Update: Asanko Gold Commences Construction Of Phase 1 Of Its Asanko Mine In Ghana

Aug.20.14 | About: Asanko Gold (AKG)

Summary

Asanko Gold has begun construction at its Asanko Mine: the company should begin commercial production in 2016.

This is in line with my expectations laid out in January.

While some of the upside is gone the shares still offer excellent value and gold price leverage, and I continue to be a buyer on weakness.

Asanko Gold (NYSEMKT:AKG) just announced that it has commenced construction of phase one at its Asanko Gold Project in Ghana. This comes a month after management made its decision to go ahead with this construction. The project, as readers of my January article are aware, is set to begin commercial production in 2016.

With this announcement I think Asanko Gold shares can potentially begin to re-rate as cash-flow starts to become a more likely scenario. The stock's current valuation--$417 million is in-line with my valuation estimate in which I assumed a 12% discount rate and a $1,250/oz. gold price. The gold price isn't that much higher, but as cash-flow becomes more of a certainty we can easily see the shares price in an 8% discount rate--giving the shares another 40% upside over the next 18 months assuming a $1,250/oz. gold price. As we have seen with other large low cost projects moving through construction [e.g. Tahoe Resources (NYSE:TAHO) last year] we can potentially see a higher valuation.

Investors are therefore encouraged to accumulate the shares on weakness and to expect shares to appreciate as milestones are met and production nears. These milestones include:

  • An updated resource estimate, due out next month. This shouldn't differ markedly from the current estimate although the Dynamite Hill region--discussed here--will be included for the first time.
  • A finalized mine plan at the end of the year.
  • Completion of individual components of the project such as the processing plant.

Investors who don't want the gold exposure but who appreciate Asanko Gold's fully financed progression towards low-cost production may consider buying the stock along with put options on the SPDR Gold Trust (NYSEARCA:GLD) or on the Market Vectors Junior Gold Miner ETF (NYSEARCA:GDXJ).

Disclosure: The author is long AKG.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.