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2019-10-22 02:19:17

A month ago, I wrote that Asanko Gold (NYSEMKT:AKG) shares were set to have more upside in case gold prices (GLD) managed to stay above $1,500 per ounce. Gold prices are currently stuck a bit below the $1,500 level while Asanko shares are consolidating in the $0.90-1.10 range. Meanwhile, the company has recently published its third-quarter production report, providing investors and traders with a chance to look at its fundamental performance.

In the third quarter, Asanko Gold Mine produced a record 62,440 ounces and is on track to meet its annual production guidance of 225,000-245,000 ounces of gold. The mine sold 63,009 ounces of gold at an average price of $1443 per ounce, generating record proceeds of $91 million. Asanko Gold stated that preliminary all-in sustaining costs (AISC) were $1179 per ounce in the third quarter. The company blames the high volume of waste mining on Cut 2 at Nkran pit for the elevated costs. The management projects that fourth-quarter AISC will be substantially lower than the third quarter numbers and maintains the annual cost guidance of $1,040-1,060 per ounce.

As a reminder, the Asanko Gold Mine is a joint venture between Asanko Gold and Gold Fields (GFI). Asanko Gold stated that it will receive $10 million in cash related to the joint-venture transaction by the end of this year. At the same time, the company got confirmation for a $30 million revolving credit facility. With a cash position of $13.6 million (as per the production report), $10 million of joint venture-related cash, and $30 million under the credit facility, the company has sufficient liquidity to make Esaase pit work and deliver cash flow as planned.

I see three main near-term problems that prevent Asanko Gold shares from developing more upside. First, AISC stays stubbornly high. Gold investors have plenty of stocks to choose from and are cautious on the cost side following a multi-year bear market that plagued the gold industry from 2012 to 2016 and a range-bound market from 2016 to the first half of 2019. With costs at $1,179 per ounce, the company is unlikely to generate much enthusiasm even if it promises that costs will go down as soon as in the next quarter – the market wants to see actual numbers rather than promises.

Second, the market waits for the updated life of mine plan. The latest update promised a mine life of 8-10 years with gold production of 225,000-250,000 ounces per year. The report is expected to be published in the first quarter of 2020. There's a material difference between 8 and 10 years of production, so this report will be a very important catalyst.

Third, Asanko shares will likely need more gold price momentum to go above $1.10 in the near term. Currently, gold stocks as a group (GDX) are in the correction mode due to gold being stuck below $1,500 per ounce, and it will be hard for a higher-cost gold producer to go against the grain.

All in all, I maintain my view that Asanko Gold shares may develop a robust upside momentum above $1.10 if the stock is supported by additional positive catalysts, be it a drop in AISC, a new life of mine plan, or a material gold price upside. Without such catalysts, the stock will likely remain range-bound, so anyone willing to take a long-term position in Asanko Gold will be better off searching for prices at the bottom of the current range.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the above-mentioned stocks. Vladimir Zernov
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