Forecast and valuation upgraded

Alkane Resources 2 May 2019 Update
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Alkane Resources

Forecast and valuation upgraded

Q319 results

Metals & mining

2 May 2019

Price

A$0.24

Market cap

A$119m

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

(17.5)

9.3

(16.1)

Rel (local)

(19.7)

0.3

(20.8)

52-week high/low

A$0.31

A$0.19

Business description

Alkane Resources 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

Q319 was a strong quarter for Alkane Resources, with gold production from the stockpile at Tomingley Gold Mine above expectations. As a result, we have increased forecast gold production for FY19 to 44,000oz from 40,000oz and increased gold sold to 48,800oz from 41,500oz. We have also decreased our forecast all-in sustaining cost to A$1,059/oz Au from A$1,108/oz Au.

Year end

Revenue (A$m)

PBT*
(A$m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

06/17

117.8

6.6

0.02

0.00

12.0

N/A

06/18

130.0

31.5

0.05

0.00

4.8

N/A

06/19e

85.1

23.5

0.03

0.00

8.0

N/A

06/20e

57.3

10.6

(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.

Higher-grade stockpile leads to forecast upgrade

As part of Alkane’s transition from open pit mining to underground mining, it is treating the mid-grade stockpile at Tomingley before transitioning to the low-grade stockpile for the rest of the financial year. During Q319, 10,669oz of gold were produced, with 10,791oz sold, at an all-in sustaining cost (AISC) of A$956/oz. The higher than expected level of production led management to increase guidance to 42,000–47,000oz for the financial year from 35,000–40,000oz (announced on 30 January 2019). Management also advised it has decreased guidance for AISC to A$950–1,100/oz from A$1,050–1,150/oz.

Improved metrics result in EBITDA forecast upgrade

Our revenue forecast for FY19 has increased to A$85.1m from A$73.9m, with our cost of sales forecast increasing to A$45.7m from A$43.7m. As a result, our EBITDA forecast increases to A$29.9m from A$20.7m and PBT increases to A$23.5m from A$14.3m.

Increased stake in Calidus Resources

Alkane Resources has invested an additional A$2.16m in ASX-listed gold junior, Calidus Resources, increasing its holding in the company to 15.2% from 10.19%. Calidus is currently completing a pre-feasibility study (PFS) at its 1.25Moz Warrawoona Gold Project, located in the Pilbara Region of Western Australia.

Valuation: Increased on Tomingley improvements

Alkane’s increased interest in Calidus Resources and updates to the potential cash flow from the Tomingley Gold Mine increase our valuation of these components to A$0.30/share from A$0.27/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$0.47/share from A$0.44/share.

Strong Q319 leads to FY19 forecast upgrade

Q319 was stronger than anticipated for Alkane Resources, due to the mid-grade stockpile being higher-grade than expected. As a result we have upgraded our forecast for the year compared to our previous update note and our initiation note.

Financials

Year-on-year comparison (nine months)

Revenue for 9M18 totalled $72.2m, down 24.5% from A$95.6m in 9M18, despite a 3.1% increase in the realised gold price to A$1,749/oz in 9M19 from A$1,696/oz. The decline in revenue was driven by the move to underground mining, which reduced gold production by 37.0% to 37,414oz in 9M19 compared to 59,398oz in 9M18, with gold sales reduced by 26.7% to 41,288oz in 9M19 compared to 56,344oz in 9M18. AISC declined 0.6% during 9M19 to A$991/oz Au from A$997/oz Au in 9M18. Net cash increased to A$72.4m at the end of Q319, up 19.5% from A$60.6m at the end of Q318.

Quarter-on-quarter comparison

Q3 revenue totalled $19.9m, down 51.3% from A$40.9m in Q219, despite a 7.3% increase in the realised gold price to A$1,841/oz from A$1,716/oz. The substantial reduction in quarter-on-quarter revenue was driven by the reduction in gold inventory in Q219. Gold production was slightly down, by 4.0% to 10,669oz during Q319, from 11,111oz in Q219, while gold sales were 54.7% down to 10,791oz in Q319 from 23,841oz in Q219. AISC declined 9.0% during Q319 to A$956/oz Au from A$1,051/oz Au in Q219. Net cash decreased 1.7% to A$72.4m in Q319 from A$73.7m in Q219.

Changes to our forecasts

Operational changes: gold production forecasts for FY19 increase to 44,000oz of gold from 40,000oz. Forecast gold sales increase to 48,800oz Au from our prior 41,500oz Au. Forecast AISC has been reduced to A$1,059/oz Au from A$1,108/oz Au.

Income statement changes: revenue for FY19 increases to A$85.1m from A$73.9m, with cost of sales increasing to A$45.7m from A$43.7m. As a result, EBITDA increases to A$29.9m from A$20.7m and PBT to A$23.5m from A$14.3m.

Cash flow statement changes: our estimated operating cash flow for FY19 has increased to A$26.4m from A$19.9m, with cash used in investing activities increasing to A$30.2m from A$25.4m, largely due to increased forecast exploration expense for FY19 to A$12.8m from A$10m and the increased investment in Calidus to A$6.5m from A$4.3m. As a result, we estimate net cash at end FY19 of A$68.3m (previouslyA$66.5m), down c 5% from A$72.0m at end FY18.

Valuation

The total effect of all the updates to our forecasts is an increase in our valuation of the Tomingley Gold Mine to A$0.30/share, with our valuation of Alkane’s 15.2% holding in Calidus Resources largely unchanged at A$0.012/share, from A$0.008/share. Our valuation of the Dubbo Project has not changed and, assuming Alkane secures initial development funding for Dubbo in Q419 (financial year) and the prices of metals improve to the level the company expects over the next three years, our valuation could increase to A$0.47/share, previously A$0.44/share.

Exhibit 1: 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

85,130.1

57,266.8

75,445.5

174,103.7

Cost of Sales

(57,073.0)

(51,304.0)

(45,724.0)

(26,549.7)

(36,469.9)

(104,172.4)

Gross Profit

60,719.0

78,670.0

39,406.1

30,717.0

38,975.6

69,931.3

EBITDA

 

 

49,333.0

68,578.0

29,906.1

21,027.0

29,091.8

59,849.8

Normalised operating profit

 

 

7,607.0

32,107.0

22,652.9

13,651.8

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

22,652.9

13,651.8

0.0

0.0

Net Interest

(1,035.0)

(603.0)

819.2

(3,021.0)

(25,190.1)

(32,841.1)

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

23,472.1

10,630.7

(25,190.1)

(32,841.1)

Profit before tax (reported)

 

 

(33,568.0)

31,316.0

23,472.1

10,630.7

8,166.5

(32,841.1)

Reported tax

4,631.0

(6,845.0)

(5,993.0)

(10,996.8)

0.0

0.0

Profit after tax (norm)

11,203.0

24,659.0

17,479.1

(366.1)

(25,190.1)

(32,841.1)

Profit after tax (reported)

(28,937.0)

24,471.0

17,479.1

10,630.7

8,166.5

(32,841.1)

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

17,479.1

(366.1)

(25,190.1)

(32,841.1)

Net income (reported)

(28,937.0)

24,471.0

17,479.1

10,630.7

8,166.5

(32,841.1)

Basic average number of shares outstanding (m)

503

506

506

524

733

1,135

EPS – basic normalised ($)

 

 

0.02

0.05

0.03

(0.00)

(0.03)

(0.03)

EPS – diluted normalised ($)

 

 

0.02

0.05

0.03

(0.00)

(0.03)

(0.03)

EPS – basic reported ($)

 

 

(0.06)

0.05

0.03

0.02

0.01

(0.03)

Dividend ($)

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

10.3

(-34.5)

(-32.7)

31.7

130.8

Gross margin (%)

51.5

60.5

46.3

53.6

51.7

40.2

EBITDA margin (%)

41.9

52.8

35.1

36.7

38.6

34.4

Normalised operating margin (%)

6.5

24.7

26.6

23.8

0.0

0.0

BALANCE SHEET

Fixed assets

 

 

148,474.0

138,275.0

160,684.1

344,778.9

736,464.5

904,496.5

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

39,376.3

229,098.3

610,783.9

768,815.9

Investments & other

4,740.0

8,873.0

15,390.8

15,390.8

15,390.8

15,390.8

Current assets

 

 

54,276.0

93,306.0

83,024.0

12,313.2

18,314.0

24,196.8

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

68,265.0

4,789.8

8,099.2

1,588.9

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)

(17,025.3)

(34,586.6)

(47,802.2)

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)

(5,423.1)

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)

(9,420.0)

(31,589.1)

(39,240.1)

Long-term liabilities

 

 

18,488.0

13,647.0

17,215.0

(17,785.0)

(242,785.0)

(312,785.0)

Long-term borrowings

0.0

0.0

0.0

(35,000.0)

(260,000.0)

(330,000.0)

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

239,340.1

322,281.8

477,406.9

568,106.0

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

201,903.0

217,798.0

239,340.1

322,281.8

477,406.9

568,106.0

CASH FLOW

Operating cash flow before WC and tax

49,333.0

68,578.0

29,906.1

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)

(5,993.0)

(12,502.7)

(5,423.1)

0.0

Net operating cash flow

 

 

55,523.0

55,058.0

25,196.1

10,807.1

22,792.7

54,021.4

Capex

(33,551.0)

(9,224.0)

(10,363.5)

(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)

819.2

0.0

(3,021.0)

(25,190.1)

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)

(7,017.8)

36,775.0

79,815.2

43,040.2

Net cash flow

17,270.0

29,940.0

(4,147.0)

(98,475.2)

(221,690.6)

(76,510.3)

Opening net debt/(cash)

 

 

(24,455.0)

(41,969.0)

(72,003.0)

(68,265.0)

30,210.2

251,900.8

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)

(68,265.0)

30,210.2

251,900.8

328,411.1

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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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.

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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.

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United Kingdom

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United States of America

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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

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