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Wednesday, 15 May 2013
Jennings Capital sees good reasons to own Asanko in light of Esaase economics
Jennings Capital analyst Dan Hrushewsky has highlighted what he called Asanko Gold's (TSE:AKG) "good project economics" at the Esaase gold project in Ghana, saying the company ranks first of all Canadian gold companies on its radar in terms of cash as a percentage of market cap.
Indeed, based on Jennings' screen of TSX/TSX-V mining companies with a market cap of greater than $100 million, Asanko's cash as a percentage of market cap comes in at about 70 per cent.
Cash equals 68 per cent of the upfront capex outlined in the company's pre-feasibility study, which the analyst says substantially lowers financing risk.
On Tuesday, Asanko announced the updated pre-feasibility economics of the Esaase project, showing an IRR of 23 per cent after tax, based on an upfront capex estimate of $286.4 million and total projected cash operating costs of $736 an ounce.
The economics, says Hrushewsky, are reflective of a flotation circuit, which decreased the size of the carbon-in-leach (CIL) circuit that now needs to process less than 10 per cent of the millhead mass. The circuit also lowered operating costs due to the lower amount of reagents and energy required to process the lower mass throughput, and cut the disposal costs of the flotation tails that are devoid of sulphides.
Average annual free cash flow, for the estimated mine life of 10 years, is projected at $87 million at a price of $1,400 an ounce, with the company saying the life of the mine has the potential to increase even further, while average annual cash flow is still pegged at $65 million using a $1,200 an ounce gold price.
The study is based on the October 2012 mineral resource estimate of 4.41 million ounces of gold in the measured and indicated category, and resulted in 2.37 million ounces of resources being converted to proven and probable reserves.
The Jennings analyst noted that the lower cut-off grade of 0.6 grams per tonne (g/t) versus 0.8 g/t used for the measured and indicated resource base, on which the new proven and probable reserve estimate is based, should have resulted in a reserve estimate with more tonnes and a lower grade.
"However, the amount of tonnes converted to reserves was much lower than we expected. This, together with the lower grade, resulted in a significant negative impact to our valuation," noted the analyst in his report, which took the company's price target down to C$4.75 from C$5.75 previously.
Still, Asanko noted in its release Tuesday that the detailed mine design as part of the definitive feasibility study now underway could result in more resources converted to reserves. The definitive study is expected in the fourth quarter of this year, with hopes of attaining the mining leases and a final environmental permit by year-end.
Aside from the low financing risk, Hrushewsky, which reiterated his speculative buy rating, took note of several other "good reasons" to own Asanko, including a large deposit at Esaase with good open pittable grades and continuity, as well as a newly acquired contiguous concession that contains a shear zone similar to the one that hosts the current resource.
He also adds that Ghana is a good jurisdiction in which to operate, with a company that has a "proven management" team.
Indeed, chief executive of Asanko, Peter Breese, joined the company in October last year, and brought a team of "highly seasoned" executives that he says focused on capital efficiency at Esaase, as well as on lowering operating costs and “fine-tuning” the metallurgical flow sheet from the pre-feasibility study the company announced in September 2011, when it functioned as Keegan Resources.
Breese has more than 25 years of operational mining experience in Africa and Australia, having been the CEO of Mantra Resources prior to its $1 billion acquisition by ARMZ.