Alkane Resources — Expanding its resources

Since our last note in April, Alkane has:

This note updates our analysis of the company with respect to all of these announcements.

Alkane achieved its updated FY23 production guidance figures with 70,253oz of production (cf the most recent guidance of 65,000–73,000oz) at an all-in sustaining cost (AISC) of A$1,602/oz (cf A$1,550–1,700/oz), exceeding prior FY23 guidance of 55,000–60,000oz production at an AISC of A$1,650–1,900/oz. Production at Tomingley in Q423 was 15,822oz at an AISC of A$2,174/oz, generating gold sales of 15,136oz for revenue of A$43.7m at an average price of A$2,884/oz. FY23 full year gold sales were 70,498oz for revenue of A$190.5m at an average price of A$2,703/oz.

A summary of Alkane’s recent quarterly results plus the full year results is provided in the table below:

As a result of Alkane’s Q423 operational results, we have adjusted our FY23 financial forecasts to those shown below in Exhibit 2 (FY23 financial results are scheduled for release at the end of August 2023).

In its announcement on 13 June, Alkane reported the assay results from two diamond drill holes (denoted DD) and two reverse circulation (RC) holes at its Boda, Boda Two, Boda Three and Kaiser prospects at its Northern Molong Porphyry Project, extending over 3km. On 4 August 2023, Alkane released a second update at Boda undertaking deep core drilling, continuing to outline significant mineralisation down plunge to the north-west of the Boda mineral resource estimation. Additionally, further drilling at Boda Two and Three intercepted higher-grade gold-copper mineralisation from near surface via eight RC drill holes and two diamond core tails. An updated mineral resource estimation for Boda, expected to include Boda Two, is anticipated in Q4 CY23 and for Kaiser in Q1 CY24.

Alkane has begun further exploration at the Boda Four prospect. Composed of two linear magnetic highs approximately 800m in length and up to 200m wide, the prospect is located 1km south and along strike of the BIC and named the Boda South Intrusive Complex (BSIC, Exhibit 3).

Recently a total of 912m across three RC drill holes were completed at the northern and central section of the BSIC at the Boda Four prospect intersecting low-grade copper-gold mineralisation. More RC drilling is planned next year, following the initial mineralisation detected, focusing on the west and north-west flanks of the BSIC in a similar prospective position as observed at the other Boda deposits.

In general, the Boda porphyry system is a series of near vertical, north-west striking, intrusive related breccias hosted within a thick sequence of shallowly east dipping andesite lavas. These magmatic breccias are hydrothermal in nature and zone towards higher gold-copper grades when associated with a chalcopyrite ± pyrite dominant cement. The deposit is truncated to the north-west by the north striking Solar Fault (Exhibit 3), a 65 degree west dipping reverse structure, over which significant post-mineral displacement has occurred.

Previously, the initial Boda deposit inferred mineral resource was estimated at 624Mt grading at 0.26g/t gold, 0.14% copper for 5.21Moz gold and 0.90Mt copper (30 May 2022), following over 83 drill holes for a combined 52,390 metres of diamond core and 19,041 metres of RC drilling. Exploration via deep core DD continues to define significant mineralisation down plunge to the north-west of the Boda mineral resource estimate.

Recent exploration drilling (13 June 2023 and 4 August 2023) identified extensive gold-copper results along the aforementioned Solar Fault following a prior positive drilling result (BOD091 intercepting 1,041m grading 0.32g/t Au and 0.17% Cu from 698m, 25 October 2022). New results have been received from DD testing within the north-west margin of the mineral resource estimate as well as beneath it, identifying mineralisation outside of the current mineral resource estimation, intersecting extensive gold-copper results including:

Full details of the assay results are included in Alkane’s announcement. The other most significant intersection at Boda is a shallow intercept located within the current mineral resource estimation including the following higher-grade zones:

A summary of the eight drill holes – totalling 4,576m (or 572m per hole) – is as follows:

Gold and copper intercepts were calculated using a lower cut off of 0.2g/t AuEq. Internal dilution (<cut off) is less than 25% of reported intercepts. True widths are estimated as approximately 50% of intersected widths.

Note that, for the purposes of Exhibit 4, multiple intersections have been amalgamated and grades averaged according to the width of the individual intersections. In general, it may be seen that the eight new holes reported widths of mineralisation that were larger on average than those of previous drill holes at slightly lower grades. Boda drill results continue to follow a comparable trend to the previous average. We await an updated Boda mineral resource estimate that is expected to include Boda Two, anticipated in Q4 CY23.

The Boda Two and Boda Three prospects are currently defined by a 1,100m x 500m coincident gold-copper soil and magnetic high footprint with separate conductive induced polarisation (IP) anomalies. The prospects are centred approximately 1km south of Boda, within the BIC. Boda Two and Three are part of a system of heavily faulted, basaltic to andesitic volcaniclastics and volcanics intruded by a series of steep west dipping dykes, stocks and intrusive breccias.

Announced on 13 June 2023, assay results at Boda Two intersected zones of extensive gold-copper porphyry mineralisation. On 4 August, Alkane released a further set of results from shallow RC drilling that intercepted higher-grade gold-copper mineralisation from near surface.

A summary of the new holes drilled at Boda Two and Boda Three (Exhibit 5) is as follows:

Total metres drilled containing significant results amounted to 11,432m, or an average of 635m per hole. As at Boda, multiple intersections have been amalgamated and grades averaged according to the width of the individual intersections. Assessing new core samples, it may be seen that the 18 holes shown in Exhibit 5 reported widths of mineralisation that were smaller on average than those of previous drill holes, albeit at slightly higher grades. Owing to the narrower widths, the average of all intersections has dropped by 9% while the average gold grade has increased by 4%. We await an updated Boda mineral resource estimate that is expected to include Boda Two, anticipated in Q4 CY23.

As mentioned above, full details of the assay results are included in Alkane’s announcement. However, below are the most significant intercepts across eight RC drill holes and two diamond core tails at Boda Two and Boda Three. Significant intercepts from the shallow RC drilling have intercepted higher-grade gold-copper mineralisation from near surface, including:

Results from two diamond core tails (both RC pre-collars were drilled to 424m depth and their results previously announced on 28 March 2023) include significant new intercepts of:

Showcasing a marginally higher grade with generally narrower widths than Boda itself, drilling at Boda Two and Three nevertheless demonstrates many similarities with Boda, including an extensive zone of low-grade gold-copper porphyry mineralisation with breccias that zone to higher grades. As such, the most recent rounds of drill hole results continue to confirm that the mineralisation continues for many metres to the south of Boda and possibly much further with the potential for additional high-grade zones. Recently the envelope has been tested extensively with an updated mineral resource estimation for Boda, expected to include Boda Two, anticipated in Q4 CY23 and for Kaiser in Q1 CY24. In the meantime, Edison’s best estimate of the mineral inventory at Boda Two and Three that may be encompassed by current drilling is shown in Exhibit 6, below.

Our best estimate of the mineral inventory contained within the Boda Two and Boda Three deposits therefore is currently a 1,935koz Au at an average grade of 0.28g/t (see Exhibit 6, above). We caution that such estimates are very far from being anything close to JORC code-compliant and experience would suggest they have an accuracy of approximately ±80%. On this basis, we calculate a value for our current resource estimate of 1,935koz of A$0.117/share (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). If the ultimate resource delineated expands to 8,699koz (our estimate of the maximum reasonably possible), we would value it at A$0.524/share.

Although, at first glance our estimate of the mineralisation at Boda Two and Three is lower than previously, it is still consistent with a multi-million-ounce endowment to add to those already delineated at Boda and Kaiser. In this context, we note that the eventual maiden mineral resource estimate for Boda contained 45.6% of the maximum reasonably possible number of gold ounces implied by Alkane’s estimate of the dimensions of the orebody. Pro-rata, this would imply a mineral endowment at Boda Two and Three of 3,967koz, which we would value at A$0.239/share.

The Tomingley Gold Project represents Alkane’s flagship asset, covering an area approximately 440km2, stretching 60km north-south. Following the announcement of the Tomingley Gold Extension Project, Alkane expects underground mining to commence at Roswell before the end of CY23. Alkane has been running an extensive regional exploration programme, defining mineral resource estimate at both the Roswell and San Antonio deposits, forming part of the Tomingley Gold Extension Project. Parallel to the mine expansion, regional exploration drilling recommenced in the region during early 2023, focusing on the McLeans, Plains, El Paso and Allendale prospects.

On 10 July, Alkane released the latest exploration results in the region surrounding Tomingley, identifying significant gold mineralisation at multiple prospects located within seven kilometres of the Tomingley processing facility, including targets within the approved Tomingley project area:

Recent exploration results were captured via 142 air-core drill holes for 15,321m across five prospects (including Roswell North, albeit minimal data, 1 RC hole); 18 RC drill holes for a total of 5,212m; and 4 DD totalling 1,481m of core. Notable drill results from the aforementioned prospects are listed below:

As previously, 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 plan (including Roswell and San Antonio) discounted back to present value at a rate of 10% per year, excluding exploration expenditure. In the wake of Q423 operational results and after updating our A$/US$ forex assumptions to reflect current exchange rates, our valuation of the dividend stream potentially available to Alkane shareholders from its immediate Tomingley operations is now A$0.550/share (cf A$0.563/share in April 2023 previously). However, we add the value of residual resources at the end of the life of operations, which we now estimate to be 832koz (cf 834koz previously) with a current value of US$20.0m (A$30.6m), or A$0.051/share, to bring our total valuation of Tomingley to A$0.601/share (cf A$0.613/share previously) including cash.

A comparison of our updated expectations for Alkane’s EPS and (maximum potential) DPS stream and valuation from the present to the end of its life of operations is shown in Exhibit 9, below.

Note that the DPS columns in Exhibit 9 represent theoretical, maximum potential dividends that we believe could be paid by the company, rather than actual dividends forecast and are used solely for valuation purposes. In reality, we would expect a portion of any dividends that could be paid instead to be re-invested into the business, either in the form of exploration expenditure (eg at the Northern Molong Porphyry Project) or capital expenditure.

A summary of our updated valuation of Alkane in the light of recent announcements surrounding exploration and Q423 operating results (see Exhibit 1) is as follows:

The variation of valuation for Boda Two and Three exploration is described in Coming to fruition, published on 7 July 2022. Differing methods of estimation generate a range of valuations (drill results return A$0.11/share cf dimensions estimates at A$0.52/share). Moreover, readers are reminded that such estimates are very far from being JORC code compliant and experience would suggest they have accuracy of approximately ±80%.

We expect Alkane to produce a conceptual mine plan at the Boda deposit later this year. However, pending its release we are, for the moment, leaving our forecasts unchanged albeit we recognise the potential for a longer open-pit life of mine before transition to underground mining.

Tomingley and the Northern Molong Porphyry Project (seen as a potential operating asset) also experience a material increase in valuation as a consequence of rising metals prices, if valued at the spot prices of gold and copper rather than Edison’s long-term forecast prices (ie in real terms, both the gold price falling in CY28 to US$1,554/oz and the copper price to US$6,410/tonne) as the margin between spot prices and our long-term forecast grows with short-term increases in the gold/copper price.

As per its 27 July Tomingley Q4 production update Alkane had A$80.3m unaudited cash as well as A$8.3m of bullion on hand and, we estimate, A$18.7m in listed investments in Calidus, Genesis and Sky Metals. We also estimate that Alkane generated A$76.3m in cash (including net interest) from operating activities in FY23 compared to A$86.5m in FY22. During Q423 it invested A$15.7m on various growth and expansion programmes, including the San Antonio-Roswell underground exploration drive and ventilation rise, early works associated with the Newell Highway realignment and process and paste plant capital for the Tomingley Gold Extension Project. Additionally, A$6.5m was spent on exploration with the focus of exploration expenditure being the Northern Molong Porphyry Project and, in particular, drilling at the Boda, Boda 2 and Kaiser prospects. Hereafter, we estimate that free cash flow from operations will continue to contribute meaningfully to capex as the Tomingley mine extension is constructed and further exploration is conducted at the Kaiser-Boda deposits. To de-risk the completion of these targets, Alkane has a currently undrawn A$50m debt funding facility from Macquarie Bank, together with 100koz of gold hedging at a weighted average price of A$2,825/oz, fully described in our last outlook note, released in April.

Regarding our forecasts, we have continued to model hedges on a realised gains basis, such that any gains (or losses) will be intrinsically linked to the ever-moving gold price along with our current long-term forecast. However, the time value associated with the contracts is excluded from our forecasts. In line with previously modelled debt structures, we report any profit or loss pertaining to hedges in the revenue line of the financial summary below.