Asanko Gold revises guidance, shares tumble

Ten days after Asanko Gold (TSX: AKG; NYSE-MKT: AKG) said it was keeping its 2017 production guidance for its gold mine in Ghana at 230,000 to 240,000 oz. gold, the company said it couldn’t meet that target after all, and would produce between 205,000 and 225,000 oz. gold instead.

The downward guidance revision, announced on Aug. 3, sent the West Africa-focused gold producer’s stock down 20% that day to finish at $1.11 per share, or 82% below the 52-week high of $6.09 per share the stock reached in September 2016. Asanko touched a 52-week low of 99¢ per share on Aug. 4.

Analysts covering the company scrambled to lower their target prices — some as much as $3 per share. Others revised their sector ratings.

“The unexpected guidance review clearly is a confidence shaker and has put the story in the penalty box, and management needs to deliver according to plan over the next three quarters to restore that confidence with no further revisions,” said Nana Sangmuah, an analyst at Clarus Securities in Toronto, during an interview with The Northern Miner.

“There is still a lot of value in the assets not reflected in the current market cap of the company and management is technically competent to unlock that value,” he said. For now, however, the analyst cut his price target on Asanko to $3.25 per share from $6.25, and downgraded his rating on the company from “buy” to “hold.”

Management attributed the lower production guidance at the company’s Asanko gold mine in Ghana to two things. First, historic artisanal workings at its Akwasiso pit were deeper than previously thought, which meant less oxide and more mineable ore tonnes than expected. Second, recent results from the ore reconciliation process had identified blast movements as a source of ore losses and dilution in the Nkran pit.

The 9% change in production guidance also brought a 5% change in the forecast of all-in sustaining costs (AISCs). Under its July 19 production guidance, AISCs ranged between US$880 and US$920 per oz. this year. Now the company says AISCs will come closer to between US$920 and US$960 per ounce.

The company’s CEO, Peter Breese, noted in a press release on Aug. 3 that the second quarter “has had positive wins,” including: trimming AISCs to US$930 per oz. quarter-on-quarter; grade-control drilling in the Nkran pit that compared favourably to within 2% of the pit’s resource estimate; and volumetric upgrades to increase plant throughput to 5 million tonnes per year, finished ahead of schedule and within budget.

“The recent revision of our annual guidance was a prudent response to two new pieces of information that we received subsequent to the publication of our second-quarter production release,” Breese wrote in an email responding to questions from The Northern Miner. “As you know, in line with meeting our corporate governance obligations of timely disclosure, we are required to update the market in a timely and continuous manner. That’s what we did.”

Asanko’s flagship mine produced 46,017 oz. gold in the second quarter, and the company posted US$60 million in second-quarter revenues; earnings before interest, tax, depreciation and amortization of US$25 million; and operating cash flow before changes in working capital of US$13 million.

The mine consists of two large deposits: Nkran, which is in production, and Esasse. There are also a number of satellite deposits on the concession (Abore, Asuadai, Akwasiso, Dynamite Hill, the Nkran Extension, Adubiaso and the Adubiaso Extension), in addition to a 3-million-tonne-per-year, carbon-in-leach (CIL) processing plant.

CIBC analysts Jeff Killeen and Daniel Gavin were unimpressed with Asanko’s downward guidance revision.

“Askanko declared commercial production on April 1, 2016, with the first full quarter of steady operations noted by management in third-quarter 2016,” the analysts said in an Aug. 3 research note. “After one year of mining the Nkran pit … the cash balance has decreased despite producing less than 260,000 oz. and making no principal debt repayments.”

The analysts also said they were “concerned” about the company’s “ability to repay a debt load that has been deferred once already.”

“Asanko has a $150-million debt facility with Red Kite that was due to begin repayments in July 2016,” they noted. “Principal repayments have been deferred once to July 2018 and management noted that it has until March 2018 to elect to defer for a further year.”

Killeen and Gavin said they expect the company will defer developing its large-scale Esasse deposit “due to liquidity constraints” and cut their price target to $1 per share from $2.85 per share. They also lowered their rating on the company to “under-performer” from “neutral.”

Breese noted in his email that CIBC “is one of nine investment dealers whose analysts cover Asanko,” and that it “wasn’t appropriate for Asanko to comment specifically on individual research reports.”

In terms of the company’s liquidity position, Breese repeated points that management had made during its second-quarter conference call in July.

“The mine generates free cash flow at a time of growth, is operating well and looking to improve upon that past performance through various operational interventions that already give us clear indications that we can improve our gold extraction efficiencies.

“The mine is generating significant operating cash flow and for the past four quarters has averaged US$28 million per quarter. We expect to continue to generate strong operating cash flow for the balance of 2017 … based on our revised 2017 annual cost guidance, we still have an AISC margin of US$300 per ounces. We have US$60 million in cash and immediately convertible working capital on the balance sheet, as we reported in our second-quarter financial results. After spending the other growth capital (the majority is on plant upgrades) in the second half of 2017, we expect to have between US$57 and US$62 million in cash, and immediately convertible working capital.”

As for Asanko’s near-term growth and debt deferral, Breese pointed out that Asanko is in a growth phase and expanding production at the mine by increasing the plant’s processing capacity to 5 million tonnes per year from the original design of 3 million tonnes per annum. (Asanko calls the expansion, combined with bringing the large-scale Esasse deposit into production, as Project 5 million [P5M].)

“In our circumstance, repaying debt while spending capital to grow the mine was not optimal,” Breese said in his email. “The deferral of the debt, announced on May 19, 2016, was done to strengthen the balance sheet ahead of the P5M investment decision. We had full support from our debt-financing partner, Red Kite, who recognize that P5M offers value-accretive growth. The optics are reasonable and appropriate.”

Breese said the company intends to fund the expansion projects from internal cash flow while keeping a cash buffer of $30 million throughout construction, supported by debt financing and favourable market conditions.

The CEO also said that the first stage of P5M — the brownfield modifications to upgrade the CIL processing plant to 5 million tonnes per year — is well underway, at a total capital cost of US$22 million, which is being funded by cash-on-hand. Volumetric upgrades to 5 million tonnes a year have been installed a month ahead of schedule and within budget, and are being commissioned, and Asanko has run the plant on a campaign basis at the 5-million-tonne-per-year rate. Breese forecast that recovery upgrades would be installed and commissioned in the fourth quarter. Outstanding capital in the second half of 2017 is US$15 million.

“As we announced on June 5, 2017, the decision to proceed with the second stage of P5M, the construction of the overland conveyor and development of the Esasse deposit has been deferred until 2018 (the capital cost is estimated at US$150 million). This will help the company build cash resources of US$100 million on the balance sheet in fiscal 2018 before Esasse development,” he wrote in the email. “The deferral ensures the capital expenses on the project are funded predominantly from cash-on-hand.”

Asanko has had its share of troubles this year.

Several class-action lawsuits against the company apparently have been launched after short-seller Muddy Waters published a report in May alleging that the company “is highly likely to end up a zero.”

Muddy Waters, which is known for helping take down Sino-Forest, a company that had timber concessions in China, claims that “on the back of flawed geology” Asanko “made investments in Nkran, its satellite pits and Esasse that we believe will never be recovered.”

The short seller also described a partial collapse of the Nkran pit’s west wall as “serious” and estimated that the company would need to spend between US$75 million and US$115 million to keep mining the Nkran pit, or it would “pinch out,” and the cost of more mining would exceed its expected revenue. Spending this money, the short seller said, “likely means Asanko will run out of liquidity in 2018. Not spending the money leaves the company without the cash flow to develop its largest deposit, Esasse.”

Other criticisms outlined in the report included using a US$2,000 per oz. gold price in a December 2016 resource update, something it called a “serious” flaw.

Asanko vigorously refuted the allegations after the May 31 report, and continue to do so. Several analysts also rushed to the company’s defence. “The chances of AKG ‘ending up a zero’ are outlandish, based on our [12- to 18-month] near-term operating assumptions, which we see as realistic,” Raymond James’ Chis Thompson said in a research note.

When asked by The Northern Miner in June about the allegations in the Muddy Waters’ report, Dino Ghoussias of Red Kite Mine Finance declined to comment.

Before responding to the specific allegations in the report, Breese started his email to The Northern Miner by saying that Asanko’s executive management team and board “have solid reputations in mining and many decades of experience.

“These senior executives and directors, along with myself, have invested $850,000 of their own money to acquire nearly 500,000 Asanko shares in the open market over the past two months,” he wrote. “That is an expression of their confidence in our company.”

Asanko, he added, employs independent and objective Tier 1 industry service providers and qualified persons, who are “among the best available in the mining industry.”

He added that “as emphasized in our news release on June 5, 2017, the Asanko gold mine is a quality, long-life, gold-producing asset in a stable African jurisdiction. We are profitable — with a sustainable margin of US$300 per oz. at current gold prices — and have significant cash reserves of US$60 million, with a supportive debt-financing partner.”

On the allegations, Breese said: “The main thesis of the Muddy Waters short report is a false claim that Asanko will need between US$75 and $115 million to rectify a partial collapse in the Nkran pit. In fact, we have largely rectified the collapse at a cost of US$3 million to $4 million.

“Muddy Waters falsely claimed that the fix would require us to remove 37 million tonnes of waste rock and that this would take a year,” he said. “In fact, we removed 1.1 million tonnes in the slump area and it took only a few weeks.”

The short seller “brazenly attempted to impugn our credibility by claiming that the partial wall collapse was ‘serious’ and implying that our disclosure was faulty,” Breese added. “We disclosed the partial wall collapse on May 4, 2017, or 27 days before the Muddy Waters report. Our on-site monitoring systems predicted this wall slippage well in advance, and there was no impact on either production or safety.”

Breese confirmed that contrary to Muddy Waters’ “false” claims, the company is proceeding with its pushback plans at the Nkran pit.

Repeating comments the company made during its second-quarter conference call, Breese noted that Nkran’s cut 2 pushback continued during the quarter with the western wall sequence, which is located in mainly oxide and transition waste material with no drill and blast operations, making it cheaper to mine. This pushback sequence included changes recommended by mining consultants SRK to align the sidewall designs to the SRK geotechnical recommendations in the slump area. That called for modifying the surface oxide slope angles from 28 degrees to 22 degrees, and another 1.1 million tonnes of waste material moved in the slump area.

“In the context of moving 26 million tonnes this year, these design changes have had an insignificant impact on our mine plans,” he wrote, quoting his remarks from the conference call. “This exercise was nowhere near the misguided estimates, as recently published by a short-selling report that estimated this work would amount to 37 million tonnes, or 33 times the amount of waste needing to be removed at costs of between US$75 and US$155 million. Once we reached the required design elevation on the western wall, the cutback operations moved onto the next sequence for the pit in the southeast section to develop ore blocks in line with our cut 2 designs. We will continue mining to this section of cut 2 for the rest of 2017.’”

As for Muddy Waters’ claim that the company has found less gold in Nkran than it had expected, and has responded by mining the “guts” out of the orebody into a steep V-shape, Breese disagreed.

“The pit is not materially deeper than the original feasibility study anticipated,” he said. “The pit is not narrower and is being mined according to independent geotechnical and life-of-mine criteria. We have planned appropriately for long-term mining, based on the expertise of our team, including our independent consultants and identified qualified persons.”

Breese said that Nkran’s mineral resource reconciliation is within 2%, and that “the gold is in the ground.”

As the company disclosed in February 2017, Breese said, the resource and subsequent reserve model “have been updated and include a resource model developed by CSA Global for Nkran that “is more conservative than the prior model that was developed by another independent consultant.” The CSA Global model does show lower grade, he conceded, in part from the knowledge gained from actual mining, which has been communicated to the market.

“While the grade and contained ounces within the Nkran pit have been reduced, the expansion definitive feasibility study and mine plans are based on this new conservative model and fully reflect all the implications of both the grade and ounce reduction estimates.

“Our understanding of the complex Nkran mineralization continues to evolve as we mine deeper into the main ore zones,” he said. “Although two respected independent experts have reached different conclusions regarding grades and tonnes of this complex orebody, the contained ounce profile remains similar at a cut-off of 0.5 gram gold per tonne. However, to be prudent, we have elected to use the more conservative CSA resource model for our corporate reporting, life-of-mine planning and future capital-expenditure projects.”

He noted that reconciliation has confirmed that the grade control model is within 2% of the mineral resource estimate (MRE) for the volume of material used for the reconciliation. This is a step forward, he said, “as it clearly validates the recently updated MRE that forms the basis of life-of-mine plans for the Nkran pit, which is the major value driver for the coming years.”

In response to Muddy Waters’ criticism that the company used a US$2,000 per oz. gold price for its MRE, Breese pointed out that the company disclosed in a news release on July 18 that the constraining gold price for its MRE aligns with peers at US$1,500 per oz. gold.

“Since the [February 2017] release of our updated MRE [used in the June definitive feasibility study announcement], we have received feedback that the gold price was inconsistent,” he said. “After conducting a further peer review, we decided to align our MRE with others in the gold sector and therefore adjusted the gold price constraining parameter for our MRE to US$1,500 per ounce.”

“The use of US$2,000 per oz. had been deemed appropriate — a view shared by our technical advisors — as a reasonable constraint based on potential mine life of up to 21 years and a long-term belief in future higher gold prices. For Asanko, it is the mine’s reserves that drive value, as they form the basis of the business and the company’s valuation. It is the ability to exploit these reserves and to meet the planned production targets as per the company’s guidance that impacts a company’s valuation.”

Breese emphasized that the reduction from US$2,000 per oz. “had no impact” on the measured resource, and “only a small impact” on the combined measured and indicated resource.

More importantly, he said, the change did not impact the mine’s mineral reserve estimate, which stayed the same at 101 million tonnes at 1.57 grams gold for 5.1 million contained oz. gold, based on a US$1,300 per oz. gold price, which is within industry norms. Based on our reserves, he added, Asanko has a long-life asset with a mine life of between 12 and 20 years, depending on the mining rate.

In terms of the mill, Breese said it has consistently operated above the design rate of 3 million tonnes since the second quarter of 2016, initially at 10% above design, and then 20% above design (3.6 million tonnes).

“We have been building up a strategic stockpile of ore as part of our single pit, risk-mitigation strategy,” he said. “In our first-quarter results, we reported this has been achieved and mining rates had returned to more optimal levels. These two factors necessitated mining more than the feasibility study originally intended, however as stated earlier, this has not resulted in the pit being materially deeper than the original feasibility study.”