Asanko Gold Inc. has battled short-sellers before and survived. Investors who think the TSX-listed miner's recent travails are a buying opportunity, however, might find the risks now outweigh the potential rewards.
Its first dance with the shorts came in June, 2016, when Toronto's K2 & Associates Investment Management Inc. released a lengthy report suggesting mining at the company's Nkran project in Ghana was going poorly, putting the company's estimates of the recoverable gold there in question. Asanko weathered the critique well, but one of the big dogs joined the fight at the end of May when Muddy Waters, the firm that brought down Sino-Forest, said it, too, was short Asanko, believing it "is highly likely to end up a zero."
This time, investors pushed the shares down by 30 per cent, and Asanko stock only partly recovered, despite another full-throated response from the company. The shares have retreated further as S&P Dow Jones Indices dropped Asanko from the S&P/TSX composite index June 19, prompting index-based funds to sell.
Much of the debate is deeply difficult to understand, if you're not a geologist or a specialist in mining stocks. It largely involves physical problems at the mine and whether the mining results raise the spectre of the company running out of money. The company hotly disputes this, with chief executive officer Peter Breese saying the short argument "couldn't be more wrong."
After reviewing the Asanko file, however, I see a couple of smaller things that are potentially big red flags.
The first is a little piece of data, noted by Muddy Waters but largely missed in recent news coverage, about the way the company calculates its resources. To simplify at the risk of error, mineral resources are estimated or measured, but may not be currently economically mineable. The gold that is economically mineable at current levels are "reserves." Reserve data helps drive the values of mining stocks. But resource data is also important, particularly when the miner is a "junior" with just one or two projects that lack a lengthy track record.
Asanko uses a gold price of $1,300 (U.S.) an ounce to calculate its reserve data, a price most would say is reasonable, given recent market history. In determining the gold that's counted in the more speculative category of resources, however, Asanko adopted a $2,000-an-ounce gold price, a level that the precious metal has never hit.
There doesn't seem to be an independent summary of what other miners use as a gold price in their resources calculations. But Muddy Waters happily provides a table of other gold companies, from Centerra Gold, to Kirkland Lake, to Sulliden Mining, which used "constraining gold prices" from $1,200 to $1,500 an ounce in their most recent annual resource estimates. "Comparable mining companies appear to be ultraconservative," Muddy Waters notes.
I asked Asanko about this. As part of a lengthy written response to my questions, the company says that it and its technical advisers believe a $2,000 gold price is an reasonable input in their modelling "based on 12-21 year life of mine estimates … A review of the historic gold price shows peaks of up to US$1,800 to US$2,000/oz have occurred during 1980 and 2012." The company says "there is a reasonable likelihood of repeating these prices," citing global economic instability, a continued decrease in gold mine exploration successes and a falloff in gold mine productivity.
The second concern I have is about Phil Bentley, one of Asanko's top geologists and one of several people who sign off on Asanko's estimates as a "qualified person" under securities laws. Mr. Bentley, before he joined Asanko, was in a similar position at Great Basin Gold, a miner that collapsed rather spectacularly five years ago.
Muddy Waters mentioned this matter in Mr. Bentley's background, but did not note another fact: Mr. Bentley was, until recently, a defendant in a lawsuit by Credit Suisse against several former Great Basin Gold executives in which the international bank alleges it was fraudulently misled about the potential of a key Great Basin project when it extended millions of dollars of loans to the company.
Since the suit, which dates to 2015, was recently settled, the allegations will never be tested in court. However, since Credit Suisse was able to gain the company's computer system as part of a bankruptcy settlement, it was able to review internal e-mails.
What they found, and what they placed in the lawsuit, were e-mails in which geologists on the company's Nevada-based Hollister mine strongly contested Mr. Bentley's work. In a July, 2012, e-mail, one geologist e-mailed Mr. Bentley and said "I still have serious issues with these numbers and what we see in reality for both the resources and your prognostication on the reserves. We do NOT have eight years reserves. At what stage do we get this in line with where we're at."
By the end of December, 2012, after Great Basin Gold filed for creditor protection, it restated reserve estimates at Hollister, reporting a three-year mine life, which the general manager of the Hollister mine previously said was the "most probable outcome."
Mr. Bentley's lawyers in Nevada, where the suit was contested, declined to comment, noting the suit is settled and the firm's policy is to say no more in such cases.
Asanko says it was aware that Mr. Bentley was a defendant in the suit when it hired him and that the case settled "without any defendant admitting liability." The Hollister mine, it says, is producing gold profitably for its new owners.
Asanko also notes that Great Basin Gold had multiple qualified persons sign its Feb. 8, 2011, Technical Report, with another defendant in the Credit Suisse suit, not Mr. Bentley, responsible for reserve estimates, and a third geologist, who was not a defendant in the lawsuit, signing off as the overall qualified person. "Phil Bentley was not the Qualified Person responsible for Reserves and the Life of Mine on the Hollister project, which were at issue in the litigation."
Fair enough. But both of these items strike me as aggressive forecasting that may not, or in the case of Great Basin Gold, did not play out. When Asanko Gold's executives exude the greatest of confidence that they are right and the shorts are wrong, it's worth placing these facts on the scale – on the short side.