Asanko Gold Inc (NYSEMKT:AKG), a midlevel gold producer whose primary asset is the Asanko Gold Mine in Ghana, saw its stock plummet 46% through the month of May due to one analyst's downgrade and the release of a short-seller's report and news of its position.
Although Asanko's stock was crushed in May, it likely would have been worse had it not been for the somewhat auspicious start to the month. Releasing its first-quarter 2017 earnings on May 4, Asanko reported record gold production of 58,187 ounces. Moreover, it reported a significant improvement on the bottom line: net income of $8 million -- far better than the $4 million net loss it reported during the same period last year.
The celebration surrounding the company's Q1 performance didn't last long, though. Shortly after the earnings release, Canadian Imperial Bank of Commerce trimmed its price target on Asanko Gold from 4.50 Canadian dollars to CA$3.85. Moreover, Jeff Killeen, the analyst from CIBC, maintains a neutral outlook on the stock. But the bearish sentiment on Asanko didn't end there. In mid-May, an analyst at Cormark Securities revisited his Q2 2017 earnings estimate for the company. Whereas he had originally forecast Asanko to report EPS of $0.07 in the quarter, he now believes the company will post earnings of $0.05 per share. The most devastating report on the company came at the end of the month, though, when the short-selling research firm Muddy Waters revealed its opinion that shares of Asanko Gold will lose all their luster and go to zero.
Muddy Waters argued that Asanko's investments in the two large deposits -- Nkran and Esaase -- that comprise the Asanko Gold Mine, as well as satellite deposits, will not be recovered since the geological studies upon which the investments are based are flawed. Speaking further to Asanko's woes, Muddy Waters forecast that Asanko, in an attempt to service its $165 million in debt, would exhaust its cash position in 2018.
Additionally, Muddy Waters urged investors to exercise caution in accepting Asanko's guidance, contending that management "continuously guides for positive free cash flow[;] however[,] it has consistently missed." According to Muddy Waters, Asanko guided for $74 million in "post-tax cash flow" for fiscal 2016, but it "ended up burning free cash of -$114.1 million." Furthermore, the short-seller estimated that Asanko, in a best-case scenario, would achieve breakeven in terms of free cash flow despite the company's guidance of $89 million in post-tax cash flow.
The opinions of CIBC and Cormark are worth noting, but the greatest attention should be paid to Muddy Waters. And because Muddy Waters has a vested interest in seeing Asanko's shares plummet, investors should be wary of taking the report's claims at face value. Asanko certainly wasted little time in addressing the concerns raised by Muddy Waters in its report. In a response on its website, the gold producer asserted, "there is no merit to the negative assertions" written in the report. It went on to refute several points of the short-seller's thesis.
Moving forward, investors who are considering Muddy Waters' claim that Asanko's management is untrustworthy will want to monitor the gold producer's progress in achieving its fiscal 2017 guidance: gold production of 230,000 to 240,000 ounces and operational cash flow between $64 million and $77 million at an average price of gold of $1,200 per ounce. Should the company achieve its guidance, that may suggest that investors should be skeptical of Muddy Waters' claims.