Asanko Gold Resource Update Primer

| About: Asanko Gold (AKG)

Summary

AKG's gold shortfall between its Definitive Project Plan and actual results continues to increase.

AKG will be releasing an updated feasibility study, which will include a new mine plan, a new resource/reserve model, and 2016 reserve reconciliations.

Investors should pay close attention to how much gold was mined vs. how much Nkran's reserves were reduced specifically from the mined out areas in its initial model.

Asanko Gold Primer - Feasibility Study and Reserve Update Focus Items

Disclosure: K2 & Associates has a short position in Asanko shares

Asanko appears poised to report an updated feasibility study along with a number of year-end updates:

  • YE resources and reserves
  • A new mine plan
  • A new block model
  • Reserve reconciliations

The updates will be coming on the heels of a year where we predicted (in our initial June report) Asanko would continuously extract less gold on a per tonnage of rock mined (waste and ore) basis than its initial mine plan suggested.

As predicted, this shortfall widened during every quarter. The table below shows the gap between actual reserve gold mined versus the Definitive Project Plan (DPP):

16 Q1

16 Q2

16 Q3

16 Q4

Cumulative tonnage mined

(MT)

28.0

35.1

42.4

49.6

Cumulative Reserve Gold Mined

(koz)

20

78

152

236

Cumulative DPP Gold Mined

(koz)

75

146

246

354

Cumulative Gold Shortfall

(koz)

54

67

94

118

Actual gold mined based on processing and stockpile data from Company disclosures 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 mined to date DPP data from Asanko Gold Mine -Phase 1 Definitive Project Plan

By year end 2016, Asanko has extracted ~50Mt from Nkran, but mined ~118koz less from reserves than the DPP had predicted by the ~50Mt mark.

Asanko appears to have deviated from its initial mine plan by mining deeper than planned in the ore zones and reducing/falling behind on planned waste stripping cutbacks (refer to our previous report available at asankoreport.com). As a result, we believe the table above significantly understates the likely scale of problems encountered at Nkran through 2016 YE.

While we look forward to reviewing Asanko's feasibility study in detail when the full document is published, our initial focus during the preliminary release will be on a few key items of interest:

What to Look For? Reserve reduction from mined areas at Nkran.

More Specifically: Look at how much gold Asanko removed from its initial reserves and compare this to actual reserve gold mined.

Why Does This Matter? This will provide a good impression of how much reserve gold Asanko thought would exist compared to what the reality was.

If our thesis is accurate we expect to see actual reserves mined of only ~236koz, vs. actual reserve reduction from blocks mined of ~400koz - 500koz.

Could This Be Obscured? It appears Asanko will be swapping in a new block model and resource estimate to replace the original one in parallel with updating its year-end resources/reserves.

We may only see a before-and-after comparison of two entirely different models with different estimation methods and parameters.

While we do not expect the Company to obscure reserve reduction from its initial reserve estimate, we will be highly critical if it is not made clear on an 'apples-to-apples' basis.

Of note, early Company disclosures suggest it will be lowering the cut-off grade at Nkran from 0.8g/t to 0.5g/t.

What to Look For: Whether Asanko provides a comprehensive reconciliation on all the blocks mined, or only reconciles the tonnes that were sent to the mill/ore stockpile.

Why This Matters: The difference here is key - if Asanko only includes tonnage sent to its mill/ore stockpile in its reserve reconciliation, this will likely cause a large selection bias.

As an Example: If you grade control 2 tonnes of rock that are expected to be ore, but instead find only 1 tonne of ore and 1 tonne of waste, then your ore reconciliation will only be 50% vs. expectations.

You will send 1 tonne of ore to the stockpile/mill, and the other tonne to the waste pile.

If you only consider the rock on the stockpile/mill in reconciliation work, then you will be able to claim 100% reconciliation based on your selection methodology. Essentially, you will be excluding the null values from your calculation.

We expect that Asanko will show comprehensive bench reconciliations, but we will pay critical attention to its methodology.

What to Look For? Significant changes to Nkran's mine plan and mine life.

More Specifically: Look for a substantial decrease in mine life and an accelerated rate of vertical descent within the pit, as well as a reduction in ounces per vertical meter.

As always, reviewing the integrity of the new block model will be critical, but Nkran is bound by simple principles.

The ore structures are mostly vertical in our understanding and concentrated at the center of the pit. To exploit the ore body faster, Asanko will have to descend faster and we will pay close attention to this area.

If the ore body is underperforming on gold, then it will need to be exploited faster to compensate.

Could This Be Obscured? Yes, pay close attention to reduced transparency through 'bundling' of assets. If its flagship asset is beginning to show major blemishes, it may be bundled in with other assets and the asset specific transparency from Asanko's previous studies may be reduced to only show the consolidated bundle.

We do not expect Asanko to reduce transparency compared to its previous feasibility studies but, once again, will pay close attention.

Disclosure: I am/we are short AKG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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