Keegan Resources gets the love

Shares of Keegan Resources (KGN-T, KGN-X) surged 17.8% or 54¢ to close at $3.58 on the back of a new resource estimate for its 90%-owned Esaase gold project in Ghana and confirmation that the company plans to take a more selective approach to mining the deposit at lower rates and higher grades that should significantly cut costs. A revised pre-feasibility study will be completed early next year.

The news prompted Canaccord Genuity mining analyst Nicholas Campbell to raise his 12-month target price on the stock to $7.00 per share from his previous $5.50, arguing that overall the project “looks much more viable” in the current financial environment “and more likely to attract interest from potential acquirers.”   

“Keegan is moving forward with a scaled down, higher-grade development for the Esaase project and adjusting the process flow sheet to include flotation of a precious metal concentrate prior to cyanidation, to reduce cyanide costs,” he explained in a research note. “As a result capex is expected to decline to US$260 million and the cash operating costs are expected to come down.” (Under the first prefeasibility study the estimate had been US$506 million.)

While the global resource under the project’s updated resource estimate parameters has fallen by about 2%, Campbell adds, the average grade has jumped by 55%. Measured and indicated resources now stand at 68.92 million tonnes grading 1.73 grams gold per tonne for 3.83 million oz. contained gold and inferred resources add 22.23 million tonnes grading 1.75 grams gold for 1.25 million oz. contained gold. (The resource calculation used a 0.8 gram gold per tonne cut-off grade and was based on about 200,000 metres of reverse circulation drilling and 78,000 metres of diamond drilling over the last five years.)

“The increase in grade was largely driven by a higher utilized cut-off grade of 0.8 gram gold per tonne versus 0.4 gram gold per tonne in the previous estimate,” Andrew Breichmanas of BMO Capital Markets in London explains in a research note. “Applying the current cut-off grade to the earlier estimate, resources increased 35.6% as average grade rose 8.1%.”

“The revised resource appears to validate the company’s decision to examine an option of selectively mining the Esasse deposit; however, the upcoming PFS will provide additional details on the new approach,” Breichmanas continues. The analyst has a market perform rating on the stock and a target price of $4.00 per share.   

At presstime in Toronto Keegan was trading at $3.69 per share within a 52-week band of $2.38-6.33. It has about 75.6 million shares outstanding and a market capitalization of about $270.5 million.

Keegan has about $188 million in cash and no long-term debt. In addition to Esasse it owns 100% of the Asumura gold project, also in southwestern Ghana.