Alkane Resources — Boda and Tomingley continue to deliver

Since our last note, Alkane has:

This note updates our analysis of the company with respect to both announcements. However, given that underlying earnings for FY21 were within A$1.0m (or 3.3%) of our prior forecast (see pages 9–11), primacy in this case has been given to the drilling results at Boda, which, among other things, have increased the vertical extension of the high-grade sulphide cemented breccia zone to a total of 800m (cf 500m previously) from surface.

On 16 August, Alkane reported the assay results of an additional seven diamond drill holes (denoted DD) and an additional three reverse circulation (RC) holes at its Boda, Boda Two and Boda Three prospects at its Northern Molong Porphyry Project. The drilling is part of a 30,000m diamond and RC core exploration programme that began in July 2020 to test the dimensions and extensions to the large, low-grade mineralised envelope at Boda, as well as any internal high-grade zones.

A summary of the nine holes drilled at Boda and Boda Two (see Exhibit 2) is as follows:

Note that, for the purposes of Exhibit 1, multiple intersections have been amalgamated and grades averaged according to the width of the individual intersections. In general, it may be seen that the six new DD holes reported widths of mineralisation that were consistent with (albeit slightly less than) those of previous holes at similar grades, but that the three RC holes (and particularly KSRC42 and KSRC043) reported grades that were materially higher than those reported previously in either DD or RC holes.

One further RC hole (not shown above), KSRC039, was drilled approximately 677m west-south-west of hole KSRC037 (see Exhibit 2 map) in Boda Three and returned an aggregate intercept of 14m at an average grade of 0.07g/t Au and 0.13% Cu – not high grade in and of itself, but demonstrating that the mineralisation continues for many metres to the south of the area already drilled and possibly much further with the potential for additional high-grade zones.

Two RC drill holes (KSRC042 and KSRC043) were designed to test for shallow extensions to the high-grade breccia first identified by KSDD007 (see our note 007 strikes it rich, published on 23 April 2020), while one hole (KSRC038D) was diamond core tailed to test for similar up-dip strike continuation and one further hole (KSDD034 with a wedge hole, KSDD034W2) for down-dip continuation. Hole KSDD033 tested the southern extensions to the mineralisation at Boda Two.

In general, holes KSRC042 and KSRC043 confirmed the existence of shallow extensions to the high-grade breccia first identified by hole KSDD007, with hole KSRC043 in particular intersecting significant gold and copper grades from surface with substantial assay results of:

Hole KSRC042 also intersected elevated grades of 10m grading 0.72g/t Au and 0.40% Cu and 9m grading 0.73g/t Au and 0.50% Cu.

In the meantime, hole KSRC038D (which was the diamond core tail of original RC hole KSRC038) intersected a wide zone of sulphide cemented breccia within a broad zone of gold-copper porphyry mineralisation up-dip of holes KSDD006, KSDD016, KSDD031 (which was designed to test the high-grade breccia down plunge, on the reverse angle), KSDD034 and O34W2 and KSDD005, with significant assay results of:

In this case, while the grade of the new hole was consistent with that intersected in previous holes (particularly for gold), the width of the intersection was generally materially greater (see Exhibit 3).

At the same time, deep DD core holes KSDD034 and KSDD034W2, which tested down-dip of the high-grade breccia, demonstrated the continuity of the structure as well as a possible feeder structure and conduit to the breccia with significant assay results of:

As such, these two holes largely corroborated the results of hole KSDD028 (see our note Revealing the fruits of its labours, published on 9 July 2021). Hole KSDD028 was significant in that it was designed to intersect the north-west striking orebody at approximately 90°. The hole, collared in outer propylitic alteration, intersected a gold mineralised pyrite-sericite shell for approximately 300m downhole, which zoned in to extensive calc-potassic alteration with gold-copper (Au-Cu) mineralisation centred around a high-grade Au-Cu breccia. The breccia showed apparent sulphide zonation with the upper intercepts more pyrite rich, zoning towards the centre and at depth to more chalcopyrite rich with increasing Au-Cu grades, possibly vectoring towards a ‘causative’ intrusion to the Boda system.

All told, these five new holes are interpreted as indicating that the orientation of the high-grade sulphide cemented breccia at Boda is as expected and that it has a vertical depth extension of at least 800m. In the meantime, it remains open and further drilling in this area is designed to test the structure at depth where its nature may change from chalcopyrite dominant to more copper-rich bornite dominant as well as continuing to test for a causative porphyry intrusion to the breccia and Boda system.

Results were also received from diamond core drill hole KSDD033, which tested the southern extensions to Boda Two and confirmed a zone of extensive gold-copper porphyry mineralisation, with a higher aggregate intercept and higher grades than earlier shallower holes (KSDD021 and KSRC037), with significant discrete intercepts of:

As such, hole KSDD033 may be said to have largely confirmed the earlier (significant) results from holes KSDD022 and KSDD021, which intersected a large pyrite shell comprising stringers and aggregates of pyrite within a sequence of propylitic altered basaltic andesites and monzodiorite sills and dykes, where the thick intersection of strong gold mineralisation with anomalous copper and pathfinder elements was interpreted to be indicative of a distal component to a new, large fertile magmatic system (Boda Two). Note that the same was also true of the intersection of significant molybdenum and copper mineralisation at a depth below 841m in hole KSDD024, which also suggests a zonation of metals around a deeper magmatic source to the system.

In total, five holes tested positive for molybdenum mineralisation, at various grades from 10–124ppm and at various depths ranging from 118m to 975m. Four of the holes (KSRC038D, KSRC042, KSDD034 and KSDD034W2), including the highest grade and deepest intersection (hole KSDD034W2), related to the sulphide cemented breccia unit, while the other one was KSDD033, which was testing the southern extensions of Boda Two. While the intersections in KSDD033 were not as deep, generally, as in earlier holes (ie from only 240m downhole), it corroborated the general pattern of molybdenum mineralisation being found at greater depths (eg holes KSDD019, KSDD017, KSDD024, KSDD030 and KSDD021).

In general, the DD holes continue to demonstrate wider overall intersections than their RC counterparts, extending to greater depths at higher grades, which may be attributed to a) the zonation of the system and b) the fact that the RC drill holes are testing the upper part of the system, where grades are anyway anticipated to be lower (as is typical of this type of porphyry system). Moreover, some of the RC drill holes are pre-collars for subsequent DD holes in order to reduce the overall cost of the holes (eg KSRC038D). Note that three further earlier RC holes (KSRC031, KSRC032 and KSRC037) also finished in mineralisation and one of these (KSRC032) will be extended via a diamond tail at a later date.

Exhibit 4 updates our estimates of the potential mineralised inventory in the light of the nine new drill hole results at Boda. As previously, in recognition of the difference between RC and DD results, we have included two updated estimates: one based on the whole population of results and the other based on the results of the DD holes only. Our updated mineral inventory estimates are also compared with the resources disclosed by Newcrest for Cadia Ridgeway c 100km to the south (see Exhibit 5).

Given the information available, our best estimate of the overall size of the Boda deposit is broadly unchanged at 707–1,704Mt at an average gold grade of 0.25–0.26g/t containing 5.7–11.0Moz Au plus copper. Not easily discernible from these overall figures, but probably the most significant consequence of the drilling results announced on 16 August, is the increase in the potential resource contained within the high-grade sulphide cemented breccia, from c 2.1Moz AuE to c 3.5Moz AuE at a grade above its 3.0g/t AuE cut-off (see column entitled ‘High grade pod’), as a result of the extension of this structure to at least 800m (cf 500m previously) from the interpretation of the assay results of holes KSDD034 & 034W2, KSRC038D, KSRC042 and, in particular, KSRC043, which was designed to test for shallow extensions to the breccia and, in the process, returned an assay result of 31m grading 2.94g/t from surface (see Alkane’s announcement for more detail).

Edison’s interpretation of Alkane’s drilling results notwithstanding, clearly such estimates are very far from being anything close to JORC code-compliant and experience would suggest they have an accuracy of approximately ±75%. Even the bottom end of this range, however, 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) in the range A$0.32–0.61/share (cf A$0.34–0.60/share previously).

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 Central West New South Wales (Exhibit 5).

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 36.1Moz Au at a grade of 0.35g/t Au and 8.2Mt of copper at a grade of 0.26% Cu plus silver and molybdenum and produced 843koz of gold in FY20 at an all-in sustaining cost (AISC) of US$160/oz Au (net of by-product credits) to generate US$991m in free cash flow.

The Northern Molong Porphyry Project 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 6) 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). This survey showed a strong high chargeable anomaly along the northern edge of the survey area coincident with the magnetic anomaly, as a result of which Alkane subsequently completed a 70-line kilometre IP survey over the 6km strike extensions of the BIC to generate drilling targets.

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 and the BIC. Specifically, gold mineralisation has been discovered at Kaiser, Boda and Glen Hollow (which is part of Comobella), with recent drilling identifying multiple phases of monzonite to monzogabbro intrusion that are plumbing a north-west structural corridor hosting extensive (calc-)potassic alteration and significant gold-copper mineralisation. In this case, the north-west orientation of the structural zones is significant in that similarly oriented structural zones are important controls to Macquarie Arc alkali gold-copper porphyry mineralisation such as the Lachlan Transverse Zone at the Cadia Valley (and Northparkes) deposits. Within this context, the alteration at Boda suggests the prospect is positioned in the upper parts of an alkali porphyry system with high-level epithermal gold veins observed in some of the drilling coincident with strongly pyritic zones, while deeper drilling has defined strong pervasive hydrothermal alteration that is dominantly calc-potassic (ie, a biotite+actinolite+epidote+magnetite+chalcopyrite±kspar±bornite mineral assemblage), phasing out to a more distal propylitic alteration (albite+epidote+chlorite+pyrite±chalcopyrite).

Gold production from Tomingley in Q421 was already known prior to our last note (Revealing the fruits of its labours, published on 9 July) and therefore formed the basis of our expectations, albeit Alkane’s subsequent Quarterly Activities Report showed that this level of output was achieved via the milling of fewer tonnes at a higher grade (see Exhibit 7). This followed a first quarter in which operational results at Tomingley were close to our expectations and second and third quarters that were characterised by higher head grades and lower unit costs (in A$/oz terms). As a result, Alkane produced 56,958oz gold in FY21 at an AISC of A$1,320/oz, materially outperforming its most recent guidance of 50–55koz at an AISC of A$1,400–1,550/oz and its original guidance of 45–50koz gold at an AISC of A$1,450–1,600/oz. A summary of Alkane’s quarterly results for FY21 (including Edison’s estimates of the actual gold price and forex rates during the quarter and the year) is as follows:

Apart from the level of tonnes milled and the head grade of the ore milled, one notable variation in actual results relative to our prior forecast was the level of gold sold compared with the amount of gold produced. This reflects nothing more than timing differences as at the balance sheet date of the company’s results and will probably be recouped by a subsequent over-sale of gold relative to production in coming quarters. All other things being equal, this would have resulted in a A$3.8m negative variance in revenues relative to our prior forecasts and was borne out when Alkane announced its full-year results on 27 August, which are summarised below:

Readers should note that there is an anomaly whereby Alkane’s H119, FY19 and H120 results were reported with its recently demerged Australian Strategic Materials (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, we do not consider them to be material enough to significantly detract from the overall trends apparent from the figures.

Otherwise, to the extent that revenues were A$3.8m less than our prior forecast, this was more than offset by costs being A$5.4m lower to result in Alkane outperforming our FY21 earnings expectations by A$2.8m, or 9.0%. However, note that, if A$2.7m in gains relating to the ‘derecognition of financial assets’ and included in ‘Other income’, above, are classified as ‘exceptional’ (see Exhibit 11), then the degree of outperformance moderates to A$1.0m, or 3.3%, although, nevertheless, still out-performance.

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 (albeit now extended) discounted back to present value at a rate of 10% per year, excluding exploration expenditure.

In the wake of Q421 full operational results, our valuation of the dividend stream potentially available to Alkane shareholders from its immediate Tomingley operations is now A$0.348/share (cf A$0.324/share previously). However, to this must be added the value of residual resources at the end of the life of operations, which we now estimate to be 0.8Moz with a current value of US$18.2m (A$25.0m), or A$0.042/share, to bring our total valuation of Tomingley to A$0.390/share (cf A$0.365/share previously) including cash.

A comparison of our updated and prior expectations for Alkane’s EPS and DPS stream and valuation from the present to the end of its life of operations is as follows:

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 both our updated Boda estimates (see Exhibit 4) and FY21 results (see Exhibit 8) is as follows:

Alkane had A$9.8m in net cash on its balance sheet as at end-FY21. In addition, it had A$7.7m of bullion on hand and, we estimate, an updated A$51.1m in listed investments in Calidus and Genesis. Excluding cash flows from financing activities, Alkane generated A$71.1m in cash from operating activities in FY21 (cf A$37.1m in H121) and invested A$102.7m in capex, leading to a free cash outflow of A$31.6m. Hereafter, we estimate that cash flow from operations will contribute meaningfully to capex as the Tomingley mine extension is constructed. However, we expect that management will nevertheless seek to fund a portion of the project with debt put in place over the course of the next 12 months.