Pre-Merger: Jennings Capital Analyst Hrushewsky Opinion issued:
--------------------------------
December 7, 2012
Sector: GOLD MINING
Revised Recommendation: BUY
Analyst: DAN HRUSHEWSKY, B.ENG., MBA, CFA
Company Statistics................KGN.................PMV..............Asanko
Market Cap Basic (C$M)..............343..................343...............696.0
Basic Shares O/S (M)....................85.................412.9..............171.7
Fully Diluted ITM Shares O/S (M) 89.5...............417.2..............177.2
52-Week Range ($/share) ............$2.38-5.43 .....$0.66-1.46....... N/A
Cash & Cash Equivs (C$M)........210..................130.................340
Debt .............................................Nil................... Nil................. Nil
Resources ................................KGN................PMV................AKG
M&I (Moz Au)..................................3.8...................3.1..................6.9
Inferred (Moz Au)............................1.3...................1.4..................2.7
Valuation Metrics.......................KGN................PMV........... .Asanko
NAV 5%,$1,500 (C$M) .................621..................655............ 1,276
P/NAV.............................................0.55................ 0.52
Shareholders
Highland Park (10.8%)
Macquarie (13.3%)
Macquarie (6.1%)
Beutel (6.6%)
Waratah (7.2%)
Waratah (5.4%)
JP Morgan (4.2%)
A. Miller (5.0%)
Highland Park (4.8%)
Sprott (4.0%)
N. Taylor (4.7%)
Van Eck (4.4%)
IG (1.2%)
Taurus (4.5%)
Beutel (4.3%)
Previous Recommendation: SPECULATIVE BUY
e-mail: dan.hrushewsky@jenningscapital.com
KEEGAN RESOURCES INC. 12-Month Target: C$5.75
(BEFORE MERGER)
Tel: (416) 304-2176 Cell: (647) 864-2735
(TSX-KGN C$4.03) Risk Rating: ABOVE AVERAGE
Risk Ratings
Above Average Risk — Stocks with more volatility than the market. Financial leverage is considerable but not threatening, earnings are more erratic, or other quality concerns regarding accounting, management track record, and similar issues.
-----------------
KEEGAN Resources Inc. is a junior mining company developing its flagship Esaase Gold Project in Ghana, West Africa
(M&I resource of 3.83 Moz grading 1.73 g/t)
Revised Recommendation: BUY
Stock Ratings
Buy: The stock is expected to provide a total return in excess of 10% over the current trading price over the next 12 months.
Previous Recommendation: SPECULATIVE BUY
PMI GOLD CORPORATION 12-Month Target: C$1.25
PMI Gold Corporation is a junior mining company developing its flagship Obotan Gold Project in Ghana
(P&P reserve of 2.43 Moz grading 2.21 g/t,
M&I resource (including reserves) of 3.1 Moz grading 2.16 g/t.
(TSXV-PMV C$0.83) Risk Rating: ABOVE AVERAGE
"MERGER OF EQUALS"
CREATES A "BEST IN CLASS" GHANA BASED JUNIOR
(-) Transaction:
Asanko Gold Inc. will be created through the merger of KGN and PMV where existing shareholders of each will own approximately 50% of Asanko, on a fully diluted in-the-money basis. Each holder of KGN and PMV shares will receive 1 and 0.21 Asanko shares, respectively. Asanko, post inception, will have 171.7 M shares outstanding. The deal is subject to a shareholder vote in late February (2013) by both companies.
(-) Rationale:
1)
Operational synergies, such as building only one process plant for these 2 projects located 15-30 km from each other, and consolidation of head office G&A;
2)
Exceptional size means multiple expansion: Asanko becomes the largest undeveloped M&I resource held by a junior in West Africa and is on its way to 200,000 oz p.a. production in 2015 (Obotan) and 390,000 oz p.a. by 2017 (Obotan+Esaase);
3)
Obotan proceeds without delay (and hedging), as its $300M capex is now fully financed with $340M in cash, post-merger, and year 1 & 2 cashflow (we estimate $223M) fully funds Esaase upfront capex (estimated at $122M; and
4)
Merger of Equals means everyone wins: no one pays a premium.
(-) Valuation:
We re-calculated target prices for both KGN and PMV by modelling a target valuation for Asanko ($5.45/share) and apportioning this value to their % pro-forma ownership of the merged entity.
This methodology confirmed our previous target prices, which represent 40-50% returns off of current KGN and PMV price levels.
In modelling Asanko, we assumed:
1)
one central processing plant at Obotan starting at a 3 Mtpa throughput rate in 2015 and expanding to 7 Mtpa by 2017 (estimated cost of expansion: $122M, which represents $138M in savings realized by not building a separate process plant and associated facilities at Esaase);
2)
G&A cost savings totalling $42M life-of-mine, representing a 50% reduction in current KGN head office G&A;
3)
reduced mining costs of $3.15/tonne moved starting in 2017 (versus PMVDFS cost of $3.36/tonne), reflecting the lower costs of mining the shallower and partially softer Esaase ore (life-of-mine savings of $7M).
We are revising our recommendation to BUY for both companies (from SPECULATIVE BUY) and maintaining our 12-month target prices of $5.75/share for KGN and C$1.25/share for PMV. 2
DATE..................RATING.................TARGET...... PRICE
10/31/2012 ....SPEC BUY...................$5.75..........$3.73 (TSX:KGN)
11/14/2012.... SPEC BUY...................$1.25..........$0.79 (TSXV-PMV)
=============================================
Jennings Capital Inc. Research Disclosures
I, Dan Hrushewsky, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
U.S. Client Disclosures
This research report was prepared by Jennings Capital Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund and a Participating Organization of the Toronto Stock Exchange and the TSX Venture Exchange. Jennings Capital Inc. is an affiliate of Jennings Capital (USA) Inc. Jennings Capital (USA) Inc. accepts responsibility for the contents of this research report, subject to the terms and limitations as set out above. Jennings Capital (USA) Inc. is a registered broker-dealer with the Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority (FINRA).
THE FIRM THAT PREPARED THIS REPORT MAY NOT BE SUBJECT TO U.S. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS.
This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Any transaction in these securities by U.S. persons must be effected through either Westminster Securities Corporation, a U.S. broker-dealer registered with the Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority (FINRA) and the New York Stock Exchange Inc. or through Jennings Capital (USA) Inc., A U.S. broker-dealer registered with the Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority (FINRA).
U.S. Persons
This research report was prepared by an affiliate of Jennings Capital (USA) Inc. or other person that may not be registered as a broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of research analysts.
Subject to the limitations on liability described above, Jennings Capital (USA) Inc. takes responsibility for the content of this research report in accordance with Rule 15a-6 under the U.S. Securities Exchange Act of 1934, as amended. All transactions by U.S. persons in securities discussed in this report must be performed through Jennings Capital (USA) Inc.
U.K. Client Disclosures
This research report was prepared by Jennings Capital Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund and a Participating Organization of the Toronto Stock Exchange and the TSX Venture Exchange.
JENNINGS CAPITAL IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS.
The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001.
This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.
