This morning sees another missive from K2 regarding its short position in Asanko, a 33 page PDF with all the details mapped out that reaffirms their conviction that AKG is going to be toast one of these fine days. It’s too big a document for this humble corner of cyberspace but we can at least show you the contents of the overview page, below. If you want a copy of the whole thing I’m quite sure that if you sent a mail over to K2 they’d send you one by return (edit: Or go here). As for me, I’m neutral on this story for the time being. I think the K2 argument has merit, but so far at least AKG hasn’t shown the type of production weakness they’re expecting. Therefore as far as IKN is concerned it’s a fun spectator sport…a bit like gladiators in ancient Rome.
Anyway, here’s the paste-out of the K2 cover page today:
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1. Not getting the gold
• Asanko appears to be mining significantly less gold compared to the Definitive Project Plan (DPP), despite mining more material
• The gap between the DPP and actual results has grown to an estimated 84koz
• In Q3, we believe the Company mined deeper than plan down the high grade ‘throat’ of the orebody, and yet the gap continued to widen substantially
2. We believe the reason Asanko is experiencing a gold shortfall, is because much of it is not there
• In line with our original thesis, we believe negative gold reconciliation is the cause of Asanko’s under-performance to date
• We do not believe the Company’s selective “reconciliations” are representative of the aggregate problem
• Asanko should have the aggregate data to discredit our initial thesis, we find it unusual that they are not showing it despite vocally contesting our work
3. Not getting the cash
• Asanko’s2016 free cash flow is unlikely to come close to the DPP forecast of $91M
• The Company needs to generate $124M of FCF in H2 2016 to meet this target according to our estimates
• The Company needs to generate $164M of FCF in H2 2016 to meet what we estimate is a more appropriate benchmark given their accelerated mining activities
• We believe Asanko will experience a year 1 FCF shortfall ~30% the size of their total original Phase 1 NAV of $412M (5% DCF, $1,300/ozgold)
4. To mitigate the likely resource issues we perceive at Nkran, we believe Asankowill have to:
• Mine the ore bearing zone at ~2x the rate initially planned
• Defer waste stripping obligations
…If Asanko adopts this approach, it has the potential to significantly shorten Nkran’s mine life
UPDATE: The full K2 report can be found here.