Design changes to trim costs at Keegan’s Esaase

Dundee Capital Markets has hiked its twelve-month target price on Keegan Resources (KGN-T) by $1.50 to $5.50 per share after the West Africa-focused junior outlined ways of cutting capital costs by as much as US$246 million at its flagship Esaase gold project in Ghana.  

In a recent management discussion and analysis Keegan said it could improve the project’s economics by increasing ore grade through selectively mining the deposit instead of bulk mining it and by more effective processing with the use of flotation rather than whole ore leaching. Reducing plant capacity to 4 million tonnes per year from 7.5-9.0 million tonnes would also cut capital costs, it said. New estimates suggest Keegan could slash the initial US$506 million estimate of capital costs reported in the 2011 preliminary feasibility study down to about US$260 million.

“After Keegan’s September 2011 prefeasibility disappointed investors, the company went back to the drawing board to re-jig the project,” analysts Ron Stewart and Joseph Fazzini wrote in a research note sub-titled: “Like Keegan, the Wright Brothers Got It Wrong First.”

The Dundee analysts reason that assuming throughput of about 4.1 million tonnes per year compared with the 7.7 million tonnes outlined in the prefeasibility study, Keegan “will be able to scale back the development capex requirements towards something on the order of about $325 million (or 35% lower than the US$506 million estimated in the PFS and 2% higher than the 2012 PEA).”

And by focusing on the near-surface, higher-grade part of the resource, they add, there is potential to increase the average mill grade and reduce the strip ratio. “Though this results in fewer ounces being produced (2.0 million ounces versus 2.8 million ounces in previous PFS), the revised plan should exhibit superior economics compared to those previously published.”

Stewart and Fazzini also argue that the company’s $190 million cash balance, resource of 5.19 million ounces and discounted valuation, could make it a target. Alternatively, they note, a merger with its neighbour, PMI Gold (PMV-V), “might make a good deal of sense.”

“By combining PMI’s advanced Obotan project (4.5 million oz. defined), Keegan’s balance sheet and Esaase and Kubi’s exploration potential, we believe the two would create a rising precious metal player,” they say. “Merger or takeout, Keegan’s land holdings are large and given that exploration potential remains excellent, the ultimate owner would be well-positioned to continue expanding and upgrading the resource base at Esaase.”

Dundee has a Buy rating on the stock. At presstime Keegan was trading at $3.74 per share within a 52-week range of $2.38-$9.59. The company has about 75.6 million shares outstanding for a market cap of about $268 millon.