Another forecast upgrade and an investment

Alkane Resources 7 June 2019 Update
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Alkane Resources

Another forecast upgrade and an investment

Guidance update

Metals & mining

7 June 2019

Price

A$0.31

Market cap

A$157m

Net cash (A$m) at 31 March 2019

72.4

Shares in issue

506.1m

Free float

78%

Code

ALKX

Primary exchange

ASX

Secondary exchange

OTCQX

Share price performance

%

1m

3m

12m

Abs

32.6

48.8

19.6

Rel (local)

30.6

45.6

13.5

52-week high/low

A$0.35

A$0.19

Business description

Alkane Resources is an Australian production and development company. It previously produced 70,000oz of gold per year from the open pit operations at its Tomingley gold mine, but is now transitioning to underground operations and expects to produce around 32,000oz of gold pa.

Next events

Q419 results

25 July 2019

FY19 results

25 October 2019

Q120 results

30 October 2019

Q220 results

30 January 2020

Analyst

Dr Ryan D Long

+44 (0)20 3077 5700

Alkane Resources is a research client of Edison Investment Research Limited

Gold production from the mid-grade stockpile at Tomingley continues to perform above our expectations, resulting in a second upgrade of our production estimates this year. We increase forecast gold (Au) production for FY19 to 48,000oz (from 44,000oz on 2 May 2019, previously 40,000oz on 12 February 2019). As a result, we also increase forecast gold sold to 52,800oz (from 48,800oz). The increased production levels also result in a lower all-in sustaining cost (AISC), which decreases to A$1,004/oz Au (from A$1,059/oz Au). Alkane also announced a binding agreement with Zirconium Technology Corporation to fund a pilot plant operation to convert metal oxides into metals.

Year end

Revenue (A$m)

PBT*
(A$m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

06/17

117.8

6.6

0.02

0.00

15.5

N/A

06/18

130.0

31.5

0.05

0.00

6.2

N/A

06/19e

92.1

28.4

0.04

0.00

7.8

N/A

06/20e

57.3

7.7

(0.00)

0.00

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Underground development continues apace

Alkane’s transition to underground mining is on schedule and on budget. The company expects first ore stoping to commence in August 2019.

Strategic agreement with Zircon Tech

Alkane has entered into a strategic agreement with South Korean company, Zirconium Technology Corporation (Zircon Tech). The agreement will see Alkane invest US$1.2m in return for a 10% holding in a newly established company, which will hold an exclusive licence to all intellectual property and expertise associated with the electrolytic processing technology. Alkane will also have exclusive global rights to use the technology at commercial scale for zirconium and hafnium processing.

Technology could improve economics at Dubbo

Alkane has entered into the strategic agreement with Zircon Tech, as it believes the technology could improve the economics of the Dubbo polymetallic project by replacing the high-energy Kroll process with an electrolytic process that converts metal oxides into metals.

Valuation: Increased on Tomingley improvements

Our updated valuation factors in Alkane’s increased share price to A$0.305 (vs A$0.24 previously), increased cash flow from Tomingley, the transaction value of the Zircon Tech agreement and a minor increase in the market valuation of Alkane’s 15% interest in Calidus Resources. These factors increase our valuation of Tomingley plus Alkane’s investments to A$0.34/share from A$0.30/share. Assuming Alkane secures development funding for Dubbo and the prices of metals improve to the level it expects over the next three years, our valuation could increase to A$0.53/share from A$0.47/share.

Higher grades lead to second FY19 forecast upgrade

As in Q319 (ending 31 March 2019), the period ending 31 May 2019 saw Alkane processing higher grades from the mid-grade stockpile at Tomingley. As a result, we have upgraded our forecasts for the year.

Financials

Alkane’s management has provided an updated guidance range for Gold production at Tomingley of 48,000–49,000oz, up from 42,000–47,000oz previously. Cost guidance for FY19 has reduced to between $950/oz and $1,050/oz as a result.

We therefore increase our gold production forecasts for FY19 to 48,000oz of gold from 44,000oz. Forecast gold sales increase to 52,800oz Au from our previous 48,800oz Au. We reduce our forecast AISC has to A$1,004/oz Au from A$1,059/oz Au. Revenue for FY19 increases to A$92.1m from A$85.1m, with cost of sales increasing to A$47.7m from A$45.7m. As a result, EBITDA increases to A$34.9m from A$29.9m and PBT to A$28.4m from A$23.5m (see Exhibit 1).

Exhibit 1: Edison FY19 forecast history for Alkane Resources

Source: Edison Investment Research

Valuation

The total effect of the updates to our forecasts is an increase in our valuation of the Tomingley Gold Mine to A$0.33/share from A$0.29/share, with our valuation of Alkane’s 15.2% holding in Calidus Resources unchanged at A$0.012/share. We value the Zircon Tech investment at a transaction value of A$0.003/share.

While our forecasts for the Dubbo project have not changed, the increase in Alkane’s share price to A$0.305/share vs A$0.24/share in our last note (published on 2 May) means that we forecast a lower amount of dilution relating to the potential equity component of funding the Dubbo project, which increases our valuation per share. We continue to assume that Alkane secures initial development funding for Dubbo in CY20 and that the prices of metals improve to the level that Alkane expects over the next three years. On this basis, our valuation could increase to A$0.53/share (previously A$0.47/share).

Zirconium Technology Corporation agreement

On 6 June, Alkane agreed a binding agreement with Zirconium Technology Corporation whereby it will invest US$1.2m to secure a 10% interest in a newly established company that will hold an exclusive licence to all intellectual property and expertise associated with the electrolytic processing technology. Alkane also retains exclusive global rights to use the technology at commercial scale for zirconium and hafnium processing.

Alkane has also agreed to provide an additional loan of US$0.6m to the new company, at market-based rates, should the plant require additional capital. Alkane will have the right to convert the loan into an equity interest.

The new company will use the investment from Alkane to construct a pilot plant at Chungnam National University’s (CNU) Department of Materials Science and Engineering, located in Daejeon, South Korea. The pilot plant will use rare earth oxides, zirconium dioxide and hafnium oxide extracted from the Dubbo project and Alkane has the right to market the finished product.

The plant is expected to operate through 2019 and 2020, during which period commercialisation discussions will be advanced.

Potential impact of the technology for Alkane

There are three principal benefits to Alkane from commercialising Zircon Tech’s processing technology:

The first is the potential to use a carbon-free and environmentally superior processing technology to the traditional Kroll process, to make nuclear and industrial-grade zirconium metal, high-purity hafnium and rare earth metals at the Dubbo project.

Secondly, Zircon Tech’s processing technology has the potential to reduce metallisation costs for zirconium, hafnium and rare earth metals by 50%. As these metals account for 87% of the potential revenue generated over the life of mine at the Dubbo project, any reduction in metallisation costs for these products would have a significant impact on Alkane’s bottom line.

Thirdly, the technology uses solid oxide membranes (SOM) that are made from yttria-stabilised zirconia to replace carbon electrodes. If this technology is proven to work on a commercial scale for any of the major industrial metals, it is likely to create significant demand for both yttrium and zirconium, both of which the Dubbo project can produce.

Recent exploration results at Tomingley

Alkane has now defined significant gold mineralisation at three prospects around the Tomingley mine: Roswell, San Antonio and El Paso. All three prospects are located within 7km of the processing plant and with further work these prospects could provide additional feed for mill, extending the life of the operation beyond 2022.

The near-mine drill programme at the Tomingley Underground Mine is continuing and further drill results are expected to be announced in the coming weeks. A follow-up programme of ground magnetics and drilling is being planned at the El Paso prospect.

Exhibit 2: Financial summary

A$’000s

2017

2018

2019e

2020e

2021e

2022e

30 June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

117,792.0

129,974.0

92,108.0

57,266.8

75,445.5

174,103.7

Cost of Sales

(57,073.0)

(51,304.0)

(47,712.0)

(26,549.7)

(36,469.9)

(104,172.4)

Gross Profit

60,719.0

78,670.0

44,396.0

30,717.0

38,975.6

69,931.3

EBITDA

 

 

49,333.0

68,578.0

34,896.0

21,027.0

29,091.8

59,849.8

Normalised operating profit

 

 

7,607.0

32,107.0

27,642.8

11,519.8

0.0

0.0

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

0.0

Reported operating profit

7,607.0

32,107.0

27,642.8

11,519.8

0.0

0.0

Net Interest

(1,035.0)

(603.0)

714.8

(3,853.4)

(26,069.2)

(33,808.1)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

(40,140.0)

(188.0)

0.0

0.0

33,356.6

0.0

Profit before tax (norm)

 

 

6,572.0

31,504.0

28,357.6

7,666.4

(26,069.2)

(33,808.1)

Profit before tax (reported)

 

 

(33,568.0)

31,316.0

28,357.6

7,666.4

7,287.4

(33,808.1)

Reported tax

4,631.0

(6,845.0)

(7,214.4)

(10,255.8)

0.0

0.0

Profit after tax (norm)

11,203.0

24,659.0

21,143.2

(2,589.3)

(26,069.2)

(33,808.1)

Profit after tax (reported)

(28,937.0)

24,471.0

21,143.2

7,666.4

7,287.4

(33,808.1)

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Discontinued operations

0.0

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

11,203.0

24,659.0

21,143.2

(2,589.3)

(26,069.2)

(33,808.1)

Net income (reported)

(28,937.0)

24,471.0

21,143.2

7,666.4

7,287.4

(33,808.1)

Basic average number of shares outstanding (m)

503

503

506

506

521

685

EPS – basic normalised ($)

 

 

0.02

0.05

0.04

(0.00)

(0.04)

(0.03)

EPS – diluted normalised ($)

 

 

0.02

0.05

0.04

(0.00)

(0.04)

(0.03)

EPS – basic reported ($)

 

 

(0.06)

0.05

0.04

0.01

0.01

(0.03)

Dividend ($)

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

10.3

(29.1)

(37.8)

31.7

130.8

Gross margin (%)

51.5

60.5

48.2

53.6

51.7

40.2

EBITDA margin (%)

41.9

52.8

37.9

36.7

38.6

34.4

Normalised operating margin (%)

6.5

24.7

30.0

20.1

0.0

0.0

BALANCE SHEET

Fixed assets

 

 

148,474.0

138,275.0

173,047.7

355,010.6

746,696.2

914,728.1

Intangible assets

83,107.0

93,136.0

105,917.0

100,289.8

110,289.8

120,289.8

Tangible assets

60,627.0

36,266.0

50,035.9

237,626.0

619,311.6

777,343.6

Investments & other

4,740.0

8,873.0

17,094.8

17,094.8

17,094.8

17,094.8

Current assets

 

 

54,276.0

93,306.0

74,324.5

8,989.3

11,523.2

23,526.9

Stocks

9,644.0

19,153.0

12,895.0

2,196.5

2,893.8

6,677.9

Debtors

2,445.0

2,030.0

1,864.0

4,706.9

6,201.0

14,309.9

Cash & cash equivalents

41,969.0

72,003.0

59,565.5

1,465.9

1,308.4

919.1

Other

218.0

120.0

0.0

620.0

1,120.0

1,620.0

Current liabilities

 

 

(19,335.0)

(27,430.0)

(21,583.0)

(17,492.2)

(35,465.7)

(48,769.2)

Creditors

(11,166.0)

(9,299.0)

(8,255.0)

(2,182.2)

(2,997.5)

(8,562.1)

Tax and social security

0.0

(6,929.0)

(6,929.0)

(5,057.6)

0.0

0.0

Short-term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

Other

(8,169.0)

(11,202.0)

(6,399.0)

(10,252.4)

(32,468.2)

(40,207.1)

Long-term liabilities

 

 

18,488.0

13,647.0

17,215.0

(22,785.0)

(244,785.0)

(321,785.0)

Long-term borrowings

0.0

0.0

0.0

(40,000.0)

(262,000.0)

(339,000.0)

Other long-term liabilities

18,488.0

13,647.0

17,215.0

17,215.0

17,215.0

17,215.0

Net assets

 

 

201,903.0

217,798.0

243,004.2

323,722.7

477,968.7

567,700.8

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

201,903.0

217,798.0

243,004.2

323,722.7

477,968.7

567,700.8

CASH FLOW

Operating cash flow before WC and tax

49,333.0

68,578.0

34,896.0

21,027.0

29,091.8

59,849.8

Working capital

5,518.0

(9,498.0)

577.0

1,782.8

(1,376.1)

(6,328.4)

Exceptional & other

672.0

2,823.0

706.0

500.0

500.0

500.0

Tax

0.0

(6,845.0)

(7,214.4)

(12,127.1)

(5,057.6)

0.0

Net operating cash flow

 

 

55,523.0

55,058.0

28,964.6

11,182.7

23,158.2

54,021.4

Capex

(33,551.0)

(9,224.0)

(21,023.1)

(197,597.3)

(411,277.4)

(218,381.8)

Acquisitions/disposals

53.0

0.0

0.0

54,540.0

0.0

0.0

Net interest

(1,035.0)

(603.0)

714.8

0.0

(3,853.4)

(26,069.2)

Equity financing

3,471.0

(5.0)

0.0

10,000.0

100,000.0

80,000.0

Exploration and Evaluation

(10,154.0)

(10,969.0)

(12,781.0)

(13,000.0)

(10,000.0)

(10,000.0)

Other

2,963.0

(4,317.0)

(8,721.8)

36,775.0

79,815.2

43,040.2

Net cash flow

17,270.0

29,940.0

(12,846.5)

(98,099.6)

(222,157.5)

(77,389.4)

Opening net debt/(cash)

 

 

(24,455.0)

(41,969.0)

(72,003.0)

(59,565.5)

38,534.1

260,691.6

FX

0.0

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

244.0

94.0

409.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(41,969.0)

(72,003.0)

(59,565.5)

38,534.1

260,691.6

338,080.9

Source: Company accounts, Edison Investment Research

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This report has been commissioned by Alkane Resources and prepared and issued by Edison, in consideration of a fee payable by Alkane Resources. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This report has been commissioned by Alkane Resources and prepared and issued by Edison, in consideration of a fee payable by Alkane Resources. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

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United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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