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Asanko Gold Offers Tantalizing Deep Value (Part 2 of 2)

As I covered in part 1, Asanko Gold Inc (AKG) NYSEMKT:AKG is currently trading below the value of cash on its balance sheet and the company looks like a deep value play. Additionally, the company has the financing in place to develop its mine, although, as with all early-stage resource companies, risk remains.

Institutional investors aware of Asanko Gold’s value offer

However, Asanko Gold Inc (AKG) NYSEMKT:AKG’s backers are numerous and you get the feeling that institutional investors are aware of the value on offer here. For example, approximately 50% of Asanko’s issued share capital is held by institutions. Van Eck & Associates, the commodity trading company with more than five decades of history behind it constitutes 10.6% of this institutional interest and Fidelity National Financial Inc (FNF) and Standard Life Plc (SL) OTCMKTS:SLFPF also hold a significant portion. What’s more, Asanko’s management holds 12% of the shares in issue so their, ‘skin in the game’ as it were, is something to be reassured by.

Furthermore, Asanko Gold Inc (AKG) NYSEMKT:AKG’s management team has a wealth of experience behind it. The seven major figures of the management team have nearly 200 years of mining experience behind them. Moreover, Ben Adoo, Asanko’s Managing Director within Ghana is a Past President & Honorary Member of the Council of the Ghana Chamber of Mines; I don't need to state how invaluable this factor is.

Anyway, let’s have a further look at the financials of the proposed mine. Presently, the company only has the pre-feasibility study to work off, the final feasibility study is expected to be completed sometime this month; as I have already mentioned, the mine financing from Red Kite is dependent upon this final study. However, the pre-feasibility study suggests that at a gold price of $1,400 per ounce, the mines net present value is $355 million, the IRR will be 23% and the average annual cash flow from the mine, post-tax will be $87 million. The study also highlights that at a lower gold price of $1,200 per ounce, the NPV falls to $155 million and the IRR declines to 13% annual post tax cash flow at this price will be $61 million. The estimated post-tax all inclusive cost of production is expected to be around $990 per ounce.

Asanko Gold’s capital cost pf ESAASE project

Asanko Gold Inc (AKG) NYSEMKT:AKG estimates that the total capital cost of developing its ESAASE project will be $286 million, which is fully funded with both the company’s cash balance of $185 million and $130 million in finance from Red Kite. That said, the company does provide a complete cost breakdown of the whole project right up until production, which is expected to start during 2015. The company estimates that during the construction and ramp-up period, it will spend $44 million on working capital costs and corporate overheads. This takes the total projected all-in cost of the mine to $330 million. Unfortunately, $330 million is $15 million more than the company has available at present. Nonetheless, management has been proactive, putting in place measure to gain access to an additional $57 million if required.

Still, these plans may sound impressive but they are no means the final numbers. Gold mines are notorious for their cost overruns and the declining price of gold could soon make this project unattractive to backers.

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