VANCOUVER — Asanko Gold (TSX: AKG; NYSE-MKT: AKG) has reported its inaugural production quarter at its Asanko gold mine in Ghana, but it is also busy countering criticism about its technical reporting from Toronto-based hedge fund K2 & Associates Investment Management.
Asanko hit commercial production at its namesake operation in early April after completing the US$295-million development ahead of schedule. Asanko’s first phase of mining will focus on the Obotan project, which includes the Nkran pit and four satellite deposits.
This first phase of production is expected to total 2.34 million oz. over a 12.4-year mine life based on reserves of 2.5 million oz. gold hosted within 36.7 million tonnes grading 2.15 grams gold per tonne. Asanko is scheduled to produce 190,000 oz. gold annually.
The trouble with K2 emerged in late June when the hedge fund published an unsolicited, 42-page report that claims Asanko’s stock could be overvalued by as much as 90%, based on net asset value calculations. The investment critique was based on historic technical information (not compliant with National Instrument 43-101 standards) and a feasibility study Asanko released in early 2014.
K2 has cited inconsistencies in resource reporting between Asanko’s figures and data published by the previous mine operator, Resolute Mining. The report notes that current Nkran resource estimates contain six times more gold ounces than previous resources released before Resolute “forfeited” the asset. K2 also noted that Resolute claimed ore zones at Nkran become “thinner and more discontinuous” at depth, while Asanko has said the opposite.
Asanko has defended the phase-one mine plan, resource estimation and its 2016 production guidance. The company noted that K2 has relied on “anonymous authors” whose credentials have not been disclosed and reiterated that an independent review was conducted by Red Kite Mine Finance before it extended a US$150-million loan in 2014.
Asanko added that it has completed 34,000 metres of drilling below Resolute’s “old floor” at the Nkran open pit.
“K2 omits to mention that in comparing [our 2014 resource estimate] with an estimate developed 17 years ago by a former owner, Resolute, there has been a substantial increase in information gathered from subsequent drilling at depth,” Asanko said. “This information, which wasn’t available to Resolute, clearly contradicts prior assumptions that the Nkran deposit was becoming thinner and more discontinuous at depth.”
Asanko also notes that K2 has been “short selling” stock, and that its negative report was likely intended to temporarily drive down Asanko’s share price.
This short position is no secret. The K2 report includes the following line: “Disclosure: K2 & Associates has a short position in the shares of Asanko Gold.”
Meanwhile, Asanko released its quarterly results on July 20 and reiterated production guidance that calls for between 90,000 and 100,000 oz. gold during the second half of the year. The company produced 36,000 oz. during the reporting period, and said it had 7,833 oz. gold doré in inventory at a US$10.2-million market value.
“In the last few weeks of June, as anticipated, we encountered the main ore zone and have seen dilution and ore losses drop to a more normal level resulting in higher feed grades to the processing plant,” president and CEO Peter Breese said during a conference call.
“Our mining efficiency is showing signs of improvement as a result of receiving part of the new contractor fleet during the quarter to replace the second-hand fleet we started the pre-strip with back in early 2015,” he added.
Canaccord Genuity analyst Rahul Paul suggested that the quarterly performance indicates that Asanko’s resource model is “performing well,” with head grades and recoveries beating his estimates.
“Preliminary reconciliation data for [the quarter] suggests that the grade control model is reconciling positively with the block model,” Paul wrote on July 20.
Canaccord has a “speculative buy” rating on Asanko, along with a $6.75-per-share price target. Paul also noted “significant recent insider buying” by Breese and chairman Colin Steyn.
Asanko shares have traded in a 52-week range of $1.77 to $5.89 per share, and closed at $4.85 per share at press time. The company has 197 million shares outstanding for a $974-million market capitalization, and reported US$44 million in cash and working capital balances at the end of June.