Reborn

Alkane Resources 3 September 2020 Update
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Alkane Resources

Reborn

Demerger update

Metals & mining

3 September 2020

Price

A$1.14

Market cap

A$679m

A$1.3890/US$

Net cash (A$m) at 30 June 2020*

41.7

*Pro-forma post-demerger

Shares in issue

595.2m

Free float

78%

Code

ALK

Primary exchange

ASX

Secondary exchange

OTC QX

Share price performance

%

1m

3m

12m

Abs

(17.2)

24.1

173.7

Rel (local)

(19.1)

15.8

184.8

52-week high/low

A$1.3

A$0.4

Business description

Alkane Resources is an Australian production and development company. It previously produced 70,000oz of gold per year from the open-pit operations at its Tomingley gold mine, but is now transitioning to underground operations and expects to produce around 47,500oz in FY21.

Next events

Q121 activities & cash-flow reports

October 2020

Updated resources

October 2020

Updated mine plans

October 2020

Annual general meeting

November 2020

Analyst

Charles Gibson

+44 (0)20 3077 5724

Alkane Resources is a research client of Edison Investment Research Limited

On 30 July, Alkane achieved its goal of demerging Australian Strategic Materials (ASM) in order to become a purely gold-focused miner. Since then, it has announced FY20 results, including an updated reserve & resource statement and the results of additional drilling at Boda, which continue to be consistent (in our opinion) with its hosting a multi-million-ounce gold resource. This note updates our financial forecasts and valuation in the aftermath of the ASM demerger in particular and also the material (12.0%) strengthening of the Australian dollar vs the US dollar.

Year end

Revenue (A$m)

PBT*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/19

94.0

25.4

4.57

0.00

24.9

N/A

06/20

72.5

20.6

2.56

0.00

44.5

N/A

06/21e

105.7

23.5

2.96

0.00

38.5

N/A

06/22e

126.5

27.5

3.46

0.00

32.9

N/A

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

ASM (Dubbo) demerger dividend

The in specie distribution of ASM shares (incorporating the Dubbo rare earths project) to Alkane shareholders was completed on 28 July, in the ratio of one ASM share per five ALK shares. All other requirements having been met, ASM’s first day of trading was Thursday 30 July. Taken together, the combined value of ‘new’ Alkane and ASM shares on 30 July implied the crystallisation of an immediate 29.5c ASM demerger dividend for Alkane shareholders (note: the gold price fell US$14/oz that day) – a number that, if anything, has only increased subsequently as ASM’s fundamental value has increasingly been reflected in its rising share price.

Reserves expanded and extending

In its updated FY20 reserve and resources statement, Alkane revealed a 1.6Mt increase in reserves at Tomingley (notwithstanding depletion), which is sufficient to increase its life to three years from the end of FY20 (even at higher production rates), with resources potentially able to support production for an additional 6.4 years thereafter. We estimate that Roswell and San Antonio could potentially add another 15 years to the life of operations and should add circa another nine years. NB Updated resource statements for Roswell and San Antonio (including resources in the indicated category) are anticipated in October, as are updated mine plans.

Valuation: 55c confirmed plus up to 70c contingent

Even against the headwind provided by the Australian dollar, our updated valuation of Alkane nevertheless confirms a value of 21c/share on its Tomingley asset plus cash (cf 25c previously, but with A$20m having been demerged with ASM). To this should then be added a further 29c for Alkane’s investments in Calidus and Genesis and at least 5c for its maiden Roswell and San Antonio resources. To this total of 55c can then be added up to a further 70c in value from contingent assets (especially Boda), the final valuation for which will depend on additional, future exploration success (see Exhibit 15).

Recent developments

Since our last note on the company (007 strikes it rich, 23 April), Alkane has announced a number of developments:

The demerger of the Dubbo project into Australian Strategic Materials (effective July 2020).

Quarterly and FY20 results.

A reserves and resources update.

Additional drilling results at its Boda prospect within the Northern Molong Porphyry Project.

In our last note, of the combined entity, we placed a value of up to 170c on Alkane’s shares, comprising 25c/share for Tomingley plus cash and 52c for Dubbo. To this was added 14c for its investments in Calidus, Genesis and Ziron Tech (see our note Genesis of a golden opportunity, published on 24 September 2019) and at least 6c for its maiden Roswell and San Antonio resources. To this total of 97c could then be added up to a further 73c in value from contingent assets, the final valuation for which would depend on future exploration success (see Exhibit 15). Among other things, this note updates our valuation of Alkane in the wake of the Dubbo/ASM demerger.

ASM (Dubbo rare earths project) demerger

The in specie distribution and transfer of Australian Strategic Materials (ASX: ASM) shares to ‘Alkane Eligible Shareholders’ and the ‘Sale Agent’ was completed on 28 July, in line with the timetable detailed in the Demerger Booklet released to the ASX on 17 June 2020. In keeping with Alkane’s then 595.2m shares in issue at the time of the demerger, the total number of ASM shares issued was 119.0m – consistent with the stated five for one demerger ratio. All other requirements for listing having been met, ASM’s first day of trading was Thursday 30 July.

A brief summary of the trading levels of each company in the immediate aftermath of the demerger is as follows:

Exhibit 1: ASM demerger dividend

Date

ALK share price
(A$/share)

ASM share price
(A$/share)

Implied pre-demerger Alkane value
(A$/share)

Wednesday 29 July

1.190

N/A

1.190

Thursday 30 July

1.205

1.400

1.485

Thursday 3 September*

1.140

2.210

1.582

Source: Edison Investment Research, Bloomberg. Note: *The date of writing.

Note that ASM’s share hit a recent (closing) high of A$2.48/share on 24 August.

Tomingley

FY20 results and FY21 guidance

On 25 August, Alkane announced its results to 30 June. While this was prior to the demerger, Alkane re-formatted its accounts to reflect AMS as a ‘group classified as held for distribution to owners’, with the main body of the accounts thereby being left to reflect Alkane’s gold operations and activities alone. Together with the pro-forma information provided in the Demerger Booklet, published on 17 June, Edison has endeavoured as much as possible to present both the past operating performance of Alkane, together with its future financial forecasts on the basis of its gold operations only.

After having upgraded its guidance after a better than expected output in Q120, since Q220 Alkane left its annual gold production forecast for FY20 unchanged at 30–35koz at an all-in sustaining cost (AISC) of A$1,250–1,400/oz. In the event, it produced 33,507oz in FY20 at an AISC of A$1,357/oz, notwithstanding the need to pause processing in December in order to accommodate an extended maintenance shutdown before restarting in mid-February. Perhaps more significantly, the first underground stope material was processed during the period, with both grade and metallurgical recoveries performing as expected, while underground development progressed to schedule.

Alkane has now provided production guidance for FY21 of 45–50koz gold at an AISC of A$1,450–1,600/oz, which we calculate is consistent with the following operating parameters over the course of the year and forms the basis of our updated forecasts in Exhibits 3 and 16.

Exhibit 2: Tomingley quarterly operating results, Q120–Q421e

Q120

Q220

Q320

Q420

FY20

Q121e

Q221e

Q321e

Q421e

FY21e

Ore milled (t)

289,282

231,493

113,699

204,269

838,743

227,203

227,203

227,203

227,203

908,813

Head grade (g/t)

0.96

1.21

1.83

2.20

1.45

1.86

1.86

1.86

1.86

1.86

Contained gold (g/t)

8,929

9,006

6,690

14,448

39,072

13,587

13,587

13,587

13,587

54,348

Recovery (%)

87.4

88.3

85.6

89.3

88.1

87.4

87.4

87.4

87.4

87.4

Gold poured (oz)

7,497

6,929

5,723

13,358

33,507

11,875

11,875

11,875

11,875

47,500

Gold sold (oz)

6,997

9,143

3,864

12,992

32,995

11,875

11,875

11,875

11,875

47,500

Gold price (US$/oz)

1,474

1,483

1,581

1,713

1,563

1,906

1,919

1,749

1,749

1,831

Forex (A$/US$)

1.4593

1.4627

1.5282

1.5226

1.4932

1.4025

1.3890

1.3890

1.3890

1.3924

Average realised price (A$/oz)

2,151

2,084

2,126

2,327

2,199

2,674

2,665

2,429

2,429

2,549

C1 site cash costs (A$/oz)

1,000

1,024

995

981

997

1,268

1,268

1,268

1,268

1,268

AISC (A$/oz)

1,268

1,441

1,346

1,368

1,357

1,590

1,595

1,588

1,595

1,592

Source: Alkane Resources, Edison Investment Research. Note: Forecast average realised gold price in Q1–Q420 excludes forward sales over 17,770oz at an average price of A$1,836/oz.

Among other things, readers should note Edison’s short-term gold price forecast in Q121 and Q221 and our relatively conservative assumption that it will fall to US$1,749/oz (in real terms) in CY21 coupled with a US$/A$ rate that is lower/stronger (as far as the Australian dollar is concerned) than at any time since March 2019 (NB this forex rate recorded a recent peak of A$1.7408/US$ on 19 March 2020).

A summary of Alkane’s implied H220 forecast results in the context of recent half-year periods is provided in the table below. Readers should note the anomaly whereby Alkane’s H119, FY19 and H120 results were reported with its ASM numbers fully consolidated, but its FY20 results were reported with ASM reflected as ‘classified as held for distribution to owners’ and/or ‘discontinued’. The consequences of this are most obviously apparent in the line items entitled ‘loss after tax from discontinued operations’. However, this anomaly is not considered material enough to significantly detract from the overall trends apparent from the figures. Our updated forecasts for FY21, within the context of our quarterly forecasts, disclosed in Exhibit 2, above, are also provided:

Exhibit 3: Alkane FY20 results vs H119, H220, FY20e and FY21e (A$m, unless otherwise indicated)

H119

H219

H120

H220

FY20e

FY20

FY21e

Revenue

52.352

41.643

34.098

38.451

67.338

72.549

105.664

Cost of sales

(28.829)

(24.827)

(16.500)

(16.400)

(33.054)

(32.868)

(62.861)

Gross profit

23.523

16.815

17.598

22.051

34.284

39.681

42.803

Other net income

1.759

(1.667)

0.111

(0.201)

1.688

(0.090)

(0.090)

Administration expenses

(4.797)

(2.570)

(4.993)

(5.276)

(11.386)

(10.269)

(7.367)

Exploration and evaluation expenditure expensed

0.000

0.000

0.000

(0.329)

0.000

(0.329)

0.000

Impairments

0.000

0.000

0.000

0.000

0.000

0.000

0.000

Gain/(loss) on disposal

0.000

0.000

0.000

(0.317)

0.000

(0.317)

0.000

EBITDA/(LBITDA)

20.485

12.579

12.747

15.929

24.586

28.676

35.346

Depreciation

(5.990)

(1.265)

(1.429)

(7.722)

(3.729)

(9.151)

(12.480)

EBIT/(LBIT)

14.495

11.314

11.318

8.207

20.857

19.525

22.866

Interest income/(cost)

(0.258)

(0.161)

(0.109)

0.498

0.413

0.389

0.626

Loss after tax from discontinued operations

0.000

0.000

0.000

(0.583)

0.000

(0.583)

0.000

PBT/(LBT)

14.237

11.153

11.209

8.122

21.270

19.331

23.492

Income tax

2.047

0.219

3.743

2.826

6.260

6.569

5.873

Effective tax rate (%)

14.4

2.0

33.4

34.8

29.4

34.0

25.000

Profit/(loss) for the year

12.190

10.934

7.466

5.296

15.010

12.762

17.619

Basic adjusted EPS (A$/share)

0.0241

0.0216

0.0146

0.0091

0.0275

0.0233

0.0296

Source: Alkane Resources, Edison Investment Research

While it can be seen that earnings in FY20 were somewhat below our expectations therefore, it should be noted that all of the negative variance could be attributed to a materially higher depreciation charge in H220 (largely as a consequence of higher capital expenditure) and that, in the absence of this item alone, results would otherwise have been better than our expectations, driven by better revenues and good control of costs.

Tomingley FY20 resource and reserve statements

On 18 August, Alkane reported its updated resource and reserve statement for FY20 (by this time excluding Dubbo resources). Among other things, the report was significant for showing a material increase in reserves and resources in both absolute and percentage terms:

Exhibit 4: Tomingley updated FY20 total resource and reserve statement cf FY19

Category

Tonnage

(kt)

Grade

(g/t)

Contained gold

(koz)

Category

Tonnage

(kt)

Grade

(g/t)

Contained gold (koz)

FY20

FY20

Measured

2,521

1.8

168

Proven

1,230

1.6

65

Indicated

4,600

2.2

310

Probable

1,737

1.9

109

Inferred

2,328

1.5

132

Possible*

0

N/A

0

Total

9,449

1.9

610

Total

2,967

1.8

176

FY19

FY19

Measured

1,317

1.8

76

Proven

722

0.8

19

Indicated

3,869

2.2

276

Probable

688

3.2

71

Inferred

1,253

1.5

61

Possible*

0

N/A

0

Total

6,439

2.0

407

Total

1,410

2.0

90

Change (units)

Change (units)

Measured

+1,204

-0.0

+92

Proven

+508

+0.8

+46

Indicated

+731

-0.0

+34

Probable

+1,049

-1.3

+38

Inferred

+1,075

-0.0

+71

Possible*

+0.0

N/A

+0

Total

+3,010

-0.1

+203

Total

+1,557

-0.2

+86

Source: Alkane Resources, Edison Investment Research. Note: Totals may not add up owing to rounding. *Archaic.

Within the context of having ‘reasonable prospects for eventual economic extraction’, open pittable resources were restricted by an indicative optimised pit shell estimated at a gold price of A$2,000/oz (cf A$2,665/oz at the time of writing – see Exhibit 2) with the potential open pittable component assessed at a 0.5g/t gold cut-off. By contrast, the underground resource is restricted to material below the current final pit design, below the highest stope level currently designed, with potential for eventual economic extraction by underground mining methods assessed at a 1.3g/t cut-off (cf 2.5g/t in FY19). The reported ore reserve is based on the measured and indicated resources within the defined underground resource base at 1.3g/t, a gold price of A$2,000/oz and the application of the current site-based mine design. While a portion of the reserve and resource increase will inevitably have arisen as a result of lowering the underground cut-off grade (and the increase in both reserves and resources is most apparent underground – see Alkane’s announcement for full details), a cut-off grade of 1.3g/t at a gold price of A$2,000/oz nevertheless appears appropriate within the context of Q4 C1 site cash costs of A$62.39/t milled plus an additional A$24.61/t milled in additional AISC costs.

Full details of the changes in Tomingley’s reserves and resources are available in Alkane’s August announcement. A comparison of the totals in Exhibit 4 nevertheless demonstrates a 3.0Mt increase in resources and a 1.6Mt increase in reserves that, at a milling rate of 1.0Mtpa, are capable of supporting a 1.6 year increase in the life of operations at Tomingley and potentially up to a 3.0 year increase (excluding depletion and additional exploration at Tomingley’s extension areas such as Roswell, San Antonio etc – see below).

Whereas Tomingley had sufficient reserves to support operations for 1.4 years from mid-2019 therefore, it now has sufficient reserves to last for 3.0 years from mid-2020 (notwithstanding a year of mining and processing operations in the interim). Resources could then extend this by an additional 6.5 years (resources being reported inclusive of reserves; cf 5.0 years in FY19) – especially given that the average resource grade is higher than the average reserve grade and that this is especially true in the higher, measured and indicated categories of resources.

As a consequence of these increases, Edison has formally increased its immediate assumed life at Tomingley from the end of FY22 to the end of FY23.

Roswell and San Antonio resources

The Tomingley Gold Project covers an area of approximately 440km2, stretching 60km north-south along the Newell Highway from the Tomingley mine in the north, through Peak Hill and almost to Parkes in the south.

Over the past two years, Alkane has conducted an extensive regional exploration programme with the aim of defining additional resources that have the potential to be mined either via open pit or underground methods and fed through the Tomingley gold plant. Note that, to this end, New South Wales state government approval has already been sought given for an underground exploration drive from Tomingley to the Roswell deposit, with equipment purchased, personnel recruited and land acquired to facilitate the rapid development of the project. In general, the programme has yielded broad, shallow, high-grade intercepts that demonstrate the potential for material project life extension (subject to resource confirmation, landholder agreements and regulatory approvals).

On 28 January, Alkane reported a maiden inferred mineral resource at Roswell, which is approximately 3km south of the Tomingley mine and processing facility. The San Antonio deposit is a continuation of the Roswell mineralised zone to the south of the Rosewood fault and, on 20 April, Alkane also announced a maiden resource at San Antonio.

Together, the Roswell and San Antonio resources comprise a 14,940kt resource at an average grade of 1.87g/t, containing 898koz gold. While the tonnage of the maiden resource at the San Antonio deposit lay between the upper and lower bands of Alkane’s exploration target, the maiden resource declared at Roswell exceeded its upper bound by 13.2% in terms of tonnage and by 17.4% in terms of contained gold at a 3.7% higher grade (at a cut-off of 0.5g/t).

Exhibit 5: Roswell and San Antonio maiden resources* vs target

Target

Actual

Uplift of actual vs target

Prospect

Bound

Tonnage (kt)

Grade
(g/t)

Contained
gold (koz)

Tonnage
(kt)

Grade
(g/t)

Contained
gold (koz)

Tonnage (%)

Grade
(%)

Contained gold (%)

Roswell

Upper

6,200

1.90

379

7,020

1.97

445

13.2

3.7

17.4

San Antonio

Upper

10,200

2.80

918

7,920

1.78

453

-22.4

-36.4

-50.6

Lower

7,400

2.30

547

7,920

1.78

453

7.0

-22.6

-17.2

Total

14,940

1.87

898

Source: Alkane Resources, Edison Investment Research. Note: *All Roswell and San Antonio resources currently categorised as inferred.

Prior to its announcing the maiden Roswell and San Antonio resources, Alkane’s resources at Tomingley (TGO) were 6,439kt of ore containing 407koz gold at a grade of 2.0g/t as at end-FY19, which converted into 1,410kt of reserves containing 89koz gold at a grade of 2.0g/t. As such, the maiden resources at Roswell and San Antonio more than trebled Alkane’s then gold resource at Tomingley and, to all intents and purposes, met the lower limit of its exploration target at TGO including El Paso (see Exhibit 6).

In terms of mine life, at a milling rate of 1Mtpa, Roswell and San Antonio’s resources could therefore potentially add more than 14 years to the life of Tomingley’s operations. Pro-rata with Tomingley’s existing reserves and resources ratio, Roswell and San Antonio’s resources could convert into a reserve of 4.7Mt at 1.78g/t containing 255koz gold and therefore should be sufficient to support an additional 4.7 years of production. However, a reserve estimate performed solely on this basis may be unduly conservative. Whereas the Roswell and San Antonio resources are stated ‘pre-mining’, the Tomingley resource reflects a mature mine that has already mined out its open pit reserves and has started to mine its underground ones. On a similar, pre-mining basis, the resource at Tomingley was c 921koz, of which c 434koz have now been mined, with 610koz remaining in reserves (see Exhibit 4) and c 179koz included in the underground mine plan (Edison assumption), which suggests that a more appropriate conversion factor would be in the order of 60% (c 613/921), in which case, Roswell and San Antonio’s reserves combined could prove to be in the order of 9.0Mt, containing 539koz gold at a grade of 1.87g/t, and sufficient to support production for an additional circa nine years (cf Alkane’s target of 10 years, with exploration still ongoing). Note that the resources at Roswell and San Antonio will both have to be upgraded from the inferred category into the indicated category, before they are eligible for conversion into reserves, which is the aim of ongoing work at both deposits currently, where updated resource reports are expected to be announced in October.

In our report Gold stars and black holes, published in January 2019, we calculated an average value of in-situ resources quoted in the Australian market of US$24.08/oz, on which basis we would value the Roswell and San Antonio deposits (combined) at US$21.6m, or A$30.0m, or 5.0 Australian cents per share.

Exhibit 6 demonstrates the value that Alkane may immediately add to its operations via success at all of its prospects to the south of Tomingley (ie Roswell, San Antonio and also including El Paso) in the event that it hits its exploration targets:

Exhibit 6: Alkane exploration targets’ potential value (US$m, A$m, A$/share)

Tonnage
(kt)

Grade
(g/t)

Contained gold (koz)

Valuation (US$/oz)

Valuation (US$m)

Valuation
(A$m)

Valuation
(A$/existing share)

Total*

Upper

23,800

2.19

1,678

24.08

40.4

56.1

0.094

Lower

15,800

1.81

920

24.08

22.1

30.8

0.052

Source: Alkane Resources, Edison Investment Research. Note: *Comprises Roswell, San Antonio and El Paso.

These valuations are based purely on the in-situ value of the resources that Alkane is targeting for delineation. Self-evidently, these valuations are subject to increase to the extent that these resources are subsequently upgraded to reserves and included in the Tomingley mine plan.

To this end, further drilling is underway at Roswell to reduce the drill hole spacing from a nominal 40m to 20m to convert inferred resources into the indicated and (perhaps) measured categories. The resource delineated to date is a high-grade, large tonnage zone proximal to the Rosewood fault in the southern section of the tenement. There is also potential to test the depth extensions of the ore zone, while other exploration targets include the poorly constrained northern zone, where mineralisation is open to the west and at depth where grade and tonnage potential is on an improving trend. Some targets will also be tested from underground as the exploration drive from Tomingley is developed. At the same time, further infill and extensional drilling is underway at San Antonio with a view to defining both the continuity of the mineralisation to the south and west and the high-grade zones at depth.

Boda drilling results

On 13 February, Alkane reported the assay results of drill hole KSDD005 at its Boda prospect and, on 23 March and 22 April, the results of holes KSDD006, KSDD007 and KSDD008 and, on 19 May, the results of hole KSDD009 (100m to the south of hole KSDD008). The drilling was part of a 5,974m diamond core exploration programme to test the depth and strike extensions to the porphyry gold-copper mineralisation at Boda, which has now been completed.

Diamond core hole KSDD005 was located 200m vertically below KSDD003 and intersected an extensive (>700m true thickness) pyrite shell with chalcopyrite dominant core (c 300m thick), which is characteristic of the upper sections of an alkali porphyry mineralisation system. Litho-geochemistry conducted on the drill samples also supported this interpretation, displaying a pattern of outer propylitic and sodic alteration at the top of the hole evolving to a copper rich calc-potassic core and terminating in a propylitic chlorite and pyrite zone. Holes KSDD006 and KSDD007 were located 100m to the north and 100m to the south of the mineralisation defined by KSDD003 and KSDD005, respectively. Hole KSDD008 was located a further 100m to the south of hole KSDD007 and hole KSDD009 a further 100m to the south of hole KSDD008.

A summary of all five holes is as follows:

Exhibit 7: Boda diamond drill hole assay results

From

(m)

To

(m)

Aggregate intercept

(m)

Average gold grade

(g/t)

Average Cu grade

(%)

KSDD005

262.0

1,415.0

720.7

0.45

0.19

KSDD006

105.0

948.0

638.6

0.25

0.13

KSDD007

59.0

1,319.1

1,197.1

0.54

0.25

KSDD008

7.3

973.0

965.7

0.22

0.11

KSDD009

12.0

876.0

315.4

0.21

0.13

Source: Alkane Resources, Edison Investment Research

In general, the holes recorded several significant gold-copper intercepts, within an extensive, low-grade mineralised shell similar to Cadia East. Note that, for the purposes of Exhibit 7, multiple intersections have been amalgamated and grades averaged according to the width of the individual intersections.

In each case, the stratigraphic sequence and the style of alteration and mineralisation was also reported to bear similarities to sections of the Cadia East deposit. The width of the mineralisation in hole KSDD007 is interpreted as being the result of the channelling of fluids along margins from Group 1 monzonites possibly from a deeper causative porphyry source. As well as the potential for an inner potassic bornite rich core to the system, the deposit remains open both on strike and at depth.

Northern Molong Porphyry Project background

The Northern Molong Porphyry Project is 100% owned by Alkane, covers c 115km2 of the northern Molong Volcanic Belt (MVB) and is around 80km to the north-east of its Tomingley Gold Mine, in the Central West of New South Wales (Exhibit 8).

Exhibit 8: Location of the Northern Molong Porphyry Project (NMPP)

Source: Alkane Resources

To date, Alkane’s drill results at Boda have demonstrated both a similar stratigraphic sequence as well as style of alteration and mineralisation to Newcrest’s Cadia Province mines 110km to the south, although it is also more structurally complex. Nevertheless, together, the Cadia Province mines host a JORC-compliant mineral resource estimate of 36.8Moz Au at a grade of 0.36g/t Au and 8.2Mt of copper at a grade of 0.25% Cu (see Exhibit 10) plus silver and molybdenum and produced 843koz of gold last year at an AISC of US$160/oz Au (net of by-product credits).

The NMPP now comprises four exploration licences – Bodangora, Boda South, Kaiser and Finns Crossing – within which Alkane has defined five magnetic anomalies interpreted to be intrusive complexes – Kaiser, Boda, Comobella, Driell Creek and Finns Crossing – all within a 15km north-west to south-east trending corridor (Exhibit 9) and all close to road, rail, gas and water infrastructure. Importantly, the Boda anomaly correlates with a historical induced polarisation (IP) survey completed by CRA Exploration (now Rio Tinto) over the Boda Intrusive Complex (BIC), which showed a strong high chargeable anomaly along the northern edge of the survey area coincident with the magnetic anomaly. As a result, Alkane has recently completed a 70 line kilometre IP survey over the 6km strike extensions of the BIC to generate further drilling targets in the area.

Exhibit 9: Northern Molong Porphyry Project regional geology

Source: Alkane Resources

Four of these targets have now been drill tested: Kaiser, Boda, Comobella and Glen Hollow. Exploration has identified the margins of major monzonite intrusive complexes that provide the primary control for porphyry and epithermal mineralisation with significant intersections being reported along the western margin of both the Kaiser Intrusive Complex (KIC) and the Boda Intrusive Complex (BIC). Specifically, gold mineralisation has been discovered at Kaiser, Boda and Glen Hollow (which is part of Comobella).

Analysis and interpretation of Boda drill results

In general, holes KSDD005–7 increased both the grade and width of the porphyry mineralisation identified by hole KSDD003 (658.8m in aggregate at average grades of 0.41g/t Au and 0.18% Cu), including the high-grade gold-copper chalcopyrite core. Hole KSDD008 increased the width of the mineralisation, albeit at a slightly lower (but still consistent) grade.

From the drill hole results a number of observations can be made:

From holes KSDD003, KSDD008 and KSDD009 the vertical depth before mineralisation is encountered is minimal – that is, the deposit (almost) crops out on surface.

From all holes, mineralisation extends to c 1km in depth.

From all holes, the mineralisation is at least hundreds of metres in width.

In purely empirical terms, using the same methodology as in our last note, the inclusion of hole KSDD009 in our analysis has caused us to reduce very slightly our assumed dimensions of the orebody. Nevertheless, the changes involved are small relative to the potential errors in the analysis, such that we are still happy to state that (given the information available) our best estimate of the overall size of the Boda deposit is 575–738Mt at an average gold grade of 0.34–0.35g/t containing 6.4–8.3Moz Au (plus copper) and containing a high-grade pod of in excess of 2.2Moz gold equivalent at a grade above its 3.0g/t cut-off.

Edison’s estimates, derived from data made public by a variety of sources, are provided in the table below and are also compared with the resources disclosed by Newcrest for Cadia Ridgeway (underground) and Cadia Province.

Exhibit 10: Edison estimate of the potential size of Boda mineralisation

Source of underlying data

Edison

Alkane Resources

Newcrest

Characteristic (units)

Updated estimate

Prior estimate

ALK dimensions

High-grade pod

Surface projection

Cadia Valley Ridgeway

Cadia Ridgeway underground actual**

Cadia Province actual**

Strike (m)

640

712

500

150

250

Average estimated true width (m)

317

353

400

100

150

Estimated area of surface projection (Mm2)

0.238

Average estimated true depth (m)

945

977

1,100

500

945

600

Estimated volume (Mm3)

192

246

220

7.5

225

22.5

Estimated density (t/m3)

3.0

3.0

3.0

3.0

3.0

3.0

Estimated tonnage (Mt)

575

738

660

22.5

675

67.5

150

3,170

Estimated average gold grade (g/t)

0.34

0.35

*0.34

0.52

0.36

Estimated average copper grade (%)

0.17

0.17

*0.17

0.33

0.25

Estimated average gold equivalent grade (g/t)

0.52

0.51

0.52

3.0

0.2

2.0

0.84

0.63

Estimated contained gold (koz)

6,354

8,342

7,215

2,400

36,800

Estimated contained copper (kt)

985

1,285

1,122

480

8,200

Estimated contained gold equivalent (koz)

***9,707

***12,140

***11,032

2,170

4,340

4,340

***4,033

***64,699

Source: Edison Investment Research. Note: *Edison estimates; **From Newcrest reserve & resource statement, 31 December 2019; ***Conducted at prices of US$6,529/t Cu and US$1,919/oz Au.

Clearly such an estimate is very far from being anything close to JORC code-compliant and experience would suggest that such estimates have an accuracy of approximately ±75%. However, the increasing number of results in the region of 6.4–8.3Moz contained gold increases our confidence that the ultimate resource estimate will be of this order of magnitude. If this does prove to be the case, then it would suggest a multi-million ounce gold deposit at Boda with a potential valuation (based on the US$24.08/oz average valuation of in-situ ounces calculated in our report Gold stars and black holes, published in January 2019) of A$0.36–0.47/share at updated forex rates and adjusted for the increased number of shares in issue at Alkane (cf 0.55/share previously).

In the meantime, a major reverse circulation (RC) and diamond core drilling programme has been started in order to further test the high-grade core and larger resource potential at Boda, as well as other regional targets defined by both the 3D-IP survey and existing Alkane data.

COVID-19

Since February, Alkane has been acting in response to information supplied by state and federal authorities and complying with recommended measures to combat COVID-19. These include heightened cleaning protocols, social distancing, stringent hygiene practices and health screening.

TGO is a predominantly a residential operation and only personnel and contractors essential to the safe operation of the mine are permitted on site. All non-essential travel has ceased.

At present, operations continue as planned. However, COVID-19 has the potential to interrupt operations in the event of any of the following:

despite the extensive measures taken, sufficient employees test positive for COVID-19 and the majority of any crew is unable to attend while they self-isolate;

despite increasing inventory from suppliers and continuing to liaise closely with them, their capacity to supply critical parts and reagents is compromised; and/or

the New South Wales State government introduces regulations that inhibit suppliers or employees from attending beyond a skeleton crew.

Tomingley valuation

As always, our valuation of Tomingley is based on the present value of our forecast life of operations dividend stream to investors in Alkane as a result of the execution of the Tomingley mine plans (now shorn of any contribution from Dubbo/ASM) discounted back to present value at a rate of 10% per year, excluding exploration expenditure.

Relative to our last note, we have now extended our life of operations at Tomingley by one year to the end of FY23, in line with the life implied by its updated reserve and resource statement (effective date 30 June 2020 – see Exhibit 4). In the aftermath of the demerger, our valuation of the dividend stream potentially available to Alkane shareholders from its immediate Tomingley operations is now A$0.186/share. However, to this must be added the value of residual resources at the end of the life of operations, which we estimate to be 0.4Moz with a current value of US$10.3m (A$14.3m), or A$0.024/share, to bring our total valuation of Tomingley to A$0.210/share (including cash). This may be rationalised as our prior valuation of Tomingley (see below) plus cash of A$0.25/share less A$20m (A$0.034/share) in cash demerged with Dubbo/ASM.

A graph of our expectations for Alkane’s EPS, DPS and valuation from the present to FY23 is as follows:

Exhibit 11: Alkane life of operations’ forecast EPS and (maximum potential) DPS (A$/share)

Source: Edison Investment Research.

Note that the DPS columns in Exhibit 11 represent theoretical, maximum potential dividends payable, rather than actual dividends forecast and are used solely for valuation purposes. In reality, we would expect any dividend that could be payable (in FY21 for example) to instead be re-invested into the business, either in the form of exploration expenditure or capital expenditure to develop Alkane’s options at Tomingley further.

The above valuation compares with our pre-demerger valuation (including Dubbo/ASM) of A$0.77/share (see our note 007 strikes it rich, published on 23 April), of which A$0.25 in value was accounted for by Tomingley and cash and A$0.52 was accounted for by Dubbo. In that case, the equivalent graph of our expectations for Alkane’s EPS, DPS and valuation from the present to FY43 was as follows:

Exhibit 12: Previous* Alkane life of operations’ forecast EPS and (maximum potential) DPS (A$/share)

Source: Edison Investment Research. Note: *See our report, 007 strikes it rich, published on 23 April 2020.

Sensitivities

Tomingley mine life

Our current valuation of Alkane is based on the present value of future dividends potentially payable to shareholders based on a three-year mine plan. However, Alkane reports that the approval process with the New South Wales government to allow the development of the San Antonio and Roswell deposits is ‘well underway’” Extensive consultation has taken place with local landholders and key government agencies and is in the process of being expanded to the broader community and stakeholders. At the same time, preliminary pit and underground designs have been prepared, surveys and testing to prepare an Environmental Impact Statement are underway and affected land either has been purchased or is under contract.

With the caveat that the exact cost parameters around extending the mine plan at Tomingley into Roswell and San Antonio are, as yet, unknown, we calculate that, as we increase the life of the operation, our valuation of the Tomingley portion of the business (based on discounted dividends) increases as follows:

Exhibit 13: Tomingley and extensions’ valuation sensitivity to mine life increases (Australian cents per share)

Mine life extension
(years)

To end:

Valuation

Incremental valuation
change

Total valuation change

0

FY23

18.6

u/c

u/c

1

FY24

20.7

+2.1

+2.1

2

FY25

24.5

+3.8

+5.9

3

FY26

27.9

+3.4

+9.3

4

FY27

31.1

+3.2

+12.5

5

FY28

33.9

+2.8

+15.3

6

FY29

36.5

+2.6

+17.9

7

FY30

38.9

+2.4

+20.3

8

FY31

41.0

+2.1

+22.4

9

FY31

42.9

+1.9

+24.3

Source: Edison Investment Research

Hence, increasing the life of Tomingley by nine years (ie the same as the amount implied by our conversion of Roswell and San Antonio resources into reserves on page 6) adds 24.3c to our valuation cf our 5.0c per share in-situ resource valuation, which approximates to less than two additional years’ worth of mining (ie below the bottom end of what might reasonably be expected given historical reserve to resource conversion ratios at Tomingley – see page 6). Note that updated resource statements for Roswell and San Antonio (including the promotion of existing resources from the inferred into the indicated category) are anticipated in October, as are updated mine plans.

Gold price

As with all gold miners, Edison’s valuation of Tomingley is conducted in real terms at a flat nominal gold price of US$1,892/oz, which declines (in real terms) to a price of US$1,494/oz in 2025. Variations from this ‘base case’ scenario are considered in the table below:

Exhibit 14: Alkane Resources’ valuation sensitivity to the gold price (Australian cents per share, unless otherwise indicated)

Gold price change (%)

-20%

-10%

u/c

+10%

+20%

ALK valuation

12.3

15.5

18.6

21.7

24.9

Valuation change

-3.2

-3.1

0.0

+3.1

+3.2

Percent change from ‘base case’

-33.9

-16.7

0.0

+16.7

+33.9

Source: Edison Investment Research.

In the event that the gold price remains at US$1,919/oz in flat real terms (the price at the time of writing), then our valuation of Alkane (based on the present value of potential dividends payable to Alkane shareholders) increases by 21.0%, from 18.6 to 22.5 Australian cents.

Combined valuation of Alkane

A summary of our updated valuation of Alkane within the context of all of its assets is as follows:

Exhibit 15: Alkane Resources’ valuation summary (Australian cents per share)

Current

Previous*

Asset

Existing assets’ valuation

Contingent assets’ valuation

Potential total

Existing assets’ valuation

Contingent assets’ valuation

Potential total

Tomingley plus cash

21

21

25

25

Dubbo

-

-

52

52

Sub-total

21

21

77

77

Investments in Calidus** and Genesis

29

29

14

14

Roswell and San Antonio maiden resources

5

15-24

24

6

10–19

19

El Paso and ongoing TGO exploration

4

4

5

5

Boda exploration

36-47

47

55

55

Total

55

55–75

125

97

70–79

170

Source: Edison Investment Research. Note: Totals may not add up owing to rounding; *Included Dubbo/ASM; **Excludes recent, additional A$3.2m investment by Alkane into Calidus in July 2020 at a share price of A$0.51/share (cf a share price of A$0.56 at the time of writing).

Exhibit 16: Financial summary

A$’000s

2018

2019

2020

2021e

2022e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

129,973.6

93,994.9

72,549.0

105,663.8

126,520.8

Cost of Sales

(51,080.9)

(53,656.4)

(32,868.0)

(62,861.1)

(76,532.7)

Gross Profit

78,892.7

40,338.5

39,681.0

42,802.8

49,988.1

EBITDA

 

 

70,378.7

32,971.7

29,412.0

35,436.0

42,621.4

Normalised operating profit

 

 

31,658.3

25,808.8

20,171.0

22,866.2

26,811.5

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

Reported operating profit

31,658.3

25,808.8

20,171.0

22,866.2

26,811.5

Net Interest

(579.0)

(418.8)

389.0

626.0

677.4

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

(646.0)

0.0

0.0

Profit before tax (norm)

 

 

31,079.3

25,390.0

20,560.0

23,492.1

27,489.0

Profit before tax (reported)

 

 

31,079.3

25,390.0

19,914.0

23,492.1

27,489.0

Reported tax

(6,919.9)

(2,266.1)

(6,569.0)

(5,873.0)

(6,872.2)

Profit after tax (norm)

24,159.4

23,123.9

13,991.0

17,619.1

20,616.7

Profit after tax (reported)

24,159.4

23,123.9

13,345.0

17,619.1

20,616.7

Minority interests

0.0

0.0

0.0

0.0

0.0

Discontinued operations

0.0

0.0

(583.0)

0.0

0.0

Net income (normalised)

24,159.4

23,123.9

13,991.0

17,619.1

20,616.7

Net income (reported)

24,159.4

23,123.9

12,762.0

17,619.1

20,616.7

Basic average number of shares outstanding (m)

506

506

547

595

595

EPS – basic normalised (A$)

 

 

0.05

0.05

0.03

0.03

0.03

EPS – diluted normalised (A$)

 

 

0.05

0.04

0.02

0.03

0.03

EPS – basic reported (A$)

 

 

0.05

0.05

0.02

0.03

0.03

Dividend (A$)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

10.3

(-27.7)

(-22.8)

45.6

19.7

Gross margin (%)

60.7

42.9

54.7

40.5

39.5

EBITDA margin (%)

54.1

35.1

40.5

33.5

33.7

Normalised operating margin (%)

24.4

27.5

27.8

21.6

21.2

BALANCE SHEET

Fixed assets

 

 

138,275.0

172,196.0

129,077.0

136,357.1

133,837.3

Intangible assets

93,136.0

103,894.0

32,745.0

42,745.0

52,745.0

Tangible assets

36,266.0

51,038.0

62,322.0

59,602.1

47,082.3

Investments & other

8,873.0

17,264.0

34,010.0

34,010.0

34,010.0

Current assets

 

 

93,306.0

76,501.0

59,096.0

65,176.6

89,436.9

Stocks

19,153.0

4,816.0

7,647.0

4,052.9

4,852.9

Debtors

2,030.0

1,998.0

2,940.0

8,684.7

10,399.0

Cash & cash equivalents

72,003.0

69,582.0

48,337.0

51,767.1

73,513.1

Other

120.0

105.0

172.0

672.0

672.0

Current liabilities

 

 

(27,430.0)

(21,762.0)

(14,238.0)

(9,979.7)

(11,103.4)

Creditors

(9,299.0)

(8,007.0)

(9,425.0)

(5,166.7)

(6,290.4)

Tax and social security

(6,929.0)

(9,317.0)

0.0

0.0

0.0

Short-term borrowings

0.0

0.0

(2,090.0)

(2,090.0)

(2,090.0)

Other

(11,202.0)

(4,438.0)

(2,723.0)

(2,723.0)

(2,723.0)

Long-term liabilities

 

 

(13,647.0)

(13,059.0)

(19,522.0)

(19,522.0)

(19,522.0)

Long-term borrowings

0.0

0.0

(4,515.0)

(4,515.0)

(4,515.0)

Other long-term liabilities

(13,647.0)

(13,059.0)

(15,007.0)

(15,007.0)

(15,007.0)

Net assets

 

 

190,504.0

213,876.0

154,413.0

172,032.1

192,648.8

Minority interests

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

190,504.0

213,876.0

154,413.0

172,032.1

192,648.8

CASH FLOW

Operating cash flow before WC and tax

69,941.3

33,135.8

28,173.0

35,346.0

42,531.4

Working capital

(9,498.0)

(5,172.0)

(3,481.0)

(6,408.9)

(1,390.6)

Exceptional & other

1,277.0

1,454.0

3,704.0

0.0

0.0

Tax

(6,919.9)

7,047.9

(249.0)

(5,873.0)

(6,872.2)

Net operating cash flow

 

 

54,800.5

36,465.7

28,147.0

23,064.1

34,268.6

Capex

(9,224.0)

(19,621.0)

(46,122.0)

(9,760.0)

(3,200.0)

Acquisitions/disposals

0.0

4.0

(20,068.0)

0.0

0.0

Net interest

(579.0)

(418.8)

389.0

626.0

677.4

Equity financing

(5.0)

0.0

39,442.0

0.0

0.0

Exploration and Evaluation

(10,969.0)

(11,578.0)

(20,132.0)

(10,000.0)

(10,000.0)

Other

(4,317.0)

(7,442.0)

(9,522.0)

(500.0)

0.0

Net cash flow

29,706.4

(2,590.1)

(27,866.0)

3,430.1

21,746.0

Opening net debt/(cash)

 

 

(41,969.0)

(72,003.0)

(69,582.0)

(41,732.0)

(45,162.1)

FX

311.6

169.1

0.0

0.0

0.0

Other non-cash movements

16.0

0.0

16.0

0.0

0.0

Closing net debt/(cash)

 

 

(72,003.0)

(69,582.0)

(41,732.0)

(45,162.1)

(66,908.1)

Source: Company sources, Edison Investment Research. Note: FY18 and FY19 income and cash-flow statements are pro-forma, sourced from Alkane’s Demerger Booklet released to the ASX on 17 June 2020; balance sheet is ‘as reported’ until FY20 at which point ‘group classified as held for distribution to owners’ is removed from the reported figures.

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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.

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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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Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

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United States

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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