TGO shows it can, and Dubbo’s value re-emerges

Alkane Resources 27 July 2017 Update
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Alkane Resources

TGO shows it can, and Dubbo’s value re-emerges

Q4 & FY17 operating results

Metals & mining

27 July 2017

Price

A$0.35

Market cap

A$177m

A$/US$:1.26

Net cash (A$m) at end June 2017

42.0m

Shares in issue

505.2m

Free float

51%

Code

ALK

Primary exchange

ASX

Secondary exchange

OTCQX

Share price performance

%

1m

3m

12m

Abs

30.4

20.0

36.4

Rel (local)

31.7

21.3

30.6

52-week high/low

A$0.64

A$0.22

Business description

Alkane Resources is a multi-commodity explorer and developer, with projects in the central west region of New South Wales in Australia. It owns the Tomingley Gold Operation (TGO) and the Dubbo Project (DP) rare metal, zirconium chemicals and rare earths projects (both 100%). TGO entered production in January 2014 and DP’s first production is planned for 2019.

Next events

Stage 1 feasibility study

End 2017

Analysts

Tom Hayes

+44 (0)20 3077 5725

Charles Gibson

+44 (0)20 3077 5724

Alkane Resources is a research client of Edison Investment Research Limited

Following a rain-sodden H1, the second half of FY17 saw a remarkable turnaround in gold production at the Tomingley Gold Operation (TGO), and brought down unit costs markedly as a result. With similar production and cost guidance to FY17 targeted for FY18 at the TGO, key catalysts will be those linked to the development of the Dubbo Project (DP). Commentary from Alkane (ALK) that key product markets (eg certain rare earths, zircon/zirconium) are recovering from their multi-year lows signals a return of focus to the company’s flagship project.

Year end

Revenue (A$m)

PBT*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/15

101.8

0.1

1.0

0.0

35.0

N/A

06/16

109.6

11.0

2.2

0.0

15.9

N/A

06/17e

117.8

17.8

2.2

0.0

15.9

N/A

06/18e

102.6

(38.7)

(3.5)

0.0

N/A

N/A

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

Record production, grade and lowest costs for Q4

Q4 gold production was 27,924oz at AISC costs of A$905/oz and C1 cash costs of A$702/oz. This was a quarter-on-quarter production increase of a high 49% and demonstrates not only the impact high rainfall had on operation during H117, but also the efficiency of Alkane’s mining teams at the TGO in getting ore out of the ground and into saleable gold ounces.

Certain of DP’s end-markets see daylight again

We have been monitoring rare-earth element (REE) prices via the Steelhome REE price portal on Bloomberg, and agree with Alkane’s statement that certain (predominantly relating to magnet production) REE prices are experiencing stronger demand and increased pricing as a result. Also important to the DP’s future viability due to the relatively large proportions mined is the rebound in zircon and zirconium-based product prices. Both, as well as the relatively stable niobium prices, lend significant weight to the DP being developed on a modular development basis (currently being finalised by industry experts Outotec).

Valuation: Up 16% on share price increase alone

We have incorporated TGO FY18 production guidance of 65-67koz (we assume 65koz), and base our valuation from FY18 and maintain our DP funding assumptions with first capex spend this financial year (FY18). Applying ALK’s higher prevailing share price (A$0.35, vs A$0.26 previously) for notional future funding has the automatic effect of increasing our valuation 16% to A$0.71/share for the TGO and DP combined (previously A$0.61). With all other pricing, project development and mine schedule assumptions unchanged, we see considerable scope for upside as DP catalysts emerge in the form of commercial offtake and financing. We also look to the company releasing updated TGO mine plans and DP modular design cost inputs, which we will use to revise our valuation.

Mining gets back on track, Dubbo’s fortunes return

Strong production performance of 17koz of gold produced across April and May led Alkane, at end June, to revise upwards its H217 production target from 31-36koz, to 43-45koz. H217 all-in sustaining costs (AISC) also came down to the range estimated by the Alkane in January 2017 of A$1,350-1,550/oz, to A$1,000-1,100/oz. This has had a marked positive effect on the company’s full year cash flow from operations, with A$32.7m realised (net of development costs), and its cash position has also grown to A$42.0m from A$24.4m in FY16.

Alkane’s strong H2 production performance at the TGO had also led the company to revise its full-year FY17 production guidance to 65-67koz Au at all-in sustaining costs of between A$1,300/oz and A$1,400/oz. This is 12% above our TGO gold production estimate for FY17 (published in May 2017) of 58koz, and slightly ahead of our AISC estimate for FY17 of A$1,469/oz.

This positive H217 production performance sees Alkane finishing FY17 with a flourish, after a difficult H117 dominated by intense periods of rainfall, which negatively affected gold mining at the TGO. Further, Alkane has guided that it expects to produce 65-70koz of gold in FY18 at an AISC of between A$1,100/oz to A$1,200/oz. We expect to revise our base case valuation for the TGO, and Alkane’s shares, pending its release of formal revised underground mine plans for the TGO, sometime towards the end of H118 (H2 of CY17). This will follow the completion of current drilling activities and a revised resource and reserve statement for the TGO.

Exhibit 1: Quarterly production data – Q417 sees record production and grade

Source: Edison Investment Research, Alkane Resources

Similar production to FY17 forecast for next year

As a direct result of improved mining conditions, operating costs reduced markedly across FY17, as detailed in Exhibit 2 below. Alkane guides to similar production and cost levels being achieved for the TGO during FY18 (notwithstanding any further disruptions due to high levels of rainfall like those experienced in H217). We therefore estimate 65koz of gold produced at an all-in sustaining cost of A$1,092/oz.

Exhibit 2: Quarterly unit cost breakdown

C1 cash costs

Additional costs to C1

With both costs levels

Source: Edison Investment Research

Exhibit 3: TGO quarterly production, stockpiles, costs and revenue breakdown

Production

Unit

Q117

Q217

Q317

Q417

FY17

Waste mined

bcm

1,533,279

1,799,904

2,165,717

2,180,210

7,679,110

Implied strip ratio

tonnes

18.3

15.4

23.0

13.1

16.6

Ore mined

g/t

221,139

318,216

249,109

434,404

1,222,868

Ore grade

tonnes

1.51

1.39

2.42

2.69

2.08

Ore milled

g/t

231,797

279,338

281,654

295,194

1,087,983

Head grade

%

1.50

1.48

2.36

3.10

2.15

Recovery

ounces

90.1%

90.4%

91.1

92.8%

91.5%

Gold recovered

A$/oz

10,435

11,756

18,721

27,924

68,836

Gold sold

A$m

10,000

12,519

16,303

31,107

69,929

Gold revenue

A$/oz

16.3

20.8

27.6

52.6

117.3

Implied realised gold price/ actual

A$m

1,627

1,694

1,694

1,690

1,678

Cost of sales

A$/oz

19.2

21.2

22.5

25.3

88.2

AISC operating cost

%

2,139

1,803

1,201

905

1,335

Gross Margin

-11.6%

6.1%

58.3%

140.7%

48.9%

 

 

Stockpiles and bullion on hand

 

Ore for immediate milling

tonnes

3,368

2,572

4,986

1,814

1,814

Bullion on hand

ounces

5.48

4.36

8.20

2.98

30.5

Value of bullion on hand (based on implied gold price above)

A$m

661,645

709,148

620,271

761,829

761,829

 

Stockpile grade

g/t Au

0.80

0.79

0.75

0.95

0.95

Contained gold in stockpiles

oz

17,201

18,195

15,126

23,300

18,195

Value of stockpiled gold ounces at quarter's average price

A$m

28.0

30.8

25.6

39.4

30.5

 

Detailed cost summary

 

Mining

A$/oz

1,188

1,029

721

485

748

Processing

A$/oz

505

450

269

168

295

Site support

A$/oz

148

118

80

49

84

C1 site cash costs

A$/oz

1,841

1,597

1,070

702

1,127

Royalties

A$/oz

35

40

51

57

49

Sustaining capital

A$/oz

130

37

8

46

47

Rehabilitation

A$/oz

68

72

38

71

71

Corporate

A$/oz

65

57

34

29

41

AISC

A$/oz

2,139

1,803

1,201

905

1,335

Source: Edison Investment Research


Dubbo’s end-markets rebound

A key concern to investors about Dubbo has been the state of its respective end-product markets. Since the 2011 rare earth bubble, rare earth metal prices have consistently dropped in value, not only as the commodity boom in China ended, but also as worldwide demand slowed in general. Matters were exacerbated by development of Lynas Corporation’s Mt Weld project in Western Australia and the relatively short lived re-opening of Molycorps’s Mountain Pass project. However, both the aforementioned projects were largely light rare earth dominant and created a situation of oversupply, namely within the lanthanum and cerium markets.

Fast forward to today, and specific rare earth and specialist metal markets are seemingly changing for the better (see price charts in Exhibit 6). The metals given in Exhibit 6 are experiencing price increases mainly as a result of the growth in renewable energy production, but also due to Chinese environmental auditing and closure of illegal mine sites. The main consumers and drivers for growth in rare earths and specialty metals demand relate to, among others, the manufacture of magnets used in (wind) turbine technologies and the uses of rare earths throughout the spectrum of renewable energy technologies and the associated electronic infrastructure required to support it. A stark indication of the average growth rates in solar photovoltaic and wind turbine energy supply across a 25-year time span, as calculated by the International Energy Agency, is given in the following exhibit.

Exhibit 4: Annual average annual growth rates of world renewables supply, 1990-2015

Source: International Energy Agency, Renewables Information: Overview (2017 edition)

The above chart should be viewed in conjunction with the following exhibit, which details the percentage share of fuels used in energy production worldwide in 2015. While solar, wind, geothermal and tidal technologies only account for 1.5% of the fuel share in the world’s total primary energy supply, the growth rates given in the above exhibit clearly support demand for specific rare earth and specialty metals.

Exhibit 5: 2015 fuel shares in world total primary energy supply

Source: International Energy Agency, Renewables Information: Overview (2017 edition)

The following price charts are taken from Alkane’s quarterly report and detail key Chinese US dollar metal prices.

Exhibit 6: Key 2017 metal prices for a suite of Dubbo end-products

Source: Argus Metals, Alkane Resources quarterly update report

Vietnam Rare Earth JSC – Alkane’s downstream processor

The memorandum of understanding (MoU) signed with Vietnam Rare Earth JSC (VTRE) in April 2016 was originally valid for 12 months, but has been extended to allow Alkane to complete exhaustive due diligence on VTRE to make sure it can deliver the quality of product at forecast cost levels to end-users. After this due diligence period, Alkane will also have the option to purchase equity in VTRE (details of this potential purchase are not available). VTRE has been separating rare earth concentrates into separated rare earth metals since 2012 and, according to Alkane’s management, achieves this at cost levels similar to those of the rare earth processors in China. If true, it has a major competitive edge over Western rare earth developers looking to refine in house.

During Q417 Alkane signed a toll treatment agreement with VTRE as a further development to the aforementioned MoU. Toll treatment of Dubbo rare earth concentrates is favoured by Alkane as construction and operation of a dedicated rare earth separation plant at the Dubbo site is considered to add some complexity to the project.

Alkane has therefore been in the process of undertaking considerable due diligence at Vietnam Rare Earth’s processing facility. Key to this due diligence process has been the supply by Alkane of 80 tonnes of rare earth concentrate (bought on market by Alkane’s subsidiary, ASM) to VTRE, from which 31 tonnes of refined rare earth oxides have now been produced. We are unsure of the exact quantities of rare earths contained within the concentrate shipped, or whether it had similar characteristics to the concentrate that could be produced from Dubbo. However, Alkane does state that the concentrate contains cerium and lanthanum (which are in general oversupply and due to be stockpiled and not sold once Dubbo is in production) and praseodymium and neodymium (which will be produced and sold; they are key magnet metals and will be important revenue streams to Alkane).

Alkane states that final processing will be completed in July, after which Alkane will be able to validate VTRE’s processing technology as well as the quality of the refined metals and oxides produced, commercial logistics and sales capabilities.

Zirconium and lanthanum could improve Li-ion battery performance

We feel it is worth repeating Alkane’s observation that zirconium and lanthanum could improve Li-ion battery performance. It concerns research currently being undertaken by Michigan University into the use of solid electrolytes in lithium-ion batteries. The research involves the use of a film made of lithium-lanthanum-zirconate, using proportions of lithium hydroxide (20%), lanthanum oxide (53%) and zirconia (27%). The rise of the electric vehicle, either hybrid-electric or pure-electric, would greatly benefit from this battery technology being commercialised as it allows li-ion batteries to operate at higher temperatures as well as having a greater energy density. This would allow for batteries to be made lighter with a potential positive impact on vehicle range, a key anxiety of electric vehicle customers.

Status of DP product agreements and end-markets

A key risk of the DP is securing commercial offtake partner agreements for its different products. Securing such agreements is critical to Alkane’s ability to generate revenue from its suite of products that have no open market on which to be sold. The following table summarises the current agreements that Alkane has in place for its DP products.

Exhibit 7: Summary of DP product agreements

Product

Status of product agreements

Date agreement signed

Expiry date

Company

Zirconium products

MoU to market zirconium products in Europe and North America.

15 August 2012

31 December 2014

European trading and manufacturing company – moving to agreement

Refined REE output

MoU with Vietnam Rare Earth JSC to toll process ASM’s rare earths concentrate into separated rare earth products.

March 2016

2027 with option to extend

Vietnam Rare Earth JSC

Niobium concentrate

Framework agreement whereby TIAG and ASM jointly process DP niobium into FeNb ready for subsequent sale.

17 July 2013

N/A

Treibacher Industrie AG

Source: Alkane corporate announcements

With only one agreement in place with Treibacher Industrie (TIAG) over the DP’s future production, Alkane intends to finalise agreements on its zirconium and rare earth output over the remainder of CY17. It has marketed extensively through Europe and the US over the last few years and has been stepping up its efforts. Although TIAG and VTRE have allowed their names to be disclosed, this is not a standard practice and the company name supporting zirconium offtake may not be announced. Regardless, Alkane will need to notify the market of finalised commercial offtake agreements in the coming months, such that it can maintain its development timeline and progress to first production in 2019.

Edison’s projected group revenue split for DP products are shown in Exhibit 8 below.

Exhibit 8: Group revenue split for FY20e

Source: Edison Investment Research, Alkane Resources

The chart above correlates to the following amounts being produced once in steady state production in 2023 (under our assumptions):

16,374t of high-purity zirconia products;

6,664t of rare earth chemical concentrate;

1,967t of niobium in c 3,000t of ferro-niobium;

50t of hafnium as HfO2; and

approximately 65,000oz Au from the TGO.

We provide a summary of the DP’s product suite below.

Zirconium – commercial terms being finalised

The sale of zirconium-based products, in the form of zirconium chemicals and chemical zirconia, constitutes the largest revenue stream (31% at projected prices) at group level for Alkane. The zircon market in all its forms has remained flat during recent years and, with zircon used in its most widespread form in building construction applications, demand is closely linked to infrastructure spending, especially out of China. Alkane’s discussions with potential customers are ongoing for commercialisation of its zirconium-based sales agreements.

Niobium – Treibacher Industrie

Subject to the effects of the oligopoly in this market, niobium prices remain flat at US$30-35/kg. Commercialisation of Alkane’s framework agreement with TIAG is also being converted into a commercial offtake agreement.

Hafnium – output revisions mirror industry needs

The DP’s future hafnium output is based on Alkane’s discussions with potential customers, primarily in the aerospace and industrial gas turbine industries, and its current understanding for the potential scale of this market once the DP is in production. Hafnium production will be 25tpa from start-up through to 2025, at which point it rises to 100tpa, resulting in annual revenues of A$80m pa at projected prices. Alkane’s management has stated that hafnium output could increase beyond 100tpa as the world market for this metal grows and accepts the DZP as an established long-term stable producer. Refined hafnium metal currently trades at US$1,200/kg, and we forecast that US$1,100/kg will be realised during the DP’s ramp-up period from 2018-20, followed by a flat US$800/kg over the remainder of the mine’s life (2036 under our assumptions).

Valuation: Driven by change to share price assumption

The following exhibit is based on the two-stage development concept for the DP. It also includes our value for the TGO, although we highlight that the potential future revenues and profits occurring from the DP (starting in FY19 under our assumptions) dwarf the relatively small cash generation levels that result from gold mining.

Exhibit 9: Edison’s estimate of theoretical EPS, diluted EPS, DPS and dividend discount flow (DDF is in A$)

Source: Edison Investment Research

As can be seen above, earnings are depressed until FY23 as production from the DP ramps up and the project’s capital expenditure dominates. We forecast gold production of 65koz from the TGO in FY18 (ie the lower bound of the company’s guidance announced on 27 June 2017), with earnings lowered in this coming financial year as a result of A$7m in capex required to develop an underground mining phase at Wyoming, with an additional A$13m in TGO UG capex capitalised as the reserve base is expected to grow as mining commences. A slight rise in earnings is seen over FY20 and FY21 as first DP profits materialise, but reduces again as stage 2 capex is spent over FY22. The following year (FY23) sees the first full year of mining at the maximum 1Mtpa ore throughput rate.

Note that our current underground mining assumptions for the TGO may change as the company finalises new resource estimates and these are subsequently used to potentially revise the mine schedule.

Breakdowns of discounted earning valuations for the following periods of our valuation horizon are given in Exhibit 10 below.

Exhibit 10: Base case, TGO-only and DP scenario valuations (A$ per share)

Previously

FY18e

TGO only, without any dilution, financing, costs or revenues associated with the DZP

0.26

0.26

Base case – TGO and DZP fully developed

0.61

0.71

The following valuation scenarios include TGO production

Post stage one capex with stage 2 developed

0.66

0.78

Post stage 2 capex

0.86

1.01

Source: Edison Investment Research

DP financing assumptions

The exact financing structure of the DP has not been finalised. However, we understand from discussions with management that the financing structure for the total A$1.1bn required to develop the DP could be secured by:

selling 10% of the DP through ASM to a strategic partner or partners for c A$100m, which could result from Alkane’s relationships with its industry partners; and

raising c A$200m via an equity placement or shareholder issue. For the purpose of our valuation, we have assumed A$221m (gross) is raised at a notional 0.35c/share during FY18, resulting in dilution of a further 605m shares. We expect news concerning the conversion of its MoUs into commercial offtake agreements and on securing debt funding for DP to act as a positive catalyst to Alkane’s share price and potentially limit the dilution of the equity issue.

We estimate that this would leave Alkane with a maximum net debt position for Stage 1 development in FY18 of A$322m, which equates to a gearing (debt/equity) ratio of 77% and a leverage (debt/debt+equity) ratio of 44%. Alkane is looking to cover this requirement using a combination of government (termed Export Credit Agency) loans incurring favourable interest rates and more conventional project financing routes, potentially incurring higher interest rates.

Sensitivity to share price

Other than commodity prices, the most notable effect on our valuation stems from our assumption for the price at which Alkane raises capital. Following Edison’s practice we apply the current share price to future potential equity issuance. However, we note that likely positive upcoming DP catalysts will alter this calculation as good news feeds into the share price. Exhibit 11 provides our total valuation (TGO+DP) given a range of share prices at which an equity portion of the DP’s financing might be raised:

Exhibit 11: Sensitivity to price at which DP financing raised

Equity raise price (A$ per share)

0.25

0.30

0.35

0.40

0.50

0.60

NPV10 (TGO + DP) A$/share

0.56

0.64

0.71

0.78

0.89

0.99

Source: Edison Investment Research

Illustrative premium rating valuation – A$2.00 possible

Mining companies, once they are firmly into profitable stable production, are usually awarded valuations at a multiple to their NPV. Simply put, once the DP reaches steady-state stable production and its products are sold into a stable price environment, if we assume that Alkane pays out all its free cash in the form of dividends, we can impute a share price valuation. If we assume a 5% dividend yield (a relatively conservative assumption of long-term mining stock yield levels), Alkane’s maiden theoretical dividend of A$0.10 in FY24 (the first year we estimate that the dividend could be paid) could imply a potential A$2.00/share Alkane valuation.

Financials

Alkane saw its cash pile rise a massive 72% from end FY16, from A$24.5m to A$42.0m. To this can be added a further A$2.9m in gold bullion on hand.

If we take out all our financing assumptions for the DP in FY18, we see the TGO generating A$102.6m in revenue and EBITDA of A$25.9m. We estimate TGO capex of A$12m for development of an underground operation (NB this may well change) and exploration expenditure of A$4m.

On the basis of the above gold production and other cost assumptions, we forecast that, based on TGO alone, Alkane would finish FY18 with cash of A$46.0m.

Exhibit 12: Financial summary

A$'000s

2014

2015

2016

2017e

2018e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

35,474

101,813

109,624

117,792

102,595

Cost of Sales

(25,692)

(74,809)

(76,236)

(72,405)

(71,443)

Gross Profit

9,782

27,004

33,388

45,387

31,152

EBITDA

 

 

3,890

26,478

40,913

47,874

25,869

Operating Profit (before GW and except.)

3,890

(79)

10,984

14,874

(39,352)

Intangible Amortisation

0

0

0

0

0

Exceptionals/discontinued

(4,798)

(8,211)

(4,375)

(20,475)

63,244

Other

0

0

0

0

0

Operating Profit

(908)

(8,290)

6,609

(5,601)

23,891

Net Interest

(471)

153

54

2,956

628

Profit Before Tax (norm)

 

 

3,419

74

11,038

17,830

(38,725)

Profit Before Tax (FRS 3)

 

 

(1,379)

(8,137)

6,663

(2,645)

24,519

Tax

(4,893)

4,051

(1,968)

3,064

0

Profit After Tax (norm)

(1,372)

4,125

9,070

17,953

(38,725)

Profit After Tax (FRS 3)

(6,272)

(4,086)

4,695

419

24,519

Average Number of Shares Outstanding (m)

373.7

413.4

420.8

819.4

1,121.8

EPS - normalised (c)

 

 

(0.4)

1.0

2.2

2.2

(3.5)

EPS - FRS 3 (c)

 

 

(1.7)

(1.0)

1.1

0.1

2.2

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

27.6

26.5

30.5

38.5

30.4

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

160,174

162,624

182,691

169,783

752,998

Intangible Assets

53,406

65,251

72,553

55,078

59,078

Tangible Assets

100,032

89,787

102,941

107,508

686,723

Investments

6,736

7,586

7,197

7,197

7,197

Current Assets

 

 

40,811

28,342

38,569

56,935

13,006

Stocks

15,391

11,505

12,394

13,038

11,330

Debtors

4,906

1,988

1,720

1,929

1,676

Cash

15,569

14,849

24,455

41,969

0

Other available for sale financial assets

4,945

0

0

0

0

Current Liabilities

 

 

(14,726)

(11,251)

(10,448)

(15,986)

(329,689)

Creditors

(13,755)

(9,726)

(8,745)

(14,283)

(5,872)

Short term borrowings

0

0

0

0

(322,114)

Other

(971)

(1,525)

(1,703)

(1,703)

(1,703)

Long Term Liabilities

 

 

(12,039)

(9,265)

(20,502)

(20,502)

(20,502)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(12,039)

(9,265)

(20,502)

(20,502)

(20,502)

Net Assets

 

 

174,220

170,450

190,310

190,230

415,813

CASH FLOW

Operating Cash Flow

 

 

(3,508)

28,454

37,432

51,416

19,419

Net Interest

(369)

153

54

15

628

Tax

0

0

0

3,064

0

Capex

(95,281)

(32,588)

(40,423)

(40,567)

(648,437)

Acquisitions/disposals

40,534

3,151

416

0

63,244

Financing

9,800

162

12,127

3,585

201,064

Dividends

0

0

0

0

0

Net Cash Flow

(48,824)

(668)

9,606

17,514

(364,083)

Opening net debt/(cash)

 

 

(64,294)

(15,569)

(14,849)

(24,455)

(41,969)

HP finance leases initiated

0

0

0

0

0

Other

99

(52)

0

(0)

0

Closing net debt/(cash)

 

 

(15,569)

(14,849)

(24,455)

(41,969)

322,114

Source: Alkane Resources accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Alkane Resources and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in
accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Alkane Resources and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in
accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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