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Asanko Gold Offers Tantalizing Deep Value (Part 1 of 2)

Asanko Gold Inc NYSEMKT:AKG (AKG) is a gold exploration company, focused on becoming a mid-tier gold producer. The company’s main focus is the multi-million ounce Esaase gold project located in Ghana, West Africa. Presently, the company’s US listing has a market capitalization of $169 million and an average daily volume of 85,400.

Asanko could offer deep value that is hard to pass up

Asanko Gold Inc NYSEMKT:AKG (AKG) was formerly known as Keegan Resources, unfortunately, in my view this immediately puts the company on its back foot, as I have a healthy distrust of companies that have changed their name. Still, Asanko could offer deep value that is hard to pass up.

Indeed, at the end of the company’s fiscal second quarter, Asanko Gold Inc NYSEMKT:AKG (AKG) had cash on its balance sheet of $190.4 million and total assets of $244.2 million. Total liabilities meanwhile only came to $13.2 million. With 85 million shares outstanding, this means that Asanko had a book value per share of $2.70 at the end of the reported period. What’s more, the company’s cash balance at the end of the period worked out to approximately $2.24 per share. So, at a current share price of $1.99, Asanko is trading at a price-to-cash ratio of 0.89 and price-to-book ratio of 0.74.

However, financing is paramount with all early stage development companies and a healthy cash balance can soon be frittered away on exploration and development. Nonetheless, Asanko Gold Inc NYSEMKT:AKG (AKG) already has financing in place for the initial development of its mine. One of the key take-away’s to note here, is the fact that Asanko received this financing back in September, despite the current environment of falling gold prices and general distain for small mining projects, many of which are collapsing under lack of investment and rising capital spending.

Asanko Gold Inc NYSEMKT:AKG (AKG) received this financing commitment from Red Kite Mine Finance Trust, a subsidiary of Red Kite and comes in two tranches, a $130 million term loan facility and a $20 million overrun facility. The term facility has actually been offered on quite favorable terms for Asanko. Specifically, interest demanded is LIBOR +6%, with a 1% minimum LIBOR rate, this works out at around 7% at present. The facility also comes with a two year principle and interest payment holiday. That said, both facilities are dependent upon the completion of the Definitive Feasibility Study, which is expected this quarter.

Asanko has signed an offtake agreement with Red Kite

Along with financing, Asanko Gold Inc NYSEMKT:AKG (AKG) has signed an offtake agreement with Red Kite for 100% of the Esaase Gold project’s future gold production. Under the agreement, the full price of the gold will be paid by Red Kite to Asanko, nine business days after shipment. However, Red Kite is buying the gold at a spot price, selected presumably to its benefit during a nine day quotation period following shipment. Now, currently this should not be an issue as according to Asanko Gold Inc NYSEMKT:AKG (AKG)’s December presentation, based on numbers supplied within the pre-feasibility conducted in May this year, the company’s all-in-sustaining cash cost will be US$843 per ounce of gold produced, indicating a profit of $350 per ounce, while gold is trading at current prices. Although, if gold prices continue to fall, and/or the company’s all-in-sustaining cost of production rises, it is unlikely Asanko Gold Inc NYSEMKT:AKG (AKG) will be unable to seek improved terms on its offtake agreement. This could lead to Asanko losing a hefty amount of cash on each gold ounce sold.

That’s not all Asanko Gold Inc NYSEMKT:AKG (AKG) has to offer. So, stick around for part two, within which I’m going to take a closer look at the company’s potential.

-By Rupert H

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