Canaccord: Keegan shares oversold

Keegan Resources (KGN-T, KGN-X) shares are undervalued, even considering the new tax changes proposed in Ghana, Canaccord Genuity mining analyst Nicholas Campbell argues in a research note, adding that the gold junior could be targeted by an opportunistic takeover bid.

Proposals in Africa’s second-largest gold producer to hike the corporate tax rate to 35% from 25% – and tag on a 10% windfall profits tax – still need to be approved in parliament. But the news has hammered the shares of miners active in the country.

Campbell, who has added the new tax rates into his model, reduced his net present value estimate for Keegan’s Esaase gold project, but argues the project “remains robust.”

“Today Keegan Resources has an enterprise value of only ninety-four million dollars, [which is] less than nineteen dollars per ounce of gold,” he wrote in his Nov. 29 report. “The last time Keegan Resources had the same enterprise value was in June 2009. Since then, the Esaase resource has grown forty-eight percent and the price of gold has increased eighty-three percent. We believe Keegan Resources has been heavily oversold.” Enterprise value is a measure of a company’s value, often used as an alternative to market capitalization. It is calculated as market capitalization plus debt, minority interest and preferred shares, minus cash and cash equivalents.

Campbell says if investors believe gold prices will remain higher than US$1,300 per oz., as he does, the recent pullback in Keegan’s shares represents an excellent buying opportunity.

Campbell’s long-term forecast for the gold price is US$1,500 per oz., and at that price he estimates a net present value (NPV) for Keegan’s Esaase project, at a 5% discount rate, of $465.1 million. At a peak gold price of US$1,750 per oz., his NPV estimate is $770.1 million.

Campbell has a speculative buy on the stock with a target price of $10 per share, down from his previous estimate of $13.25 per share. At presstime Keegan traded at $4.19 per share within a 52-week range of $3.91-9.59.

The Esaase project is near Kumasi in southwestern Ghana. Keegan released its prefeasibility study on Sept. 22 incorporating a 25% corporate tax rate. 

Highlights from the prefeasibility demonstrate the project can produce 2.6 million oz. gold over a mine life of 10.2 years. Capital costs were estimated at $506 million with cash costs of $693 per oz., excluding royalties and refining charges.

The project’s proven and probable reserves amount to 79.4 million tonnes grading 1.1 grams gold per tonne for 2.88 million contained oz. gold, based on a $1,150 per oz. gold pit shell.