Keegan and PMI merging to form Asanko Gold

With debt and equity financings hard to come by, mine developers are turning to more creative ways to finance their projects.

Keegan Resources (KGN-T, KGN-X) and PMI Gold (PMV-T) are the latest to take an alternative route, with their announcement of a merger of equals into a new Ghana-focused gold company to be named Asanko Gold.

“The beauty about this merger is not only that it elevates us into becoming a leading gold development company — it also puts $343 million of cash into treasury,” Keegan’s CEO Peter Breese said on a conference call. “So there’s no need to issue new equity or take on debt in the near-term.”

The $186 million in cash that PMI shareholders would gain access to is a major component of the deal. When combined with its current cash reserves, it would allow the new company to get PMI’s Obotan project into production by 2014.

But the access to capital comes at a cost to PMI shareholders, as Keegan’s neighbouring Esaase gold project, which is expected to reach production by 2017, has a lower average grade, making the merger dilutive on a gram-per-tonne basis for PMI shareholders.

Still, the company’s CEO Collin Ellison says the merits of a deal outweigh the negatives, given the state of the finance world.

“The merger removes financial uncertainty and brings another project with significant size that can be further optimized. It gives benefit to our shareholders through increased production, longer life and cost savings,” Ellison said on the same conference call. “It’s not a normal situation that you have two companies with projects at a similar stage, of similar resource size, that can help each other build a mining camp. It’s a fairly unusual opportunity, and beneficial to both companies’ shareholders.”

He also noted that avoiding debt markets means that production from Obotan would be unhedged, giving investors direct access to gold prices through the company’s equity.

As for any synergies the executives were short on specifics, saying they’d have firmer numbers after an optimization analysis in January. But they expect synergies on both the capex and operational side of things, and with the projects separated by one small forest, it isn’t hard to conceive that the synergies could be significant.

Obotan is expected to turn out 200,000 oz. gold per year starting in 2014, while Keegan’s Esaase project is slated to contribute between 150,000 and 200,000 oz. per year by 2017. The two properties sit side by side on Ghana’s prolific Asankrangwa gold belt.

Esaase has measured and indicated resources of 68.9 million tonnes grading 1.73 grams gold for 3.83 million oz. gold, while Obotan has measured and indicated resources of 44.8 million tonnes of 2.16 grams gold for 3.11 million oz. gold.
The broad plan is to use Keegan’s capital to help drive Obotan’s development, and then fund Esaase out of cash flows generated from Obotan production.

By combining the land packages, Asanko Gold would control 1,000 sq. km, and will have consolidated 70 km of strike length along the belt.

As for the merged company’s name, Breese says it shows connection and commitment to the two future mines, as Asanko is the name of a gold area in the country.

“We’re partners with Ghana, and renaming the company will give us a lot of presence in the country,” Breese says. “We will be the largest land package holder and one of the largest gold producers going forward in the country.”

The Asankrangwa gold belt is in the middle of three prolific gold belts in the country’s southwest, with the Ashanti gold belt situated to the south, and the Sefwi belt to the north. All three belts run in a parallel, northeasterly direction. After the merger, Asanko would control three quarters of the Asankrangwa belt.

The deal calls for PMI shareholders to get 0.21 Asanko shares for each PMI share, while Keegan shareholders would do nothing. That would give both sets of shareholders an equal stake in the merged entity’s 171.7 million outstanding shares.

The two companies have similar market capitalizations: Keegan comes in at $325 million, while PMI is close to $335 million. The combined company would have $340 million in cash-on-hand, and no debt.

In Toronto on Dec. 4, the day the deal was announced, Keegan shares closed 1.5%, or 6¢ higher at $3.97 per share, while PMI shares were up 12%, or 9¢, to 81¢ per share.