Update: Asanko Gold Eliminates The 2% NSR Royalty On Phase One Of Its Asanko Gold Project

Aug.26.14 | About: Asanko Gold (AKG)


Asanko Gold bought back a 2% NSR royalty on phase 1 of its Asanko Gold Project held by Goknet Mining.

The terms of the agreement were undisclosed but management comments that the cost was immaterial to Asanko Gold.

I had not anticipated this in January.

The elimination of a royalty in a low gold price environment is bullish as it will lower the company's effective production costs.

Asanko Gold (NYSEMKT:AKG) continues to improve the quality of its Asanko Gold Mine by eliminating a 2% NSR royalty on phase 1 of its Asanko Gold Mine in Ghana. The terms of the agreement with Goknet Mining were undisclosed but the press release reassures investors that the cost was not material to shareholders.

While I cannot say this categorically without knowing the actual cost of buying the royalty this is probably a very good move for Asanko shareholders. An NSR royalty entitles the royalty holder to 2% of the company's revenues off the top minus smelting costs, which are essentially negligible. This lowers the company's attributable production without lowering its overall production costs, meaning it increases its cost of production on a per-ounce basis. The royalty would also give its owner the same rights on any new gold found on the pre-determined land mass, making the royalty potentially far more valuable than it appears to be in today's market.

As I argued back in January Asanko Gold is a compelling investment insofar as it is fully financed and trading at only a small premium to its cash position. While the company's shares have risen and while it has spent some of this cash the broader thesis remains intact. Unless Asanko grossly overpaid for the NSR royalty it is still more than sufficiently financed to bring phase 1 of its Asanko Mine into production, and the share price hasn't risen sufficiently to reflect its potential. Furthermore, the fact that the company eliminated the royalty means that its costs will come down, making the Asanko Gold mine a more profitable project once it goes into production.

This was an excellent move on Asanko's part, and it incidentally comes shortly after I espoused the incredible value potential of royalties elsewhere. I continue to own the stock and believe it is a compelling buy on weakness going into production at the beginning of 2016.

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.