Cashed up and hungry for investments

Alkane Resources 12 February 2019 Outlook
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Alkane Resources

Cashed up and hungry for investments

Re-initiation of coverage

Metals & mining

12 February 2019

Price

A$0.20

Market cap

A$101m

Net cash (A$m) at 31 December 2018

73.7

Shares in issue

506.1m

Free float

78%

Code

ALK

Primary exchange

ASX

Secondary exchange

OTCQX

Share price performance

%

1m

3m

12m

Abs

5.3

(13.0)

(31.0)

Rel (local)

0.2

(14.7)

(33.2)

52-week high/low

A$0.3

A$0.2

Business description

Alkane Resources an Australian production and development company. It previously produced 70,000oz of gold per year from its open pit operations from its Tomingley gold mine but is now transitioning to underground operations and is expected to produce around 32,000oz of gold pa. The company is also seeking funding to move its Dubbo Polymetallic project into production.

Next events

H119

28 February 2019

Q319 update

27 April 2019

FY19 results

25 October 2019

Analyst

Dr Ryan D Long

+44 (0)20 3077 5700

Alkane Resources is a research client of Edison Investment Research Limited

Alkane Resources is a well-funded gold production company with A$73.7m in cash and no debt. It is seeking to leverage its cash balance and extensive expertise in gold mining and exploration through a strategy of investing in junior gold companies and projects that meet its investment criteria. Alongside this, the company is transitioning from open pit mining to underground mining at its Tomingley gold project and is pursuing the finance required to develop its Dubbo polymetallic project.

Year end

Revenue (A$m)

PBT*
(A$m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

06/17

117.8

6.6

0.02

0.00

10.0

N/A

06/18

130.0

31.5

0.05

0.00

4.0

N/A

06/19e

73.9

14.3

0.02

0.00

10.0

N/A

06/20e

47.9

1.7

(0.01)

0.00

N/A

N/A

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

Tomingley gold mine: Going underground

At Tomingley, operations are transitioning from open pit to underground. Over the next four years we forecast the mine to produce an average of 32,000oz Au pa and generate an average EDITDA of A$34m pa. The cash flow from Tomingley will fund ongoing exploration to potentially extend the life of the mine, corporate overheads and could contribute to the development of the Dubbo Project.

Investments in gold juniors: Expanding its portfolio

During Q418, Alkane acquired 144.6m shares at an average price of A$0.029/share and 70m options exercisable at A$0.035 in Calidus Resources (ASX:CAI) through a placing and on-market purchases. This represents c 10.19% of Calidus’s issued capital. Calidus is an exploration company that has defined 1,248,000oz of gold at a grade of 1.83g/t Au at its Warrawoona Gold Project in Western Australia. Alkane recently attempted to invest in Explaurum (ASX:EXU), but this was terminated following Ramelius Resources’ (ASX:RMS) successful takeover offer for the company.

Dubbo polymetallic project: Seeking funding

Alkane completed an updated engineering and financials study for the Dubbo Project in June 2018, which outlined its plans to develop the project in two stages. Alkane is seeking A$808m funding for stage 1 production.

Valuation: Underpinned by cash and Tomingley

In our valuation, we take into account the market value of Alkane’s investment in Calidus Resources and a discounted dividend analysis of the potential cash flow generated from the next four years of operations at the Tomingley project, as well as its cash position, to arrive at a valuation of A$0.27/share for Alkane. Assuming Alkane secures the development funding for Dubbo in H119, and the prices of zirconium, total rare earth oxide (TREO) and ferro-niobium improve to the level it expects over the next three years, our valuation increases to A$0.44/share. This provides an upside of 121% to the current share price.

Investment summary

Alkane Resources is a gold production company with a strong balance sheet and a management team with extensive experienced in successful exploration and mine development.

Underground operations extend the life of Tomingley: at the 100%-owned Tomingley gold mine, Alkane expects to produce an average 33,000oz of gold pa over the next four years by transitioning to underground mining, as the open pits have reached the end of their life. We forecast that this will generate an average EBITDA of A$19m pa for the company between FY19 and FY21, compared to an EBITDA of c A$69m in FY18.

Additional discoveries could continue to extend the life of Tomingley: Alkane is attempting to extend the life of the plant at Tomingley by defining additional minable ounces within a truckable distance of the plant.

Strong cash position being leveraged: Alkane is implementing its strategy to take advantage of its significant cash position (A$73.7m at 31 December 2018) by investing in junior gold mining companies and projects that have high exploration potential and/or require near-term development funding. Alkane has completed its first investment into ASX-listed Calidus Resources, accumulating 10% of the company at an average price of US$2.4/oz of resources (A$3.4/oz). By acquiring interests in advanced gold projects, Alkane is diversifying and potentially positioning itself to be able to continue gold production when Tomingley ends production.

Securing funding for Dubbo would provide additional upside: the Dubbo polymetallic project has all the material state and federal approvals, permits and licences in place, the technical and financial studies are completed and the project will be construction-ready, once the A$808m finance required for stage 1 production is secured.

Recent share price performance and upcoming catalysts

Over the past 12 months, Alkane’s share price has declined from A$0.32/share to A$0.20/share. We believe this has been driven by the anticipated decline in gold production as Tomingley moves from open pit to treating the mid-grade stockpile and then underground operations, combined with weakening sentiment towards the sector against a backdrop of anticipated economic slowdown in China. The potential catalysts for the company over the next 12 months are evidence of successful completion of the transition to underground mining at Tomingley (H219), exploration success extending the life of mine at Tomingley, additional investments in the gold junior space and securing the development finance for Dubbo stage 1.

Sensitivities: Underground development and Dubbo financing

The development of an underground mining operation is fraught with risk: poor ground conditions, water ingress, dilution and grade reconciliation can all affect the capital cost, operation cost, production levels and development time frame for the mine.

The timing of funding required for the development of the Dubbo project is the major hurdle that Alkane currently faces and the biggest threat to the company meeting our forecasts. We have assumed the funding is secured early in FY20 as a scenario to demonstrate the potential value of the company. In reality, market conditions will dictate the pace of the development funding timetable, which is considered to be fairly fluid at present.

Financials: 50% decline in y-o-y revenue

In H1 FY19, gold production totalled 26,745oz at an all-in sustaining cost (AISC) of A$1,005/oz Au, while gold sales totalled 30,497oz Au, generating revenue of A$52.4m at an average sales price of A$1,717/oz Au. At the end of Q2 FY19, the company had a net cash position of A$73.7m.

In FY19, we forecast that Alkane will produce 40,000oz Au, down 49% y-o-y from 78,533oz Au in FY18 due to reduced throughput as a result of transitioning to underground operations. We forecast an AISC of c A$1,150/oz Au, up 15%y-o-y, compared with an AISC of A$1,002/oz Au in FY18. In FY19 we forecast gold sales of 41,500oz, down 45% y-o-y from 75,507oz in FY18, generating revenue of A$73.9m, down 43% y-o-y from A$130m in FY18 with EBITDA of A$21.2m, down 69% from A$68.6m in FY18. Our forecast average sales price per ounce of gold is A$1,756/oz Au, up 3% from A$1,706/oz Au in FY18.The reduction in gold production, revenue and EBITDA is driven by transitioning from open pit to underground operations.

Company description: Gold & polymetallic in Australia

Alkane Resources was known as Alkane Exploration before 2007 and has been listed on the ASX since 1969. At the time of the IPO, it was exploring for gas in the Sydney Basin, but moved into gold exploration in the late 1970s. Alkane has been producing gold from the area around the town of Dubbo since 1996.

Between 1996 and 2004, it extracted c 153,000oz of gold through a heap leach operation of oxide ore from four open pits at the Peak Hill Gold Mine.

Between 2014 and 2018, it extracted c 305,000oz of gold from four open pits at the Tomingley gold mine.

Between 2019 and 2022, it expects an additional 130,000oz Au to be produced. The ore will come from the existing open pits (10,000oz Au), existing mid-grade stockpile (40,000oz Au) and the underground development (80,000oz Au) of the Wyoming One orebody.

Alkane has also been actively exploring the area around the town of Dubbo for other metals and minerals, and in 1998 commenced initial metallurgical evaluation of the Dubbo zirconium-rare earth element-niobium-hafnium (polymetallic) project. Since then it has advanced the project to definitive feasibility study (DFS) stage.

Alkane owns 100% of both the Tomingley and Dubbo projects, both of which are in New South Wales (NSW), Australia (Exhibit 1).

Exhibit 1: Map of Alkane’s projects

Exhibit 2: Map of Alkane’s Tomingley project

Source: Alkane Resources – TGP Exploration Update,19 October 2018

Exhibit 1: Map of Alkane’s projects

Exhibit 2: Map of Alkane’s Tomingley project

Source: Alkane Resources – TGP Exploration Update,19 October 2018

The company has commenced the underground development of Tomingley in early 2019, with the first extraction of ore from underground to occur in mid-2019 and processing of the underground ore in Q419.

Alongside the Tomingley underground development, Alkane is assessing the potential to go underground at its former open pit mine, Peak Hill, while continuing its regional exploration programme in the wider Tomingley area. It is also seeking the funding required to develop the Dubbo project into a large polymetallic mine.

Tomingley gold project

The Tomingley gold project is composed of seven exploration licences covering an area of c 440km2 (Exhibit 2). The project contains the four open pits that make up the current Tomingley operation, which has an associated 1Mtpa processing facility. The project contains numerous prospects that have already been demonstrated to contain gold, including the former Peak Hill Gold Mine (153,000oz Au mined in 1996–2005) and the Myalls United Mine (70,000oz Au up to 1917).

Reserves and resources

The Tomingley project has a total JORC 2012-compliant mineral reserve estimate of 124,200oz Au at a grade of 1.8g/t Au, the bulk of which would be accessible from an underground operation, with a significant contribution from the mid-grade stockpile (Exhibit 3). The project has a JORC 2012-compliant mineral resource estimate of 437,000oz Au at a grade of 1.8g/t Au, the majority of which is considered open-pittable but has strip-ratio and physical limitations of the near-by highway that limits the economically extraction (Exhibit 3).

Exhibit 3: Reserves and resources for Tomingley gold project

Deposit

Reserve category

Tonnes (t)

Au grade (g/t)

Contained Au (oz)

Tomingley open pittable (COG 0.5g/t)

Proved

211,000

1.7

11,000

Probable

6,000

1.7

200

Total

217,000

1.7

11,200

Tomingley stockpiles (COG 0.5g/t)

Proved

1,257,000

1.0

39,000

Probable

0

0.0

0

Total

1,257,000

1.0

39,000

Tomingley underground (COG 2.5g/t)

Proved

45,000

2.7

4,000

Probable

688,000

3.2

70,000

Total

733,000

3.2

74,000

Tomingley

Total

2,207,000

1.8

124,200

Resource category

Tonnes (t)

Au grade (g/t)

Contained Au (oz)

Tomingley open pittable (COG 0.5g/t)

Measured

1,462,000

1.6

73,000

Indicated

2,847,000

1.7

148,000

Inferred

1,020,000

1.3

41,000

Total

5,329,000

1.5

262,000

Tomingley underground (COG 2.5g/t)

Measured

92,000

3.6

10,000

Indicated

1,125,000

3.9

141,000

Inferred

237,000

3.2

24,000

Total

1,454,000

3.7

175,000

Tomingley

Total

6,783,000

1.8

437,000

Source: Alkane Resources – Tomingley Resource and Reserve Statements FY18, 8 October 2018

Geology

The Tomingley gold project contains Ordovician volcanic, intrusive and sedimentary rocks that have been complexly folded and faulted. Orogenic gold mineralisation at the Tomingley project is hosted in porphyritic andesites and monzodiorites along the contact with volcaniclastic meta-sedimentary rocks.

Alkane believes the Peak Hill deposit, which it formerly open-pit mined between 1996 and 2005 and it is now examining for its underground potential, is a high sulphidation epithermal deposit that has been highly deformed and hydrothermally altered. The host rocks are Ordovician volcaniclastic and are similar to the sequence at Tomingley.

Current operations

Alkane has now completed open-pit operations at Tomingley. The company in focusing on treating the mid-grade surface stockpile. Processing of the stockpile is then expected to continue until April 2019.

Underground development

At present the company expects to recover c 93,000oz Au from the underground development of the Wyoming One orebody (Exhibit 4) at the Tomingley project over 40 months, which equates to c 28,000oz Au pa. Mineralisation remains open under the existing three open pits, which could extend the life of the underground operation beyond this initial period. With that in mind, Alkane is planning to rapidly establish underground drill positions to target along strike and down dip extensions. The company estimates the cash cost of the underground operation to be between A$1,100/oz and A$1,200/oz.

Exhibit 4: model of the planned underground development at Tomingley

Exhibit 5: Block model at a 2g/t cut-off grade at Peak Hill, showing potential underground workings

Source: Alkane Resources – Tomingley Underground Development Approved, 24 September 2018

Source: Alkane Resources – Gold Resource Peak Hill, 18 October 2018

Exhibit 4: model of the planned underground development at Tomingley

Source: Alkane Resources – Tomingley Underground Development Approved, 24 September 2018

Exhibit 5: Block model at a 2g/t cut-off grade at Peak Hill, showing potential underground workings

Source: Alkane Resources – Gold Resource Peak Hill, 18 October 2018

At the Peak Hill deposit, a JORC 2012-compliant inferred mineral resource estimate has been established for 108,000oz Au at a grade of 3.29g/t Au and 0.15% copper (Cu) (Exhibit 5). The deposit remains open at depth and has the potential for deeper mineralisation in the satellite deposits. Alkane is continuing to re-evaluate the potential for an underground operation at Peak Hill.

Underground development timeline at Tomingley

Alkane has purchased and is refurbishing most of the major equipment that is required for the underground operation at Tomingley. It has also completed the recruitment of experienced underground operators.

The ground support for the portal started installation in late 2018, with underground development now underway. The extraction of first ore is expected in mid-2019. This ore will be stockpiled at the surface, with processing of the ore expected in Q419. Alkane estimates the total capex requirement until first underground ore is recovered to be A$25m, which is likely to be funded from internal cash resources.

Regional gold exploration around Tomingley

Alkane’s regional exploration efforts are focused on defining minable ounces to the south of Tomingley (Roswell, San Antonio and El Paso prospects) and it is assessing the potential to go underground at its former open pit operation at Peak Hill (Exhibit 6). Additional ounces in both areas could be used to extend the life of operations at Tomingley.

Exhibit 6: Cross-section through the Peak Hill deposit

Exhibit 7: Cross-section through the Roswell prospect

Source: Alkane Resources – Gold Resource Peak Hill, 18 October 2018

Source: Alkane Resources – TGP Regional Drilling Update, 1 February 2019

Exhibit 6: Cross-section through the Peak Hill deposit

Source: Alkane Resources – Gold Resource Peak Hill, 18 October 2018

Exhibit 7: Cross-section through the Roswell prospect

Source: Alkane Resources – TGP Regional Drilling Update, 1 February 2019

Mineralisation at the Roswell prospect has been defined over a north-south strike of 350m and remains open to the north and south. Recent drilling at Roswell returned 39m at a grade of 4.49g/t Au from 123m, 21m at a grade of 2.46g/t Au from 207m and 26m at 2.48g/t Au from 234m (RWRC023), 16m at a grade of 1.90g/t Au from 76m (RWRC003) (Exhibit 7); 11.55m at a grade of 2.15g/t Au from 323.45m and 7.65m at a grade of 2.5g/t Au from 340.6m (RWD001). A follow up RC drill programme towards the south of Roswell is underway.

Air core drilling at the San Antonio prospect returned results including 3m at a grade of 1.81g/t Au from 57m (RWAC058) and 15m at a grade of 1.29g/t Au from 57m (RWAC101). This drilling was focused on highly weathered rocks and several of the holes terminated in mineralisation or early in quartz reefs. Follow-up reverse circulation drill programme is underway at San Antonio (5,000m) and El Paso prospects (2,500m). These prospects cover a strike length of 2,500m.

At the Peak Hill deposit, a diamond drill programme is currently underway to provide confirmation of the geology and structures that appear to control the higher-grade ore shoots in the deposit (Exhibit 6), as well as fresh material for metallurgical testing.

Investing in gold juniors

Alkane Resources is seeking to leverage its impressive cash position of A$73.7m (as at 31 December 2018) by acquiring interests in junior gold companies and gold projects, which it considers have high exploration potential and/or require near-term development funding.

Alkane believes this strategy will allow it to continue generating revenue from gold production, even after mining has ceased at Tomingley. Alkane’s first successful acquisition was 144.6m shares in Calidus Resources through a placing and on-market purchases with an average acquisition price of A$0.0295/share. Calidus’s current share price is A$0.028/share.

Alkane also attempted to acquire an interest in Explaurum but was unsuccessful following Ramelius Resources’ increased bid for the company. Alkane was reimbursed its cash advance of A$0.8m and received a break fee of A$0.4m.

Resources

Alkane holds 144.6m shares and 70m options exercisable at A$0.035 in Calidus Resources. This is around 10.19% of Calidus on an undiluted basis. Alkane acquired its interest in Calidus at what we believe is an attractive average price of US$2.4/oz Au resource (A$3.4/oz Au), which compares to the average in-situ value of ASX-listed gold explorers of US$24/oz Au and a global average of US$16/oz Au (source: Gold stars and black holes, January 2019).

Calidus is an exploration company that has defined an initial JORC 2012-compliant mineral resource estimate of 1,248,000oz of gold at a grade of 1.83g/t Au at its Warrawoona Gold Project, located in the East Pilbara of Western Australia.

The company has made numerous discoveries of gold mineralisation along strike of its current mineral resource estimate and we believe it has the potential to prove up a significant project with further exploration. Calidus is continuing to explore alongside undertaking an initial feasibility study at the project.

Dubbo polymetallic project

The Dubbo zirconium-rare earth element-niobium-hafnium project is composed of one mining lease (1724), which covers an area of 3,456ha (Exhibit 8), within a larger exploration licence, and is focused on the Toongi deposit. The mining lease was awarded in December 2015 and is valid for an additional 21 years, and can be renewed, which should cover the project’s initial 20-year mine life. The project has all the material state and federal approvals, permits and licences in place and is construction-ready, once the finance required to move the project into production is secured.

Exhibit 8: Location of the Dubbo Project

Source: Alkane Resources – Dubbo Project: Engineering & Financials Update, 4 June 2018

Two DFSs have been completed for the project (announced in 2011 and 2013). Since then, the company has completed a number of optimisation studies and engineering reviews to improve project metrics and potential returns, culminating in the Dubbo Project: Engineering & Financials Update (announced on 4 June 2018). This study defined a pre-tax NPV8 of A$909m and a pre-tax IRR of 16.1%.

Our valuation of the Dubbo Project is based on the results of this study, which defines a two-stage development programme for the project. Stage 1 will be a 500ktpa operation due to start construction once funding is secured, which in our model we assume is secured early in FY20, as a scenario to demonstrate the potential value of the company. In reality, market conditions will dictate the pace of the development funding timetable, which is considered to be fairly fluid at present.

Following stage 1, an expansion to 1Mtpa is planned for stage 2. The two-stage development allows Alkane to build the project in a more investor-friendly way. The first stage will de-risk the project and act as a proof of concept, potentially allowing the funding for stage 2 to be secured on more favourable terms. Alkane is also examining the potential for a further expansion to 2Mtpa should demand be high enough and funding available. Once the financing is completed, construction of the project is estimated to take 27 months.

Reserves and resources

The Dubbo Project has a total a total JORC 2012-compliant mineral reserve estimate of 18.9Mt at a grade of 1.85% ZrO2, 0.04% HfO2 and 0.7% TREO (Exhibit 3). It’s JORC 2012-compliant mineral resource estimate is 75.18Mt at a grade of 1.89% ZrO2, 0.04% HfO2 and 0.74% TREO (Exhibit 9), excluding yttrium, including yttrium grade is 0.88%.

Exhibit 9: Reserves and resources for Dubbo polymetallic project

Reserve category

Tonnes (Mt)

ZrO2 (%)

HfO2 (%)

Nb2O5 (%)

Ta2O5 (%)

Y2O3 (%)

TREO (%)

Proved

18.90

1.85

0.04

0.44

0.03

0.14

0.74

Resource category

Measured

42.81

1.89

0.04

0.45

0.03

0.14

0.74

Inferred

32.37

1.90

0.04

0.44

0.03

0.14

0.74

Total

75.18

1.89

0.04

0.44

0.03

0.14

0.74

Source: Alkane Resources – Dubbo Project Resource and Reserve Statements FY17, 19 September 2017

Infrastructure

The Dubbo Project site will require a significant amount of ancillary infrastructure despite its proximity to the town of Dubbo, largely because of the massive scale of the project. The project will be able to use existing roads to transport goods to and from site, but the exiting road to the site entrance will need to be upgraded to accommodate the project's traffic.

The water required for construction and development will come from the Macquarie River and the Upper Macquarie River Alluvial Aquifer. Alkane has already obtained the required licences to extract c 2gl annually.

Natural gas is required to heat reagents within the processing plant and Alkane is in discussions with the owner of the gas distribution network in NSW to expand the existing network to the Dubbo Project site. However, as a base case, the company has assumed the required gas is trucked to site in its estimate of operating costs.

Grid-based high-voltage power will be installed at the site through a single-circuit 132kV overhead transmission line and a dual-circuit 132kV overhead transmission line to the Geurie Switching Station, around 25km away.

The Dubbo Project will use a residue storage facility made up of a series of cells that are double lined to prevent leakage. Cells can be filled, closed and rehabilitated independently of each other, providing a high standard of safety and rehabilitation.

The Dubbo Project will also require the construction of two facilities to produce two of the process plant’s main reagent consumables: sulphuric acid and limestone. Sulphuric acid will be produced in an on-site sulphur-burning plant with waste heat from the acid plant used to co-generate electricity. Limestone will initially be purchased externally, while a quarry close to Geurie can be developed.

Geology

The Toongi deposit, on which the Dubbo Project is focused, is one of several alkaline volcanic and intrusive bodies in the area that formed during the Jurassic period. Toongi is an elliptical-shaped lava flow or sub-volcanic intrusion with a strike of 850m east-west and a width of 550m, extending to a depth of around 115m below the surface (Exhibit 10).

Exhibit 10: Cross-section through the Toongi deposit

Source: Alkane Resources – Dubbo Project: Engineering & Financials Update, 4 June 2018

The orebody is dominantly fine-grained micro-porphyritic trachyte that is composed of 80% feldspar, with potassium feldspar, albite and aegirine in roughly equal amounts. The minerals of economic interest are fine grained (<100µm) and fairly evenly distributed throughout the host rock. The bulk of the ore metals occur within Na-Ca-Zr-Hf-heavy rare earth elements (HREE) silicate phase minerals (similar to eudialyte). The dominant Nb and Ta mineral is close to natroniobite in composition and bastnasite hosts the light rare earth metals. The deposit also contains low levels of uranium and thorium and is therefore a weakly radioactive ore.

Mining method

Ore will be extracted from a single open pit using conventional drill and blast operations in two c 10-year stages. The initial open pit (stage 1) will have an area of c 20ha and be excavated down to a depth of c 32m; the second stage will widen the pit to an area of 40ha.

Processing method

Alkane has been working on the processing flow sheet for the Dubbo project since 1998. The flow sheet is based on sulphuric acid and water leaching, followed by solvent extraction recovery and refining. A pilot plant has been periodically operational since 2008.

The extracted ore from the open pit first undergoes several stages of crushing and grinding before being mixed with sulphuric acid and roasted to form sulphated solids (Exhibit 11). The sulphated solids are then cooled, mixed with water and leached into a solution. The leach slurry is washed and separated into two liquors. The first contains the majority of the light rare earth elements (LREE), the second contains the zirconium, hafnium, niobium and HREE.

The liquor containing the HREE and other minerals passes through a solvent extraction circuit in several stages. The zirconium-hafnium precipitate is extracted in the first stage; some of this precipitate then passes to a hafnium-removal circuit producing zirconium and hafnium-rich products. The liquor then passes to a crude niobium-tantalum precipitate that is further refined to produce the final ferro-niobium product. The remaining liquor (mainly HREE concentrate) is combined with the LREE concentrates and pumped to a REE separation process, which produces final separated REEs as oxides.

Exhibit 11: Dubbo flow sheet

Source: Alkane Resources – Dubbo Project: Engineering & Financials Update 4 June 2018

Products

The polymetallic nature of the Toongi deposit combined with the complex processing method means Alkane can produce a variety of products to supply a variety of end users, but the products can broadly be split into four groups. Zirconium accounts for 47% of estimated life of mine (LOM) revenue, REE 33%, ferro-niobium 13% and hafnium oxide 7% (Exhibit 12).

Exhibit 12: Percentage contribution of minerals and metals to LOM revenue at Dubbo

Source: Edison Investment Research

The Dubbo Project contains 14 of the 15 REEs, but neodymium, dysprosium and praseodymium account for 84% of the LOM REE revenue (Exhibit 13).

Exhibit 13: Percentage of 'contribution to REE revenue (by REE) from the Dubbo Project

Source: Alkane Resources

The 14 products Alkane plans to produce are:

zirconium oxychloride (ZOC), which is used to make other zirconium chemicals;

zirconium basic carbonate, derived from ZOC, is used in the manufacture of zirconium salts, as well as in coating, painting, papermaking, leather softeners, cosmetics, catalysts, ceramics and as a lacquer dryer;

high-purity monoclinic zirconia powders are used in refractory materials and molten metal fillers among other things;

low-hafnium zirconium oxide used to produce zirconium metal in the nuclear industry and attracts a significant price premium over other grades containing hafnium;

yttria-stabilised zirconia powders and products are used for a range of applications and markets, including zirconia-milling media to reduce and control particle sizes;

hafnium oxychloride is used as a source of hafnium to produce other hafnium chemicals or complexes, or converted to high-purity hafnium oxide;

high-purity hafnium oxide has an increasing range of applications due to its specific ferroelectric and thermoelectric properties;

ferro-niobium, Alkane will produce crushed ingots with a composition of 65% Nb via a joint venture with Treibacher Industrie; the main market for ferro-niobium is the steel industry;

praseodymium/neodymium oxide are used in rare earth permanent magnets;

dysprosium oxide is used in conjunction with other elements in making laser materials, commercial lighting and in neutron-absorbing control rods in nuclear reactors;

terbium oxide is used as a dopant for materials that are used in solid-state devices, and as a crystal stabilizer of fuel cells which operate at elevated temperatures;

yttrium oxide is a common material used for materials science and inorganic compounds;

unseparated lanthanum and cerium concentrates used in glass, and as a catalyst for oil cracking and rubbers; and

heavy and light rare earth concentrates that contain samarium, europium, gadolinium and lutetium.

Additional information on the most economically significant minerals to be produced at Dubbo can be found in the Edison Explains section of our website:

REE

Funding

The capex for stage 1 at Dubbo is estimated to be A$808m and A$692m in stage 2, giving a total expenditure of A$1.5bn. This is a large amount for a company with a market cap of A$99m to secure. Alkane plans to raise the funds required through:

securing offtake contracts: Alkane has an agreement with Minchem for zirconium products, a JV with Treibacher Industrie for ferro-niobium, a memorandum of understanding with Siemens for a number of REE products and range of other letters of intent for zirconium products; it is continuing its discussions with other potential offtake counterparties;

the sale of an interest in the project: Alkane continues to meet with potential strategic partners;

export credit agencies (ECAs): the company continues to liaise with ECAs from potential offtake partner countries, as well as engineering, equipment supply and construction partners;

traditional debt and equity: the company appointed Sumitomo Mitsui Banking Corporation to assist with arranging the debt financing for the project; and

non-traditional funding: the company recognises that it may be necessary to look at prepaid offtake contracts, royalties, product streaming and equipment leasing.

Dubbo peer group comparison

Relative scale compared to REE peers

Compared to the deposits held by Alkane’s REE peer group, Dubbo is relatively small and low-grade based on its total rare earth oxide (TREO) content (Exhibit 14). This is because the REE content of the deposit only accounts for 33% of its estimated LOM revenue, with zirconium accounting for 47%, ferro-niobium 13% and hafnium oxide 7% (Exhibit 12). If we compare Dubbo to its REE peer group using the TREO equivalent grade, we can see that Dubbo is not only one of the three highest-grade deposits but also the largest in terms of contained TREO equivalent of the three highest-grade deposits (Exhibit 14).

Exhibit 14: Resource estimate tonnage and grade of REE projects

Source: Edison Investment Research using various technical reports

Management expects the Dubbo Project to have an LOM of 20 years based on the reserve estimate (Exhibit 15). Based on the size of the resource estimate, management believes the project could have an LOM of 75 years, which makes it the largest of its peer group.

Exhibit 15: LOM of Dubbo and REE peers based on resources

Source: Edison Investment Research using various technical reports

Strip ratio compared to REE peers

The Dubbo Project benefits from an exceptionally low strip ratio of 1:0.1 for stage 1 and 1:0.2 for stage 1 and 2 combined compared to its peer group (Exhibit 16), which is a key reason why the project’s opex is in the mid-range of its peer group (Exhibit 19). This is a result of the geometry of the mineralisation combined with a lack of over burden over much of the deposit (Exhibit 10).

Exhibit 16: Strip ratio of Dubbo and REE peers

Source: Edison Investment Research using various technical reports

REE recovery compared to REE peers

Compared to Alkane’s REE-focused peer group, the Dubbo Project appears to have a relatively low REE recovery rate (Exhibit 17) of 60%. There are two reasons for this, the first is that Alkane plan to produce finished products from Dubbo, while the majority of its peer group are likely to produce intermediate products so the recoveries of the peer group appear higher than Alkane’s. Secondly, because REEs only account for 33% of the LOM revenue of the Dubbo Project, so the recovery circuit is optimised for a higher recovery of zirconia (84.4%), which accounts for 47% of the project’s LOM revenue.

Exhibit 17: REE recovery rate of Dubbo and REE peers

Source: Edison Investment Research using various technical reports

TREO equivalent annual production compared to REE peers

During stage 1, management expects Dubbo to produce an average of 2,603t of TREO pa. This increases to 5,269t of TREO pa with the addition of stage 2. As TREO only accounts for 33% of the LOM revenue, we compared Dubbo to its REE peer group using TREO-equivalent production based on the prices assumed in our model, which averages 8,301tpa for stage 1 and 15,575tpa for stage 1 and 2 combined (Exhibit 18). On this basis, stage 1 is a moderate-scale operation whereas stage 2 is much larger. It is important to note that Alkane plans to produce finished products from Dubbo, while the majority of its peer group are likely to produce intermediate products that will receive a discount to the market price.

Exhibit 18: TREO production of Dubbo and REE peers

Source: Edison Investment Research using various technical reports. Dubbo shown as TREO equivalent.

Position on cost curve compared to REE peers

Using the Dubbo Project’s opex per TREO equivalent estimate (see above) compared to the opex per TREO of its REE peer group, the Dubbo Project lies within the middle of the cost curve for stage 1 and stage 1 and 2 combined (Exhibit 19).

Exhibit 19: Cost curve of Dubbo and REE peers

Source: Edison Investment Research using various technical reports. Dubbo shown as TREO equivalent.

Position on capital intensity curve compared to REE peers

The Dubbo Project lies within the middle of the capital intensity curve on a capex per TREO-equivalent basis for stage 1 and stage 1 and 2 combined (Exhibit 20).

Exhibit 20: Capital intensity curve of Dubbo and REE peers

Source: Edison Investment Research. Dubbo shown as TREO equivalent. Capex figures exclude contingency.

Valuation and funding assumptions

Mineral price assumptions

To value and forecast the production from the Tomingley gold mine, we used Edison’s gold price deck of US$1,263/oz Au for 2019, US$1,482/oz for 2020, US$1,437/oz for 2021 and US$1,304/oz for 2022. We use an exchange rate of US$1.39/A$.

Given the relative complexity and low transparency of the REE market and products used to value the Dubbo Project, we chose to use the average price forecasts defined in its engineering and financials update (announced 4 June 2018). We focused our model using the top eight products the company plans to produce, which account for 94.5% of the LOM revenue. The other six products we include as a factor of the major products. In addition to our base-case model we provide a detailed sensitivity analysis (Exhibit 25 and Exhibit 26), which includes price assumptions.

In the model we used flat commodity prices over the mine’s 20-year life with production starting in 2022. The prices used are US$10,000t for zirconium oxychloride (December 2018 price US$2,450/t); US$90,000/t for neodymium oxide (October 2018 price US$46,960/t); US$21,000 for low hafnium zirconia (October 2018 price US$4,700/t); US$33,350 for ferro-niobium (December 2018 price US$45,000/t); US$21,000t for yttria stabilised zirconia (October 2018 price US$10,000/t); US$325,000/t for dysprosium oxide (October 2018 price US$173,000/t); US$600,000/t for hafnium oxide (December 2018 price US$850,000/t); and US$90,000/t for praseodymium oxide (October 2018 price US$59,000/t).

The majority of the prices used in our forecast are above the current level and reflect the company’s belief in the underlying supply-demand commodity fundamentals. Although we believe the REE fundamentals are supported by developments in the electric vehicle space, the current economic slowdown in China against the backdrop of the US trade tensions may prevent REE prices from appreciating in the near term.

Updated project study assumptions

We base our forecasts and valuation of Alkane’s Tomingley project on the Tomingley Underground Development Approved update (announced on 24 September 2018) and on guidance from management. The key operational variables used in our discounted dividend model between 2019 and 2022 are outlined in Exhibit 21.

Exhibit 21: Variables used in Tomingley valuation

2019e

2020e

2021e

2022e

Gold produced (oz)

40,000

22,940

34,479

35,686

Gold sold (oz)

41,500

22,940

34,479

35,686

Revenue (US$m)

52

34

50

47

Opex (US$m)

(31)

(19)

(26)

(22)

Sustaining capex (US$m)

(15)

(8)

(7)

(2)

Source: Edison Investment Research

We base our forecasts and valuation of Alkane’s Dubbo Project on the project’s engineering and financials update (announced 4 June 2018). The key operational variables used in our discounted dividend model between 2020 and 2030 are outlined in Exhibit 22.

Exhibit 22: Key operational and price assumptions used in Dubbo valuation

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Zirconium oxychloride produced (t)

-

-

4,646

5,421

4,259

2,102

2,102

8,179

10,205

10,259

10,542

Neodymium oxide produced (t)

-

-

301

370

416

460

460

806

919

920

925

Low hafnium zirconia produced (t)

-

-

500

1,000

1,500

3,000

3,000

3,000

3,000

3,000

3,000

Ferro-niobium produced (t)

-

-

644

791

887

983

982

1,717

1,974

1,976

1,983

Yttria stabilised zirconia produced (t)

-

-

-

-

1,577

3,153

3,153

3,153

3,153

3,153

3,153

Dysprosium oxide produced (t)

-

-

40

49

55

61

61

106

121

121

122

Hafnium oxide produced (t)

-

-

33

40

45

50

50

50

50

50

50

Praseodymium oxide produced (t)

-

-

77

95

107

118

118

207

236

236

238

Zirconium oxychloride revenue (US$m)

-

-

46

54

43

21

21

82

102

103

105

Neodymium oxide revenue (US$m)

-

-

27

33

37

41

41

73

83

83

83

Low hafnium zirconia revenue (US$m)

-

-

11

21

32

63

63

63

63

63

63

Ferro-niobium revenue (US$m)

-

-

21

26

30

33

33

57

66

66

66

Yttria stabilised zirconia revenue (US$m)

-

-

-

-

33

66

66

66

66

66

66

Dysprosium oxide revenue (US$m)

-

-

13

16

18

20

20

34

39

39

40

Hafnium oxide revenue (US$m)

-

-

20

24

27

30

30

30

30

30

30

Praseodymium oxide revenue (US$m)

-

-

7

9

10

11

11

19

21

21

21

Revenue from eight major products (US$m)

-

-

145

183

229

285

285

424

470

471

475

Total revenue from all products

(US$m)

-

-

152

192

240

299

299

445

494

495

499

Opex (US$m)

-

-

(106)

(121)

(132)

(144)

(145)

(201)

(243)

(244)

(244)

Sustaining capex (US$m)

-

-

-

-

-

-

(0)

(4)

(1)

-

(0)

Development capex (US$m)

(266)

(307)

-

-

-

(246)

(246)

-

-

-

-

Source: Edison Investment Research. Note: Data for 2031 to 2041 are not displayed due to space constraints.

Capex

At Tomingley we include LOM sustaining capex of US$33m, which is largely associated with the underground mine development. The total development capex for stage 1 production at Dubbo is A$808m. We forecast A$375m will be spent in 2020 and A$433m in 2021. Stage 2 is expected to cost an additional A$692m in capex; we forecast A$346 will spent in 2025 and A$346m in 2026. Over the LOM we include sustaining capex of A$28.6m with closure costs of A$29m.

Funding

In our model we present a scenario whereby Alkane secures the funding for the Dubbo Project in the early part of FY20 (July to September 2019). However, it is important to note that the timing of funding for the Dubbo Project will be driven by market conditions and the timeline for funding should be considered to be fairly fluid at this stage.

In our funding assumptions for Dubbo, we have assumed a strategic partner acquires a 20% interest in the project for A$54.5m in FY20. This A$54.5m represents 20% of the project’s NPV of A$909m, as defined in the Dubbo Project’s engineering and financials update, which we discounted by 70% to reflect what a potential partner could pay for an interest in a project at this stage of development.

Based on our assumptions, the strategic partner’s contribution to stage 1 capex is A$161m, which is paid between FY20 and FY22. This would leave Alkane funding the balance of A$647m. We estimate that Alkane will finish FY19 with a net cash position of A$66.4m and generate an average EBITDA pa of A$42m from Tomingley during FY20-22. Some of this will be used to fund ongoing exploration costs and the sustaining capex at Tomingley and other requirements, but the rest can be used toward the development of Dubbo. We have estimated the remaining A$535m is funded through 60% debt (A$325m) and 40% equity (net of fees A$210m, A$221m gross). We assume an interest rate of 10% for the debt and assume the equity (1.1bn shares) is issued at the current share price of A$0.20, although based on discussions with management we note that they would not consider issuing shares at the current share price and would be seeking a higher price for any equity component to the Dubbo Project finance.

Valuation

Alkane trades on an EV per attributable contained ounce of gold in the resource estimate of US$28/oz (100% interest in Tomingley and 10.2% interest in Calidus), which compares to an average in-situ value of ASX-listed gold explorers of US$24/oz and a global average of US$16/oz (see Gold stars and black holes) but does not take into account the Dubbo Project’s value.

Alkane trades on an EV per attributable tonne of TREO of £21/t for Dubbo not including zirconium, ferro-niobium or hafnium, including these as a TREO equivalent it trades on an EV multiple of £7.5/t. This compares to an average of £205.8/t for its REE peer group, although the range is very broad at £1.4/t to £1,104/t (Exhibit 23). Hastings Technology Metals is perhaps Alkane’s closest peer in terms of jurisdiction, development stage and size of contained TREO; it trades at an EV per attributable tonne of TREO of £256.9/t.

Exhibit 23: REE peer group comparison

Total mineral resource estimate

Company

EV (£m)

Project

Stage

Location

Ownership (%)

Tonnage (Mt)

TREO grade (%)

Contained TREO tonnage (t)

Attributable TREO tonnage (t)

EV/attributable TREO tonnage (£/t)

Peak Resources

20.5

Ngualla

BFS

Tanzania

75

214

2.2

4,609,600

3,457,200

5.9

Arafura Resources

14.6

Nolans

DFS

Australia

100

56

2.6

1,456,000

1,456,000

10.0

Greenland Minerals

15.4

Kvanefjeld

FS

Greenland

100

1,010

1.1

11,110,000

11,110,000

1.4

Hastings Technology Metals

52.8

Yangibana

DFS

Australia

94

10

1.2

126,209

118,643

256.9

Brockman

Resource

Australia

100

41

0.2

86,940

86,940

Mkango Resources

5.9

Songwe Hill

PFS

Malawi

51

49

1.4

661,850

337,544

17.5

Texas Mineral Resources Corp

9.1

Round Top

PEA

US

100

806

0.1

525,436

525,436

17.3

Rare Element Resources

7.5

Bear Lodge

PFS

US

100

45

2.7

1,242,000

1,242,000

6.0

Northern Minerals

47.6

Browns Range

DFS

Australia

100

9

0.6

56,663.0

56,663

840.2

Ucore Rare Metals

21.0

Bokan

Resource

US

100

3

0.6

19,034

19,034

1,104.2

Avalon Advanced Materials

8.7

Nechalacho

FS

Canada

100

305

1.4

4,147,699

4,147,699

2.1

Commerce Resources

10.5

Ashram

PEA

Canada

100

249

1.9

4,686,113

4,686,113

2.2

Average

Average

205.8

Alkane Resources

13.9

Dubbo

BFS

Australia

100

75

0.9

661,584

661,584

21.0

TREO equivalent

2.5

1,845,228.5

1,845,228.5

7.5

Source: Edison Investment Research

We value Alkane Resources’ projects using discounted dividend analysis and include the current market valuation of its holding in Calidus Resources. We value the Tomingley project at A$0.26/share on a fully diluted basis, including the company’s end-December cash position of A$73.7m. We use a discount rate of 10% and assume cost of debt of 10%. Alkane’s interest in Calidus Resources adds another A$0.01/share.

Assuming Alkane can secure the development funding for Dubbo in H119 and that the prices of zirconium, TREO, ferro-niobium all improve to the level expected by the company over the next three years, our valuation would increase by A$0.17/share to A$0.44/share on a fully diluted basis. This would imply an upside of 121% to the current share price (Exhibit 24).

Exhibit 24: Alkane Resources valuation summary

 

(A$/share)

Dividend discount valuation of Tomingley project

0.26

Dividend discount valuation of Dubbo Project

0.18

Market valuation of investment in Calidus Resources

0.01

Total valuation of Alkane Resources

0.44

Current share price

0.20

Upside/(downside) (%)

120.8

 

Dividend discount valuation of Tomingley project

Dividend discount valuation of Dubbo Project

Market valuation of investment in Calidus Resources

Total valuation of Alkane Resources

Current share price

Upside/(downside) (%)

(A$/share)

0.26

0.18

0.01

0.44

0.20

120.8

Source: Edison Investment Research

Valuation sensitivities

We stress-tested our valuation of Alkane Resources for variations of ±10% and ±20% for capex, opex, price of shares issued for the purpose of the modelled equity raise, interest rate on debt and metals prices (Exhibit 25 and Exhibit 26). The biggest influences on our valuation of Alkane are metal and mineral prices and the share price used in our assumptions (Exhibit 25 and Exhibit 26). Changes in opex have a moderate impact on our valuation, whereas changes in capex and potential interest rates on debt have a relatively minor effect.

A 20% reduction in metal and mineral prices results in a total valuation of Alkane of A$0.12 per share, which is below its current share price, A$0.20. Downside changes in all the other variables ranged between A$0.29 and A$0.42 per share, well above Alkane’s current share price. Upside changes in all variables ranged between A$0.73 and A$0.43 per share, demonstrating potential improvements to our valuation (Exhibit 25 and Exhibit 26).

Exhibit 25: Changes in valuation caused by changes in each key variable

Source: Edison Investment Research

Exhibit 26: Changes in valuation (A$) caused by changes in each key variable

Variable

Capex

Opex

Share price for equity funding

Interest rate on debt

Metal/mineral price

20%

0.36

0.29

0.47

0.42

0.73

10%

0.39

0.36

0.45

0.42

0.58

Base case

0.44

0.44

0.44

0.44

0.44

-10%

0.47

0.50

0.41

0.43

0.28

-20%

0.50

0.58

0.38

0.44

0.12

Source: Edison Investment Research

Financials

Near-term production and expectations

In H1 FY19, gold production totalled 26,745oz at an AISC of A$1,005/oz Au, while gold sales totalled 30,497oz Au, generating revenue of A$52.4m at an average sales price of A$1,717/oz Au. At the end of Q2 FY19, the company had a net cash position of A$73.7m.

In FY19, we forecast that Alkane will produce 40,000oz Au, down 49% y-o-y from 78,533oz Au in FY18. We forecast an AISC of c A$1,150/oz Au, up 15%y-o-y, compared with an AISC of A$1,002/oz Au in FY18. In FY19 we forecast gold sales of 41,500oz, down 45% y-o-y from 75,507oz in FY18, generating revenue of A$73.9m, down 43% y-o-y from A$130m in FY18 with EBITDA of A$21.2m, down 69% from A$68.6m in FY18. Our forecast average sales price per ounce of gold is A$1,756/oz Au, up 3% from A$1,706/oz Au in FY18.The reduction in gold production, revenue and EBITDA is driven by transitioning from open pit to underground operations.

Longer-term forecasts

Assuming Alkane secures the required funding early in FY20, we forecast that stage 1 production at Dubbo will start in FY22 and continue to FY26, with the mine producing an average per year of 3,706t of zirconium oxychloride; 402t of neodymium oxide; 1,800t of low hafnium zircon; 857t of ferro-niobium; 1,577t of yttria stabilised zirconia; 53t of dysprosium oxide; 44t of hafnium oxide; and 103t of praseodymium oxide (Exhibit 27).

Stage 2 production at Dubbo will commence in FY27 and continue to FY41, with the mine producing an average per year of: 10,167t of zirconium oxychloride; 914t of neodymium oxide; 3,000t of low hafnium zircon; 1,958t of ferro-niobium; 3,153t of yttria stabilised zirconia; 120t of dysprosium oxide; 50t of hafnium oxide; and 235t of praseodymium oxide (Exhibit 27).

Exhibit 27: Alkane Resources’ forecast production data

Source: Edison Investment Research

We forecast that Tomingley will generate average revenue of US$45m per year between FY19 and FY22 when the mine is due to close, though exploration success could extend this (Exhibit 28). We forecast that during stage 1 at Dubbo, it will generate an average revenue per year of US$237m. In terms of average revenue per product per year we forecast US$37m from zirconium oxychloride; US$36m from neodymium oxide; US$38m from low-hafnium zircon; US$29m from ferro-niobium; US$33m from yttria stabilised zirconia; US$17m from dysprosium oxide; US$26m from hafnium oxide; and US$9m from praseodymium oxide (Exhibit 28).

During stage 1 at Dubbo, we forecast the mine will generate an average revenue per year of US$492m. In terms of average revenue per product per year we forecast US$102m from zirconium oxychloride; US$82m from neodymium oxide; US$63m from low-hafnium zircon; US$65m from ferro-niobium; US$66m from yttria stabilised zirconia; US$39m from dysprosium oxide; US$30m from hafnium oxide; and US$21m from praseodymium oxide (Exhibit 28).

Exhibit 28: Alkane Resources forecasts revenue per product

Source: Edison Investment Research

Between FY19 and FY21, we forecast that Alkane will generate an average EBITDA per year of A$30m while the Tomingley mine is operational (Exhibit 29). This increases during the ramp up of production at Dubbo to A$66m in FY22 and FY23, which is the final year of production from Tomingley. Between FY24 and FY27 we expect Alkane to generate an average EBITDA per year of A$192m during stage 1 production at Dubbo (Exhibit 29). This increases during stage 2 production, between FY27 and FY41, to an average EBITDA per year of A$336m (Exhibit 29).

Exhibit 29: Alkane Resources forecast EBITDA per year

Source: Edison Investment Research

Net cash

Alkane had net cash of A$72m at 30 June 2018 and A$73.7m at 30 December 2018. We forecast that the company will have a net cash position of A$66.5m at 30 June 2019.

Exhibit 30: 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

73,904.4

47,935.9

69,860.3

172,877.6

Cost of Sales

(57,073.0)

(51,304.0)

(43,686.7)

(26,739.4)

(36,730.4)

(104,916.4)

Gross Profit

60,719.0

78,670.0

30,217.7

21,196.5

33,130.0

67,961.1

EBITDA

 

 

49,333.0

68,578.0

20,717.7

11,506.5

23,246.2

57,879.7

Normalised operating profit

 

 

7,607.0

32,107.0

13,464.5

4,071.6

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

13,464.5

4,071.6

0.0

0.0

Net Interest

(1,035.0)

(603.0)

798.1

(2,336.4)

(24,199.7)

(32,122.5)

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

(1,200.0)

33,912.8

0.0

Profit before tax (norm)

 

 

6,572.0

31,504.0

14,262.6

1,735.2

(24,199.7)

(32,122.5)

Profit before tax (reported)

 

 

(33,568.0)

31,316.0

14,262.6

535.2

9,713.1

(32,122.5)

Reported tax

4,631.0

(6,845.0)

(3,390.7)

(8,912.0)

0.0

0.0

Profit after tax (norm)

11,203.0

24,659.0

10,872.0

(7,176.8)

(24,199.7)

(32,122.5)

Profit after tax (reported)

(28,937.0)

24,471.0

10,872.0

(8,376.8)

9,713.1

(32,122.5)

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

10,872.0

(7,176.8)

(24,199.7)

(32,122.5)

Net income (reported)

(28,937.0)

24,471.0

10,872.0

(8,376.8)

9,713.1

(32,122.5)

Basic average number of shares outstanding (m)

503

506

506

550

853

1,366

EPS – basic normalised ($)

 

 

0.02

0.05

0.02

(0.01)

(0.03)

(0.02)

EPS – diluted normalised ($)

 

 

0.02

0.05

0.02

(0.01)

(0.03)

(0.02)

EPS – basic reported ($)

 

 

(0.06)

0.05

0.02

(0.02)

0.01

(0.02)

Dividend ($)

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

10.3

(43.1)

(35.1)

45.7

147.5

Gross margin (%)

51.5

60.5

40.9

44.2

47.4

39.3

EBITDA margin (%)

41.9

52.8

28.0

24.0

33.3

33.5

Normalised operating margin (%)

6.5

24.7

18.2

8.5

0.0

0.0

BALANCE SHEET

Fixed assets

 

 

148,474.0

138,275.0

156,450.1

339,396.7

740,365.7

911,927.7

Intangible assets

83,107.0

93,136.0

103,136.0

94,508.8

104,508.8

114,508.8

Tangible assets

60,627.0

36,266.0

39,674.5

230,748.3

621,217.3

782,779.3

Investments & other

4,740.0

8,873.0

13,639.6

14,139.6

14,639.6

14,639.6

Current assets

 

 

54,276.0

93,306.0

75,417.6

18,034.6

27,544.4

26,234.6

Stocks

9,644.0

19,153.0

2,834.7

1,838.6

2,679.6

6,630.9

Debtors

2,445.0

2,030.0

6,074.3

3,939.9

5,741.9

14,209.1

Cash & cash equivalents

41,969.0

72,003.0

66,508.6

11,636.1

18,002.8

3,774.5

Other

218.0

120.0

0.0

620.0

1,120.0

1,620.0

Current liabilities

 

 

(19,335.0)

(27,430.0)

(18,272.8)

(23,386.5)

(36,386.5)

(45,703.2)

Creditors

(11,166.0)

(9,299.0)

(3,590.7)

(2,197.8)

(3,018.9)

(8,623.3)

Tax and social security

0.0

(6,929.0)

(1,672.1)

(4,395.0)

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)

(13,010.0)

(16,793.8)

(33,367.6)

(37,079.9)

Long-term liabilities

 

 

18,488.0

13,647.0

13,647.0

(21,353.0)

(246,353.0)

(311,353.0)

Long-term borrowings

0.0

0.0

0.0

(35,000.0)

(260,000.0)

(325,000.0)

Other long-term liabilities

18,488.0

13,647.0

13,647.0

13,647.0

13,647.0

13,647.0

Net assets

 

 

201,903.0

217,798.0

227,242.0

312,691.8

485,170.5

581,106.1

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

201,903.0

217,798.0

227,242.0

312,691.8

485,170.5

581,106.1

CASH FLOW

Operating cash flow before WC and tax

49,333.0

68,578.0

20,717.7

11,506.5

23,246.2

57,879.7

Working capital

5,518.0

(9,498.0)

6,565.7

1,737.5

(1,821.8)

(6,814.2)

Exceptional & other

672.0

2,823.0

500.0

500.0

500.0

500.0

Tax

0.0

(6,845.0)

(8,647.6)

(6,189.1)

(4,395.0)

0.0

Net operating cash flow

 

 

55,523.0

55,058.0

19,135.8

7,554.9

17,529.4

51,565.5

Capex

(33,551.0)

(9,224.0)

(10,661.7)

(199,008.7)

(414,215.1)

(219,941.7)

Acquisitions/disposals

53.0

0.0

0.0

54,540.0

0.0

0.0

Net interest

(1,035.0)

(603.0)

798.1

0.0

(2,336.4)

(24,199.7)

Equity financing

3,471.0

(5.0)

0.0

20,000.0

110,000.0

80,000.0

Exploration and Evaluation

(10,154.0)

(10,969.0)

(10,000.0)

(10,000.0)

(10,000.0)

(10,000.0)

Other

2,963.0

(4,317.0)

(4,766.6)

37,041.3

80,388.9

43,347.6

Net cash flow

17,270.0

29,940.0

(5,494.4)

(89,872.5)

(218,633.2)

(79,228.3)

Opening net debt/(cash)

 

 

(24,455.0)

(41,969.0)

(72,003.0)

(66,508.6)

23,363.9

241,997.2

FX

0.0

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

244.0

94.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(41,969.0)

(72,003.0)

(66,508.6)

23,363.9

241,997.2

321,225.5

Source: Edison Investment Research

Contact details

Revenue by geography

89 Burswood Road
Burswood
WA 6100
Australia
61 8 9227 5677
www.alkane.com.au

N/A

Contact details

89 Burswood Road
Burswood
WA 6100
Australia
61 8 9227 5677
www.alkane.com.au

Revenue by geography

N/A

Management team

Non-executive chairman: Ian Jeffrey Gandel

Managing director: Nic Earner

Mr Gandel is a successful businessman with extensive experience in retail management and retail property. Mr Gandel has been an investor in the mining sector for 25 years and is a substantial shareholder in a number of publicly listed Australian companies.

Mr Earner is a chemical engineer with 21 years’ experience in technical and operational optimisation and management. He has held a number of executive roles in mining and processing.

Technical director: David Ian Chalmers

Non-executive director: Anthony Dean Lethlean

Mr Chalmers is a geologist who has worked in the mining and exploration industry for over 40 years. He has experience in all facets of exploration and mining through feasibility, development and production.

Mr Lethlean is a geologist with over 10 years’ mining experience. He has also worked as a resources analyst with various stockbrokers and investment banks. He was a founding director of Helmsec Global Capital, which seeded, listed and funded a number of companies in a range of commodities.

Non-executive director: Gavin Smith

Mr Smith is an accomplished senior executive and non-executive director within multinational business environments. He has more than 35 years’ experience in information technology, business development, and general management in a wide range of industries and sectors.

Management team

Non-executive chairman: Ian Jeffrey Gandel

Mr Gandel is a successful businessman with extensive experience in retail management and retail property. Mr Gandel has been an investor in the mining sector for 25 years and is a substantial shareholder in a number of publicly listed Australian companies.

Managing director: Nic Earner

Mr Earner is a chemical engineer with 21 years’ experience in technical and operational optimisation and management. He has held a number of executive roles in mining and processing.

Technical director: David Ian Chalmers

Mr Chalmers is a geologist who has worked in the mining and exploration industry for over 40 years. He has experience in all facets of exploration and mining through feasibility, development and production.

Non-executive director: Anthony Dean Lethlean

Mr Lethlean is a geologist with over 10 years’ mining experience. He has also worked as a resources analyst with various stockbrokers and investment banks. He was a founding director of Helmsec Global Capital, which seeded, listed and funded a number of companies in a range of commodities.

Principal shareholders

(%)

Ian Gandel

22.0

Companies named in this report

Peak Resources (PEK:AU); Arafura Resources (ARU:AU); Greenland Minerals (GGG:AU); Hastings Technology Metals (HAS:AU); Mkango Resources (MKA.CN); Texas Mineral Resources Corp (TMRC:US); Rare Element Resources (REEMF:US); Northern Minerals (NTU:AU); Ucore Rare Metals (UCU:CN); Avalon Rare Metals (AVLNF:US); Commerce Resources (CCE:CN); Calidus Resources (CAI:AU).


General disclaimer and copyright

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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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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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

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Frankfurt +49 (0)69 78 8076 960

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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