only holds a 40 per cent interest in the licences so it has to cover just 40 per cent of expenditures in the country. That said, its minority stake in the projects may deter future suitors – assuming (and it's a big assumption) that the company finds a large enough gold deposit to justify building a mine.

As is typical with early-stage explorers, Kefi is under-researched and no analysts cover the stock except for those at the house broker, Fox Davies. Kefi's share price is consequently volatile - it traded as high as 8p in 2011 and as low as 2p in summer 2012, before rebounding to 4.5p in October. However, we see the current level of 3p as an attractive entry price.