Carson Block, the founder of activist short seller Muddy Waters LLC, says nothing shy of a massive rally in gold will save Asanko Gold Inc.
"At this point Asanko has backed itself into a corner and short of gold ripping to $1,700 an ounce, we don't see how this company gets out of it," Block said Wednesday in a telephone interview from San Francisco.
Asanko shares fell 13 percent to C$2.19 before trading was halted in Toronto on Wednesday. The Vancouver-based company, which mines gold in West Africa, had tumbled after Muddy Waters said it was shorting the stock, believing it "highly likely to end up a zero."
Shares remained halted all day. In a statement just before the broader market closed, the company refuted the report and reaffirmed its production guidance for 2017.
"The short report has no merit," Asanko Chief Executive Officer Peter Breese said in the statement. He added that the company's June 5 feasibility study will "provide a complete rebuttal to Muddy Water's technical claims and will also make other information available to refute the non-technical allegations."
Spot gold was trading at about $1,268.90 an ounce at 4:07 p.m. in New York. Assuming gold trades at $1,200 an ounce the company expects to generate $64 million to $77 million in cash this year, it said.
In a research note dated Wednesday, Muddy Waters said the company made investments in Ghana, West Africa, based on flawed geological data and will likely exhaust liquidity in 2018.
"The best-case medium-term scenario seems to be an extremely dilutive equity raise, possibly approximating half of AKG's market cap," the report said, referring to Asanko by its stock ticker. "The worst-case scenario – and not a remote one in our view – is bankruptcy." Regardless, the stock is highly likely to end up worthless, the report said.
BMO Capitals Markets said in a note that most of the issues identified by Muddy Waters were previously known.
They "had either been acknowledged by management or were expected to be addressed with the upcoming publication of an updated feasibility study and mine plan," BMO analyst Andrew Breichmanas said in the note Wednesday.
In June 2016, K2 & Associates Investment Management, a Toronto-based activist hedge fund, took a short position in Asanko and said the miner had 90 percent downside potential. In response, Asanko said it was standing by its 2016 guidance and called the K2 report "seriously misleading."
That report -- and the reaction of Asanko management -- is what first caused Muddy Waters to look at Asanko, Block said Wednesday.
"The pattern of management being dismissive of the report, in this case Bay Street circling the wagons to defend the company, that said to us there are issues here likely," he said.
In Wednesday's 43-page report, Muddy Waters echoed the K2 report's assertions about geological risks. It said one imminent concern is that the west wall of Asanko's Nkran satellite pit is in danger of collapsing.
The report also flagged the risk of "pinching out," which occurs when costs exceed revenue, meaning it's not profitable to mine further. If this happens, the company won't be able to fund other development, it said.
Muddy Waters investigators in Ghana spoke to 21 sources with extensive knowledge of the Nkran mining operation, the report said.
Asanko's dilemma is whether to risk running out of money by fixing problems at Nkran or abandon it to concentrate on other projects. Pushing back the wall at Nkran would cost $75 million to $115 million, the report said. It would be difficult to walk away from the site because it's relying on cash from Nkran to fund development elsewhere, the report said.
In the company statement, Asanko said it has no need for a $115 million pushback expense.
Muddy Waters estimates Asanko will have a $43 million to $129 million cash short fall in 2018 and will also have to start servicing $165 million in debt that year. "We doubt the company can avoid an expensive debt restructuring in the next 12 to 18 months."
Asanko shares have declined 47 percent this year in Toronto, giving the company a market value of C$445 million ($329 million).
Block has established a name as a short seller with high-profile bets against companies including Sino-Forest Corp., and more recently China Huishan Dairy Holdings Co. He's also tussled with Olam International Ltd., a Singapore-based trader of agricultural commodities, and Noble Group Ltd., a Hong Kong-based commodities trader.
Generally speaking, mining companies are difficult to evaluate for short selling and today's call on Asanko is not indicative of more to come for the sector, Block said.
"To actually come out with an activist short thesis when you're arguing about what's in the ground is usually hard," he said. "We haven't come across too many potential theses on miners, like an Asanko, where we can say, here are, objectively, some problems."
Block did express concern about the Canadian market overall, saying excessive debt, lofty real estate values and complacency may be starting to make investors nervous.
"I'm starting to believe that there could be some real problems with Canada," he said in the phone interview.