Keegan trims projected capital costs at Esaase

Dundee Capital Markets has hiked its 12-month target price on Keegan Resources (KGN-T, KGN-X) 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 flotation, rather than whole-ore leaching. Reducing plant capacity to 4 million tonnes per year from 7.5 million to 9 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 prefeasibility study (PFS) down to about US$260 million.
“After Keegan’s September 2011 PFS disappointed investors, the company went back to the drawing board to rejig the project,” analysts Ron Stewart and Joseph Fazzini write in a research note.

The Dundee analysts reason that assuming throughput of 4.1 million tonnes per year compared with the 7.7 million tonnes outlined in the PFS, Keegan “will be able to scale back the development capital expenditure requirements towards something on the order of $325 million [or 35% lower than the US$506 million estimated in the PFS, and 2% higher than the 2012 preliminary economic assessment].”

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 million oz. versus 2.8 million oz. in a 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 oz., 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] and Keegan’s balance sheet and exploration potential at Esaase and Kubi, we believe the two would create a rising precious metal player,” they comment. “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 press time, Keegan was trading at $3.74 per share within a 52-week range of $2.38 to $9.59. The company has 75.6 million shares outstanding for a market capitalization of $268 million.