Monday, October 22, 2012

Keegan: Gold, growth & Ghana

Ably led, well-cashed and primed for growth, at its current depressed price level Keegan Resources (KGN) may well represent the ideal way to cash in on gold as an investment theme.

For starters, Keegan�s Esaase project in Ghana makes it a gold-only play with a relatively tight share structure. As a result, any significant move in gold should translate into healthy gains for the company�s share price.

With almost $200 million in cash, Keegan offers investors strong downside protection. That cash level currently equates to about 84% of the company�s overall market cap.

That means, at current levels, investors can buy a piece of Esaase (an advanced-stage, five-million-ounce gold project) for a fraction of its inherent value. The feasibility study, which should be finalized before year-end, will likely be much more pleasing to investors.
High cash costs actually play into a gold bug�s hands in terms of leverage, because as gold prices rise, profitability explodes for higher-cost projects like Esaase.

The Esaase prefeasibility study offers a prime example of this effect: A 57% increase in the gold price (from $1,150 to $1,800) would result in a 508% increase in the value of the project. That�s the kind of leverage you�d expect from an option.

Also, given the size and open-pit nature of Esaase�s gold resource, both Keegan and Esaase remain ripe takeout targets, as gold majors scour the globe looking for ways to grow their asset bases and production profiles.

If a buyer does not materialize, Keegan�s cash position allows it to be aggressive on the acquisition front and to enter the ranks of mid-tier producer by bringing Esaase into production.

Finally, regardless of the path Keegan chooses, its status as a gold-only, high-cost gold producer makes it a near perfect lever on rising gold prices.

Just a return to the trading levels it enjoyed in early September of last year would result in a triple on the company�s current share price. Near current levels, Keegan�s a strong buy.

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