New African Gold Miner

The 2000s gold bull has brought a lot of attention to West Africa.  This attention has not always translated to success given the unstable geopolitical environment in this part of the world.  But the diligent miners able to endure and overcome the challenges have been rewarded with some major discoveries that have been developed into profitable gold mines.

One country really thriving is Ghana.  On the geopolitical front there’s probably no safer country in Africa with its government acting under a stable long-standing constitutional democracy and its tax and mining laws fairly well-legislated.  And on the geological front there’s definitely no rival, with Ghana host to four massive underexplored gold-rich greenstone belts.

Ghana’s gold-mining success has resulted in a 35% increase in output over the last decade.  It has grown to become Africa’s second-largest gold producer, and the 10th largest in the world.  And when Asanko Gold’s flagship mine commissions in 2016, this country will see another huge boost in production.

The Asanko Gold we see today is a new-look company via its early-2014 acquisition of PMI Gold.  Old Asanko (formerly Keegan Resources) and PMI were both early movers into West Africa.  And their marriage is a match made in heaven given their outstanding logistical and corporate synergies.

This deal ended up bringing together the former Esaase and Obotan projects to form the newly-dubbed Asanko Gold Mine (AGM).  AGM is located in the emerging Asankrangwa gold belt, just to the west of the better-known Ashanti gold belt where Newmont, AngloGold, and Goldfields operate several prolific gold mines.  And its complex of deposits combine to make it one of the most robust gold projects in Ghana.

Obotan and Esaase are located about 30km apart.  And both projects are known to have long histories of smaller-scale artisanal mining.  This mining was primarily alluvial in nature, though it pointed towards an accessible hard-rock source.  And the larger mining companies indeed found this source when they applied modern exploration techniques.

Obotan’s mineralization was the most intriguing early on.  And large Australian miner Resolute Mining was able to delineate a multi-million-ounce deposit that it started mining via open-pit methods in the late 1990s.  Unfortunately this operation was prematurely shut down as a result of bear-market-low gold prices around the turn of the century.  And it ended up producing 730k ounces in this first go-around.

With gold prices heading higher in the subsequent years, Obotan and its large in-ground resource naturally attracted attention.  And PMI Gold was the lucky winner of its prospecting license in 2006.  That same year Asanko Gold took over the Esaase project located just northwest.  And this kicked off an exploration cycle that would highlight the vast potential of the Asankrangwa gold belt.

Obotan and its flagship Nkran deposit was especially impressive.  PMI’s aggressive exploration had uncovered a large richly-mineralized gold zone much more robust than Resolute had defined.  Per the latest resource estimate it was found to hold 4.5m ounces of gold, including 2.5m ounces in the proven-and-probable reserve categories.  And it was this core reserve base that would feed a wildly positive feasibility study in 2012.

PMI was able to procure Obotan’s mining lease shortly after completing the feasibility study.  And in 2013 it continued to explore the project while performing pre-development work in preparation for a mine build.  The critical component of this build was financing, which is no easy feat in these crummy gold markets.  So PMI eventually decided its best bet would be to team up with neighbor and deeper-pocketed Asanko Gold.

Asanko’s Esaase project was advancing nicely, but it was keenly aware that Obotan was the real treasure of this emerging gold belt.  Provocatively AKG had tried to acquire PMI about a year earlier, but to no avail.  Its diligence paid off though, with the second go-around closing in February 2014.

Within a few months of the acquisition Asanko Gold approved construction at Obotan.  And this would be the first of two phases in building out the greater and newly-dubbed Asanko Gold Mine.  Obotan’s development would be followed by Esaase’s.  And at full commercial production AGM will be one of Africa’s largest gold mines, producing in the neighborhood of 400k ounces per year.

Phase one’s $295m price tag is fully funded with the new company’s combined treasury and debt facility.  And it is expected to pour its first gold in Q1 2016.  And per a Definitive Project Plan just announced in November, this fantastic mine ought to be profitable even at lower gold prices.

Mining will occur via conventional open-pit methods.  Since the ore is fresh/sulfide it’ll require milling, employing crush/grind/gravity/carbon-in-leach circuits.  And the operation will run at a life-of-mine mill-feed rate of 8.2k metric tons per day.  With life-of-mine recoveries and average grades that exceed 92% and 2.0 g/t respectively, phase-one production will average 190k ounces annually over a 12-year mine life.

AGM’s phase-one gold will be produced at all-in sustaining costs of only $781/ounce, easily in the lower quartile of industry average.  And this will allow for a solid 20% after-tax internal rate of return at $1150 gold, and the IRR would obviously increase proportionally if AGM’s gold is sold at higher prices.

Phase-two production will come from the nearby Esaase deposit.  Esaase is a grassroots discovery made by Asanko Gold.  And its extensive exploration has defined a massive 5.9m-ounce deposit.  AKG has performed multiple economic assessments at Esaase over the years.  And the latest, a 2013 prefeasibility study, showed this project to also hold great economic potential.

Mining would focus on Esaase’s core 2.4m-ounce reserve base.  The ore would need to be milled like Obotan’s, but processing would require the extra step of running through a flotation circuit.  Feed grades and recoveries are a little lower than Obotan’s, but all-in sustaining costs would still be under $1000/ounce.  And at a throughput rate of nearly 14k tpd, production from Esaase would average about 200k ounces per year over a 10-year mine life.

Interestingly since this PFS was performed prior to the PMI acquisition and was based on a standalone operation, it is essentially obsolete.  Since Esaase will now be developed as the second phase of a larger mining operation, there are numerous synergies that ought to drastically improve the economics.

The biggest cost savings will come from not having to build standalone processing facilities.  Esaase is close enough to Obotan that its ore can be trucked.  The existing facility would need to be expanded and a flotation circuit would need to be added in order to accept Esaase’s ore, but presumably this would be much cheaper than building a full onsite facility from the ground up at Esaase.

There will also likely be many operational synergies.  And for this reason AKG is in the process of performing a scoping study that would incorporate Esaase into a larger phased mining operation.  This study is expected to be completed in Q1 2015.  And if it comes back positive as expected, it ought to lead to more feasibility work that would hopefully culminate in development shortly after phase one achieves commercial production and starts spinning out cash.

Overall Asanko Gold’s AGM is one of the world’s elite development-stage gold projects.  Its first phase of operation is fully permitted and fully funded.  And thanks to rough market conditions that have annihilated the gold-mining sector, investors have the opportunity to get onboard this emerging mid-tier producer at bargain-basement prices.

As you can see in this four-year chart, Asanko Gold’s stock has fallen sharply since its 2011 all-time high.  And the primary driver for this decline is the price action of AKG’s underlying metal.  Since gold’s own 2011 all-time high, it has fallen into a deep dark cyclical bear market that has taken it to levels not seen since 2009.  And this has been none too kind to highly-leveraged gold stocks like AKG.

AKG’s descent into bear-market mode got a kick start in September 2011 upon the release of Esaase’s first PFS.  Unfortunately this PFS wasn’t well-received by the markets as a result of much higher costs than what was outlined in the previous assessment.  Couple this with gold’s major September beat down, and AKG would see its stock price nearly cut in half in short order.

AKG finally caught its breath when gold bounced the following month, but it would be rough sailing over the next several years as gold gave up its ghost and entered into bear-market territory.  With such an ugly downtrend there aren’t many positives to analyze from a technical perspective.  So the true test of AKG’s resolve is how it performs on the rare occasions when gold gets legs.

Since its 2011 high gold has forged four meaningful uplegs.  And it should be expected that gold stocks outperform their underlying metal amidst such uplegs.  If they don’t, there’s really no reason to own them given their outsized risks compared to gold itself.  And as you can see, AKG has been a consistent outperformer.

In the first two uplegs in 2012 AKG positively leveraged gold 3.0x, rising an average of 47% to gold’s 15%.  AKG performed even better in 2013’s Q3 snapback upleg, soaring 67% to gold’s 18% (3.7x leverage).  And then in early 2014 AKG again performed well, rising 51% to gold’s 16% (3.2x leverage).

This stock has already shown the ability to pop when gold shows signs of life.  And since it is in better fundamental shape now than it was in these past uplegs, it really ought to fly when gold runs higher.  The new-look Asanko Gold’s 10m+ ounce resource base really ought to attract investors when they return to this space.  And with mine development now underway, institutional investors and the larger mining companies will take AKG a lot more seriously.

Overall AKG ranks as one of only a handful of quality junior gold stocks poised to thrive when gold turns the corner.  The carnage of the last few years has really taken its toll on this sector, but this group is ready to roll when interest returns.  And now is the time to load up on these stocks while they’re trading at such crazy-low levels.

The bottom line is new-look Asanko Gold controls the heart of one of Ghana’s most-exciting new gold belts.  AKG’s flagship AGM project is host to over 10m ounces of gold resources.  And a series of positive feasibility studies shows that its core reserves are amenable to profitable mining.

Asanko Gold will develop this exciting new mine in two phases, with fully-permitted and fully-funded phase one construction now underway.  AGM is expected to pour its first gold in Q1 2016.  And investors are able to take advantage of bargain-basement prices today to get in on one of the world’s premier gold-mine-development projects.

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