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Consistent with our original thesis, we believe the NAV of Asanko Gold is less than US$0.50/share
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 Asankos under-performance to date
We do not believe the Companys 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
Asankos 2016 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/oz gold)
4. To mitigate the likely resource issues we perceive at Nkran, we believe Asanko will 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 Nkrans mine life
2
Asanko continues to mine substantially less gold than they were supposed to in their DPP Feasibility Schedule
Est. Reserves mined
DPP
350
300
250
200
150
100
50
0
0
10
15
20
25
30
35
40
Note: The DPP does not include any gold from inferred ounces an adjustment must therefore be made
for an accurate comparison with the DPP reserves. We have adjusted for an estimated ~20koz of inferred
ounces at Q3 end. We believe this is overly conservative based on Company disclosures (See appendix A)
Data Source: Asanko Gold Mine Phase 1 Definitive Project Plan; Company Reports & Press Releases; Graph by K2
We believe the true gold shortfall is much larger than suggested by the DPP comparison, since Asanko appears
to have over-mined down the throat of the orebody
We regard the area delineated in Red as the main
throat of Nkrans orebody
Sep 27, 2016 Sat image of Nkran Pit with DPP block model overlain
~32mRL
0mRL
-200mRL
Source: Company Reports, Presentations & Press Releases; K2 Estimates & Annotations; Satellite image procured by K2
High-grading the mine: In Q3 2016 Asanko appears to have mined ahead of schedule down the throat of the orebody
In the southern end of the pit, we estimate*
that Asanko is ~16m deeper than the max
depth initially planned in the DPP in 2016
~45m
~60m
~70m
If Asanko high-graded the orebody in Q3, they should have easily outperformed the DPP instead the gold
shortfall widened again in Q3
Est. Reserves mined
DPP
350
300
250
84koz
200
150
63koz
100
50
0
0
10
15
20
25
30
35
40
Recall that in our initial report, we cautioned investors not to focus on grade/production, as both can be managed in the shortterm - instead we said to focus on mined gold which, as predicted, continues to fall short
Negative gold reconciliation issues are likely driving this gap wider
Quotes from our initial report:
Using this approach would still fail to close the gap due to the
severity of Nkrans resource/reserve overestimation that we
estimated
www.asankoreport.com
Asankos Preliminary Resource Reconciliations: Continuing to only show selective data vulnerable to bias
With selective data, mining Companies have the ability to:
Of particular note:
Asanko has never achieved a month of mining, either before or after the date of this
reconciliation, at average grades close to this preliminary resource reconciliation
grade of 2.45g/t
10
Asanko has the aggregate data, so why do they continue to only show selective fragments of it?
Asanko should know the quantity and location of resource blocks they have extracted from the pit to date
Unless Asanko has been accidentally sending large quantities of gold to the waste pile, we believe they should
already have a clear picture of how much gold they have mined vs. what was predicted in their initial model:
For all their effort to discredit our initial report without providing substantial data, a simple statement such as
the following would accomplish far greater:
ounces of gold within the specific resource blocks we have mined to date
11
Asanko has the aggregate data, so why do they continue to only show selective fragments of it?
12
13
Mining faster + deeper = pulling economics from the future of the initial mine plan into the present
14
2016 and 2017 were each supposed to generate FCF in excess of US$90M in the DPP Feasibility Study
2016 was supposed to generate:
Waste
Ore
25.0
25.0
20.0
20.0
Ore
15.0
10.0
15.0
10.0
5.0
5.0
0.0
0.0
2016
3.7Mt Ore
Mined
21.1Mt Waste
Mined
Waste
2017
3.1Mt Ore
Mined
21.9Mt Waste
Mined
Data Source: Asanko Gold Mine Phase 1 Definitive Project Plan; Company Reports, Presentations & Press Releases; K2 Estimates
15
Asanko is on pace to heavily underperform their 2016 free cash flow estimate from their feasibility study:
As at June 30th 2016, we calculate that Asanko
has generated US$-32.5M* of cash flow
through H1 2016: (excluding Phase 1 CapEx)
(US$M)
CFO + CFI
Add back Phase 1 Capex
Non-capex Cash flow
Q1
-$47.2
$32.4
-$14.8
Q2
-$30.7
$13.0
-$17.7
2016 Q1+Q2
-$77.9
$45.4
-$32.5
(US$M)
-$32.5
$124
$91
Asanko appears to be mining well beyond 2016s plan though, so we believe the shortfall on cash flow will actually
be more severe
Data Source: Asanko Gold Mine Phase 1 Definitive Project Plan; Company Reports, Presentations & Press Releases; K2 Estimates
16
Mining a portion of next years ore should also give you a portion of next years cash flow
Est. 4.2Mt of Waste
mined ahead of schedule
Waste
Ore
25.0
25.0
20.0
20.0
Ore
15.0
10.0
5.0
0.0
Waste
15.0
10.0
5.0
0.0
2016 Material
2016
2017 Material
2017
17
We believe extra material mined in 2016 should yield US$40M in additional free cash flow in accordance with the
DPP figures
Detailed breakdown
Simplified breakdown of the additional US$40M:
1.1Mt Ore
+ $85M
Gold Revenue
Ore Mining
Waste Mining
Processing
Royalties (5% NSR)
G&A, Tax, Other
Total Cash Outflow
- $19M
Mining + Processing
Revenue
Unit Cost
$6.50
$2.75
$13.40
$1.03
$1.32
Units
$/t Ore
$/t Waste
$/t Processed
Avg $/t mined
$/t mined
1.1
4.2
1.3
5.3
5.3
Mt $7 US$M
Mt $12 US$M
Mt $15 US$M
Mt $4 US$M
Mt $7 US$M
$45 US$M
4.2Mt Waste
- $15M
Mining
Royalties
- $4M
5% NSR
- $7M
$40 US$M
Ore & waste mining costs calculated from DPP figures ($/oz LOM)
Processing costs from DPP
Royalties at 5% of revenue
G&A, Tax, Other, used as a plug to arrive at the full year free cash
flow below implies a unit cost of $1.32/t
Data Source: Asanko Gold Mine Phase 1 Definitive Project Plan; Company Reports, Presentations & Press Releases; K2 Estimates
Total
$6.50
$2.75
$13.40
$0.52
$1.32
$1,300
Unit Cost
$/t Ore
$/t Waste
$/t Processed
Avg $/t mined
$/t mined
$/oz
Units
3.1 Mt
21.9 Mt
3.0 Mt
25.1 Mt
25.1 Mt
Total
$20 US$M
$60 US$M
$40 US$M
$13 US$M
$33 US$M
$167 US$M
202 koz
$263 US$M
$96 US$M
18
We believe Asanko will fall short on cash flow by an amount equal to nearly 1/3rd
of the Phase 1 Feasibility studys entire NPV in only the first year of production
US$91M
15.0
10.0
5.0
0.0
Waste
20.0
2016
+ US$40M
5
0
Excess Tonnage
= US$131M
Adj. Free Cash
Flow by 2016YE
Data Source: Asanko Gold Mine Phase 1 Definitive Project Plan; Company Reports, Presentations & Press Releases; K2 Estimates
19
4. To mitigate the likely resource issues we perceive at Nkran, we believe Asanko will 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 Nkrans mine life
20
Nkran is scheduled to be mined from 2 locations for the near future; it is important to understand how they work
Stage 3 vs. 4 mine schedule & ore contributions:
1,000
Q4 18
Q3 18
Q2 18
Q1 18
Q4 17
Q3 17
Q2 17
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Q1 17
Stage 3 + 4 shown in
cross section
Stage 4 stripping is
supposed to represent
the vast majority of
mining going forward
800
600
400
200
Data Source: Company Reports, Presentations & Press Releases; K2 Estimates; Satellite image procured by K2
Q4 18
Q3 18
Q2 18
Q1 18
Q4 17
Q3 17
Q2 17
Q1 17
21
22
We believe Asanko will have to continuously over-mine the ore zones in Stage 3 vs. their initial DPP Mine Plan
If only half of the reserve grade ore and gold exists per mining bench vs. their initial estimates, then a simplistic solution
is to mine ore benches twice as fast as initially planned to get the same quantity of gold:
As An Example:
Imagine you model your reserve grade ore as the thick gold pillar
on the right, and you only plan to mine Bench 1 and 2:
BENCH 1
BENCH 2
BENCH 3
BENCH 4
But once you grade control drill, you realize its much thinner and
only half of the reserve grade ore you expected per bench exists
As long as the zones are thick enough to mine, you can still mine at
reserve grades in the short term, and get the same amount of ore,
you just need to mine twice as many benches in a selective area:
If, at the same time you do less stripping, then you can achieve
mining numbers that look similar to what was supposed to be
achieved from your initial mine plan
BENCH 1
BENCH 2
BENCH 3
BENCH 4
BENCH 1
BENCH 2
BENCH 3
BENCH 4
Intended Pit
outline
Modelled high
grade ore
Actual high
grade ore,
~50% less
Deviated pit
outline
(narrower and
deeper)
If you need to mine ore 2x as fast, then youll need to bring a bigger shovel
In 2017 & 2018, Nkran is supposed to be mined at an average annual rate of only 14.9Mtpa in accordance with the DPP
According to the DPP and our analysis, this was to be accomplished with 2 different sized hydraulic shovels:
Stage 4
4,000
3,500
3,000
2,000
1,500
1,000
500
Q4 18
Q3 18
Q2 18
Q1 18
Q4 17
Q3 17
0
Q2 17
2,500
Q1 17
Simply put, if Asanko wanted to double their mining rate in Stage 3, they would just use a CAT6030 instead of the
CAT6015 in Stage 3 and this is very easy to observe
Data Source: Asanko Gold Mine Phase 1 Definitive Project Plan; Company Reports, Presentations & Press Releases; K2 Estimates
24
Pit Observations At Q3 End : Narrow down the throat with excess equipment in Stage 3 already
2x CAT6030 Shovels active within
Stage 3 currently (End of Sept):
~45m
~60m
~70m
Data Source: Asanko Gold Mine Phase 1 Definitive Project Plan; Satellite image procured by K2
25
Pit Observations At Q3 End : Falling behind on waste mining development in the North/West
26
Pit Observations At Q3 End: Falling behind on waste mining development in the North/West
Sep 27, 2016 Sat image of Nkran
27
28
We see certain avenues for Asanko to manage the problem in the short term, but at the expense of the long term
We believe Asanko will have to mine Stage 3 at 2x the rate originally planned:
Asuadai
Dynamite Hill
Akwasiso*
Abore
Adubiaso Ext.
Adubiaso
Nkran Ext.
Nkran
29
We normally have a pretty dim view of feasibility studies built by previous parties
- Asanko, during their 2016 BMO presentation
Feasibility studies are always fraught with danger, and some are more detailed than others
Ultimately, the mitigating actions that we believe Asanko will have to undertake in our thesis would
require a major overhaul of the mine plan and an acceleration of mining in the ore zones
Whether they adopt this approach may or may not be clear in their feasibility studies, but it will be
evident from their equipment selection, placement, and benches mined which we will closely monitor
30
Appendices
31
The company has mined approximately 3.8Mt of ore to the end of Q3 2016, containing 181koz of gold
2.2Mt reportedly processed + 1.6Mt reportedly on various stockpiles
In Asankos Q4 2015 MD&A, released on March 17th, the company disclosed that a majority of the 0.9Mt of ore mined up to
that date was from inferred zones (minimum ~450kt)
Estimated grade equivalent to approximate total grade mined to that date (1.25g/t)
Additionally, on Asankos Q2 call, they said they had continued to mine from inferred zones, so we have rounded only
another 2koz up to 20koz
We believe this is an overly conservative estimation, as we have essentially taken the minimum
32
Kt
Kt
Kt
Jan-17
370
0
370
Feb-17
244
0
244
Mar-17
224
7
231
Apr-17
203
3
206
May-17
227
2
229
Jun-17
232
0
232
Jul-17
110
47
156
Aug-17
199
17
216
Sep-17
165
1
166
Oct-17
146
10
155
Nov-17
150
7
156
Dec-17
107
18
125
Total
2,375
111
2,486
Stage 3 Waste
Stage 4 Waste
Total Waste
Kt
Kt
Kt
483
341
824
590
283
873
311
836
1147
141
821
962
281
706
987
283
767
1050
199
934
1133
404
769
1173
182
883
1065
193
882
1075
197
782
978
292
873
1165
3,555
8,877
12,432
Kt
Kt
Kt
853
341
1194
833
283
1116
535
843
1378
344
824
1168
508
708
1216
515
767
1282
309
981
1290
603
786
1389
347
884
1231
339
892
1231
346
788
1135
400
890
1290
5,930
8,988
14,919
Grade
Gold Mined
g/t Au
2.25
26.7
2.16
16.9
1.91
14.1
2.31
15.3
2.23
16.4
2.20
16.5
2.06
10.4
2.35
16.4
2.09
11.2
2.04
10.2
2.61
13.1
Note: The DPP also included Adubiaso in 2017 and the grade is a blend of the 3 ore sources. We have assumed the grade is the same for all 3 sources. This is
conservative as Adubiasos reserves are lower grade than Nkrans (~2.06g/t vs. ~2.2g/t)and are likely biasing the Nkran grade downward here.
Data Source: Asanko Gold Mine Phase 1 Definitive Project Plan; Company Reports & Press Releases; K2 Estimates
2.41
9.7
2.21
176.8