Keegan shares oversold, Canaccord says

Shares of Keegan Resources (KGN-T, KGN-X) are undervalued even when taking into account new tax changes proposed in Ghana, Canaccord Genuity mining analyst Nicholas Campbell argues in a research note to clients, adding that he believes the Vancouver-based junior gold exploration and development company could become “vulnerable to an opportunistic takeover bid.”

Proposals in Africa’s second-largest gold producer to hike the corporate tax rate to 35% from 25% and tag on a 10% windfall profits tax, still need to be approved in parliament. But the news has hammered the shares of mining companies active in the West African country.

Campbell, who has added the new tax rates into his model, has reduced his net present value estimate for Keegan’s Esaase project, but argues the project “remains robust.”

“Today KGN has an EV of only $94 million, less than $19 per oz. of gold,” he writes in his Nov. 29 report. “The last time KGN had the same EV was in June 2009. Since then the Esaase resource has grown 48% and the price of gold has increased 83%. We believe KGN has been heavily oversold.” (EV-also known as Enterprise value-is a measure of a company’s value, often used as an alternative to market capitalization. It is calculated as market capitalization plus debt, minority interest and preferred shares, minus cash and cash equivalents.)

Campbell reasons that if investors believe gold prices will remain higher than US$1,300 per oz., as he does, “the recent pullback in the shares of KGN represents an excellent buying opportunity.”

The mining analyst’s long-term forecast for the gold price is US$1,500 per oz. and at that price he estimates a net present value for Keegan’s Esaase project, at a 5% discount rate, of $465.1 million. At a peak gold price of US$1,750 per oz., his NPV estimate rises to $770.1 million.

Campbell has a speculative buy on the stock with a target price of $10 per share, down from his previous estimate of $13.25 per share. At presstime in Toronto Keegan was trading at $4.19 per share within a 52-week range of $3.91-9.59.

The Esaase gold project is near Kumasi in southwestern Ghana. Keegan released its pre-feasibility study on Sept. 22 incorporating a 25% corporate tax rate.

Highlights from the prefeasibility demonstrate the project can produce 2.6 million ounces of gold over a mine life of 10.2 years. Capital costs were estimated at $506 million with cash costs of $693 per oz. excluding royalties and refining charges.

The project’s proven and probable reserves amount to 79.4 million tonnes grading 1.1 grams gold per tonne for contained gold of 2.88 million ounces based on a $1,150 per oz. gold pit shell.