On December 17, Asanko Gold (NYSEMKT:AKG) announced that it made an offer to buy neighboring company PMI Gold. Last Friday, the deal was finalized when we learned that over 95 percent of PMI Gold shareholders approved the deal, and over 99 percent of Asanko shareholders approved the deal.
While there have been several deals announced recently in the gold mining sector, I think investors need to pay special attention to this one. Asanko Gold and PMI Gold have synergies in the proximity and the development timelines that make the deal truly accretive.
The new company will be a juggernaut in Ghana with over 9 million ounces of gold and $280 million in cash. Furthermore, the company’s shares are incredibly inexpensive, with a market capitalization of roughly $300 million. The company has two properties — Esaase, which was owned by Asanko Gold, and Obotan, which was owned by PMI Gold. The new company now has sufficient cash on hand in order to develop the Esaase mine, which has a $260 million price tag. Once in production, Esaase will produce 200,000 ounces of gold for over a decade at an estimate $840/ounce — well above the current market price of about $1,240/ounce. Ten percent of this production belongs to Ghana’s government, so Asanko Gold will see cash-flow from 180,000 ounces of production. This is a lot for a company with a $300 million market capitalization.
Furthermore, once Esaase goes into production towards the end of 2015, the cash-flow from this mine can be used to finance the development of Obotan. Given Obotan’s proximity to Esaase, the company will be able to share infrastructure across both mines, which means that it will save both time and money. Prior to the deal, Obotan had a $297 million price tag — but the company expects that it can save $100 million. Once Obotan is in production, it will produce 200,000 ounces of gold annually for more than a decade at about $800/ounce.
In all, Asanko Gold is going to be able to produce 380,000 ounces of attributable gold per year through 2026 starting in 2017. It will not have to dilute shareholders, nor will it have to sell gold to a royalty company.
For gold bulls who are sufficiently patient, this is an excellent opportunity. For instance, if the gold price remains the same, then the company will earn over $100 million in after tax cash-flow in its first full year of production at Obotan (2018). Even if we just assume a modest increase in the gold price to $1,500/ounce, the company’s annual cash-flow will exceed $175 million, which is more than half of the company’s current valuation.
Ultimately, by purchasing PMI Gold, Asanko Gold positioned itself apart from its peers in the junior gold mining sector. Most of these companies are low on capital that they desperately need to move their projects forward. Asanko Gold now has the capital and the resources to develop and begin production at two mines. If it is successful, it will be able to produce 380,000 ounces of gold annually at a cost that is well below the current market price.
Despite the obvious opportunity, the market has yet to acknowledge the value here, as the shares trade at just a slight premium to Asanko’s cash. Rather than trying to justify this disparity, I think investors who are bullish on the gold price should consider taking a position now. As production approaches at Esaase, the shares should climb higher to reflect the relatively large amount of cash-flow that the company will generate. If the price of gold rises meaningfully during this time-frame, investors will see their shares soar in value, and it will then be too late to take advantage of this unloved yet well-positioned company.