By Otto Rock
The last time Asanko Gold (AKG) was mentioned on these pages was in this post dated March 29th, just after the announcement that Gold Fields (GFI) was buying into the Asanko Gold Mine complex and we pointed out the large slice of humble pie that AKG management were having to eat over their company, its projects and the financial snafu they’d got themselves into (hubris and ignorance is a powerful combo). But what didn’t appear on this humble corner of cyberspace was the following note dated April 1st (no joke) that appeared in IKN463 for subscribers only. It explained why AKG was now a buy with a decent near-term upside. FWIW I bought a few the day after this note went out at U$0.93.
People sometimes ask me about the difference between the blog and the Weekly. Therefore Exhibit A:
What wasn’t mentioned in the Asanko (AKG) post Thursday: It looks like a buy
Before this starts, I want to make it 100% clear that I stand by every word written in this post on the blog Thursday (12) regarding the deal between Asanko Gold (AKG) and Gold Fields (GFI) as announced that day (13). What it does is point out something I (and many others, it started with K2 Assoc and then famed short sellers Muddy Waters got in on the act, it even got to the point where all Canadian sellside coverage either discontinued or went bearish on the stock) have stated about AKG in numerous posts over the years; that it’s a failed company, with poor execution and a debt burden that was killing the stock.
A few numbers, with money things in US Dollars unless stated:
- As at December 2017 (with Share price close of Wednesday, pre-announcement)
- Total Assets $708.8m
- Total Liabilities $278.8m
- Book value: $430m
- Shares out: 225.8m shares out
- Book value per share: $2.11
- Share price: $0.73
- Price/Book ratio (P/Bv): 0.35X
- Working capital: $9.51m
The above, in slightly more formal terms, is what I was alluding to on Thursday. Anyone can see this is a dysfunctional company just by checking that P/Bv, after that the details of the dysfunction (e.g. financial debt $158m as at Dec 31st which is now $164m, or the lack of operational profits at its mine in 2017, impending liquidity crunch, missed guidance, changes in mine plan, etc) can be searched and taken into account.
However, when we run the pro-forma numbers on “New Asanko” and assume the deal with GFI goes through as planned (we also need to assume asset valuations don’t change until then and operational results are a net neutral) the structure of AKG changes. Here are the IKN-estimated new numbers for AKG:
- Pro-forma deal (with share price close of this weekend)
- Shares out: 225.8m shares out
- Total Assets $428.5m
- Total Liabilities $120.5m
- Book value: $308m
- Book value per share: $1.36
- Share price: $1.00
- Price/Book ratio (P/Bv): 0.74X
- Working capital: $64.6m
The P/Bv has doubled, something is afoot. It’s still under 1X so can be classed as a dysfunctional company, but that’s a big leap in just one day. We consider the total liabilities are now without formal financial debt (there are always a few minor items scratching around on accounts payables in any company) and importantly, there’s no liquidity crunch now as working cap has bounced via a 1) $17.6m cash injection as GFI buys 9.9% of the company in new shares 2) over $36m is lifted from current liabilities when the Red Kite loan is paid off.
But most of all, AKG is now under adult supervision. It’s one thing to take out a loan and go into operation, quite another to screw it all up as one does not necessarily lead to another (yup, even in mining and despite all the recent evidence). We can send out the jury for a while on the precise start and causes of the AKG SNAFU, but we can surely narrow it down to a mine plan that did not match the reality of the assets and a management team that first devised, the executed, then refused to come clean that the plan wasn’t working and a different approach was needed.
Enter GFI. Of course you can point at errors that company might have made too, but there’s no denying they have a deep knowledge pool and not only that, are specialists on the African continent. The appearance of GFI on the scene affords Asanko and its assets money, real time to re-work its mine plan and get it right (maybe start with a serious and necessary pit wall cutback plan to expand the pit meaningfully, instead of trying to piecemeal essential capex works while limping on with decadent production), plus the type of mining brains who’ll get it right from the start and won’t try to BS the market before, during or afterwards. It also begs the question as to how long GFI will support the continued presence of current AKG CEO Peter Breese (ultimately responsible for this mess) and whether or not he “may choose retirement after many years of effort and a long…etc”, but that’s another issue for the medium-term, perhaps. In short the combo of money, time and brains that has just been injected into this story by GFI will bring confidence back to the market about the project. And that means a higher share price.
When AKG opened Friday at 85c or so, up 16% and 17%, I was surprised and started planning this note for today’s edition to call buy on the stock. Then it broke 90c, then to 95c and a final surge on late-day volume saw the stock get to U$1.00. This was disappointing because it’s taken the edge off the potential gains in AKG this weekend, but it’s also understandable (and the way in which the trading closed strongly suggests short covering going on…Muddy Waters worked it out too, perhaps?).
Here’s a clear statement for you, from somebody who’s been hating on this stock for quarters on end: The news last week of GFI moving on AKG is strongly positive for the AKG stock price:
- It brings in the money it needs to extinguish the welter burden of debt.
- It allows the company real time to re-work its plans.
- It brings in serious, respected brains that will provide the confidence lost by this team on this project to date.
I don’t know what will happen once the Nkran pit is re-worked and then when the Esaase pit comes online in 2019 (they’ve always looked rather marginal to me), but in the near-term* AKG now looks like a lay-up to regain that 1X P/Bv mark. That would indicate a target of U$1.36 and thanks to the neat and clean close of U$1.00 on Friday, it’s not tough to work out the potential percentage gain on such a trade (hint: 36). Do with this what you will. As for me, when it was under 90c the opportunity of biting at a potential 50% near-term gain was strong, but the thinner margin due to that close has taken a bit of the shine off. Depending on how it opens next week I may play a small side-bet trade, i.e. one of those I occasionally call here in the ‘Market Watching’ section that don’t make the formal ‘Stocks to Follow’ list in subsequent lists.
*For those new round here, my idea of “near-term” is normally three months, a financial quarter.