Alkane Resources — Coming to fruition

Alkane Resources (ASX: ALK)

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Last close As at 25/01/2023

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Market capitalisation

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Research: Metals & Mining

Alkane Resources — Coming to fruition

Alkane Resources has made a number of seminal announcements since our last note. The first concerned a 244koz (or 37%) increase in the resource at Roswell, which brings the underground Roswell life extension in FY29–31 ever closer to fruition. However, by far the more important is the announcement of a maiden resource at Boda in the Northern Molong Porphyry Project of a globally significant 5.2Moz, or 10.1Moz AuE (cf a prior Edison estimate of 5.5Moz Au or 9.8Moz AuE – see Exhibit 1). This note looks at Boda in the wake of this announcement, including its potential valuation and development options.

Lord Ashbourne

Written by

Lord Ashbourne

Director, Energy & Resources

Metals & Mining

Alkane Resources

Coming to fruition

Maiden Boda resource

Metals & mining

7 July 2022

Price

A$0.69

Market cap

A$405m

A$1.4708/US$

Net cash (A$m) at end-December

17.0

Shares in issue

595.4m

Free float

76%

Code

ALKX

Primary exchange

ASX

Secondary exchange

OTC QX

Share price performance

%

1m

3m

12m

Abs

(32.3)

(40.6)

(43.6)

Rel (local)

(25.9)

(31.8)

(37.4)

52-week high/low

A$1.27

A$0.62

Business description

Alkane Resources has two main assets in Central West New South Wales: the Tomingley gold mine, where recent exploration has increased the mine life by at least eight years from FY23 to FY31, and its Northern Molong project, which is shaping up to be a tier 1 alkalic porphyry district.

Next events

Tomingley extension project approval

Mid-CY22

Q422 activity report

July 2022

Underground production at Roswell begins

Q1 CY23

Open cut production at San Antonio begins

Q3 CY23

Analyst

Lord Ashbourne

+44 (0)20 3077 5724

Alkane Resources is a research client of Edison Investment Research Limited

Alkane Resources has made a number of seminal announcements since our last note. The first concerned a 244koz (or 37%) increase in the resource at Roswell, which brings the underground Roswell life extension in FY29–31 ever closer to fruition. However, by far the more important is the announcement of a maiden resource at Boda in the Northern Molong Porphyry Project of a globally significant 5.2Moz, or 10.1Moz AuE (cf a prior Edison estimate of 5.5Moz Au or 9.8Moz AuE – see Exhibit 1). This note looks at Boda in the wake of this announcement, including its potential valuation and development options.

Year end

Revenue (A$m)

PBT*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/20

72.5

20.6

2.56

0.00

27.0

N/A

06/21

127.8

46.3

5.35

0.00

12.9

N/A

06/22e

162.3

42.4

1.73

0.00

39.9

N/A

06/23e

140.1

37.8

4.45

0.00

15.5

N/A

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

Many analogues, much potential

Boda is a classic calc-potassic porphyry, analogous to nearby Northparkes (see Exhibit 7) and similar in size to Cascabel’s Tandayama-America deposit. However, outcropping mineralisation creates an opportunity to mine from surface and Alkane’s immediate imperative will be to define the extent of the mineralisation ahead of a preliminary economic assessment (PEA) at end CY23 or early CY24. For the moment, our valuation of Boda (below) remains relatively conservative. However, it is worth noting that Newcrest paid US$806.5m for a 70% interest in the then 20Moz Au plus 5.8Mt Cu resource at Red Chris in August 2019 (equivalent to US$57.61/oz Au or US$25.89/oz AuE), on which basis Boda would be worth c US$280.8m, or US$0.472/share or A$0.694/share.

Valuation: Tangible assets cover 136% of share price

Our valuation of Alkane continues to be underpinned by Tomingley, which we now estimate contributes A$0.57/share to its valuation. Liquid assets in the form of Alkane’s holdings in Calidus and Genesis contribute a further A$0.06/share. Where before these had been the only two tangible contributors to Alkane’s valuation, they have now been joined by Boda, which we estimate is worth an immediate US$125.5m (or US$0.21/share or A$0.31/share) to Alkane either as an in-situ resource or as a development project (see pages 10–13), albeit with the proviso that the project-based valuation will now increase inexorably, both as a result of continued resource increases and upgrades and as a result of Alkane’s de-risking the project by achieving future development milestones and with the passage of time. As such, we calculate that Alkane’s share price is now more than 100% covered by the value of tangible assets (cf 56% previously), with up to A$0.59/share in additional upside available in the form of further exploration success in the Northern Molong Porphyry Project as well as the gold price and the ever-increasing probability that the Roswell underground extension will be sanctioned.

Investment summary

Company description: Australian gold miner and explorer

Listed on the ASX since 1969, Alkane Resources is a gold production company with a multi-commodity exploration and development portfolio. Having de-merged its Dubbo rare earths project into Australian Strategic Materials in 2020, Alkane’s focus is a multi-faceted gold investment strategy at its two major projects, Tomingley (including its Roswell and San Antonio extensions) and the newly discovered Northern Molong Porphyry Project (NMPP), both in New South Wales (NSW). In addition to its owner-operated assets, Alkane has also made a number of strategic investments in junior gold mining companies and high-potential projects, where it is in a position to contribute capital, expertise and operating capability, for mutual benefit, for example, in Calidus Resources (ASX:CAI), which is now fully funded and in development, and Genesis Minerals (ASX: GMD), which is developing the Ulysses gold project in Western Australia.

Valuation: Share price now >100% covered by tangible assets

Our valuation of Alkane continues to be underpinned by Tomingley as it develops into the San Antonio and Roswell deposits (SAR) to its immediate south, which we estimate contributes A$0.57/share to company’s valuation. Liquid assets in the form of Alkane’s holdings in Calidus and Genesis contribute a further A$0.06/share. Where before these had been the only two tangible contributors to Alkane’s valuation, they have now been joined by Boda (part of the NMPP), where Alkane has recently announced a maiden resource of 5.2Moz gold, or 10.1Moz gold equivalent (AuE). We estimate that this is worth an immediate US$125.5m (or US$0.21/share or A$0.31/share) to Alkane either as an in-situ resource or as a development project (see pages 10–13), albeit with the proviso that the project-based valuation will now increase inexorably, both as a result of continued resource increases and upgrades and as a result of Alkane’s de-risking the project by achieving future development milestones and with the passage of time. Whereas we previously calculated that 56% of Alkane’s share price was covered by tangible assets, we now estimate that 136% of it is, with up to A$0.59/share in additional upside available in the form of further exploration success in the NMPP as well as the gold price and the ever increasing probability that the Roswell underground extension will be sanctioned in the wake of its resource upgrade on 2 May.

Sensitivities: Material early-stage sensitivity to metals prices

As befits a project at an earlier stage of development, the sensitivity of our Boda project valuation to long-term changes in metals prices (±73% for every ±10% change in metals prices) is much greater than the sensitivity of our Tomingley valuation (±21% for every ±10% change in prices).

Financials: Liquidity on several fronts

Alkane had A$17.0m in net cash on its balance sheet as at end-H122, composed of A$38.0m in cash and A$21.0m in external borrowings. As at end-Q422, the cash component of this equation was reported to have increased to c A$77.9m after the company’s sale of 20m shares in Genesis Minerals for A$34.4m in February. In addition, it had A$8.2m of bullion on hand and, we estimate, an updated A$38.5m in listed investments in Calidus, Genesis and Sky Metals. 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. 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 six to 12 months.

Recent developments

Since our last note on the company, Alkane has:

Announced a maiden resource at Boda in the NMPP in Central West NSW in Australia of 10.1Moz AuE (5.21Moz Au plus 0.90Mt Cu) contained within 624Mt ore at a grade of 0.51g/t AuE.

Announced an updated mineral resource at Roswell of 904koz on 2 May 2022.

Announced operational results for Q322 and production results for Q422 (Q1 CY22 and Q2 CY22, respectively).

Announced the sale of the majority of its stake in Genesis Mineral Holdings.

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

Boda maiden resource

On 30 May 2022, Alkane announced a maiden mineral resource estimate for its deposit at Boda in the Northern Molong Porphyry Project (NMPP) of 624Mt ore at a grade of 0.51g/t AuE containing 10.1Moz AuE (5.21Moz Au plus 0.90Mt Cu). The resource also contains a sub-component of 353Mt at a grade of 0.63g/t AuE containing 7.1Moz AuE (3.72Moz Au plus 0.62Mt Cu) potentially amenable to bulk-tonnage underground mining at a 0.4g/t AuE cut-off. A comparison between these actual resources and Edison’s prior estimate of the mineral inventory contained at Boda is provided in Exhibit 1, below. It is also compared with the resources disclosed by Newcrest for Cadia Ridgeway c 100km to the south of the NMPP (see Exhibit 7).

Exhibit 1: Edison estimate of the potential size of Boda mineralisation

Source of underlying data

Actual

Edison

Alkane Resources

Newcrest

Characteristic (units)

Total

Bulk tonnage underground mineable resource

***Prior
(all holes)

*Variance

(%)

***Prior
(DD holes)

*Variance

(%)

High-grade pod

Cadia Valley Ridgeway

Cadia Ridgeway underground actual**

Strike (m)

1,037

1,037

150

250

 

Ave est true width (m)

257

327

100

150

 

Est surface area (Mm2)

 

 

 

 

 

Ave est true depth (m)

830

1,008

800

600

 

Est volume (Mm3)

221

342

12

22.5

 

Est density (t/m3)

3

3

3

3

 

Est tonnage (Mt)

624

353

664

-6.0

1,026

-39.2

36

67.5

151

Est ave gold grade (g/t)

0.26

0.33

0.26

0.0

0.26

0.0

 

 

0.49

Est ave copper grade (%)

0.14

0.18

0.12

+16.7

0.12

+16.7

 

 

0.32

Est ave AuE grade (g/t)

0.51

0.63

0.46

+10.9

0.47

+8.5

3.0

2.0

1.00

Est contained gold (koz)

5,210

3,720

5,516

-5.5

8,696

-40.1

 

 

2,400

Est contained copper (kt)

900

620

827

+8.8

1,276

-29.5

 

 

480

Est contained AuE (koz)

10,100

7,100

9,847

+2.6

15,377

-34.3

3,472

4,340

4,840

Source: Edison Investment Research, Alkane Resources. Note: *Actual cf estimated. **From Newcrest reserve and resource statement, 31 December 2021; AuE equivalent calculation based on prices of US$1,770/oz Au and US$9,750/t Cu. ***Conducted at prices of US$1,818/oz Au and US$9,518/t Cu.

The Boda resource estimate was based on 71,431m of drilling over 83 holes (average 885m/hole) using a 0.3g/t AuE cut-off deemed appropriate for potential open-cut mining.

Immediately apparent from Exhibit 1 is how closely the total resource at Boda approximated our prior estimate based on the data collected from both diamond (DD) and reverse circulation (RC) drilling (10.1Moz AuE cf 9.8Moz AuE estimated). The resource was less than that previously estimated solely on the basis of diamond (DD) holes. The fact that DD holes demonstrated wider overall intersections than their RC counterparts and extended to greater depths at higher grades may be attributed to the zonation of the system and the fact that the RC drill holes were testing only the upper part of the system, where grades are anyway expected to be lower (as is typical of this type of porphyry system).

Our estimate of a high-grade sulphide cemented breccia of 3.5Moz at a grade above 3.0g/t AuE cut-off (based on Alkane’s estimated dimensions; see column entitled ‘High grade pod’) has yet to be explicitly confirmed but is entirely consistent with what has been announced so far. At least four mineralised intrusive breccias have now been identified central to the Boda mineralisation.

Exhibit 2: Kaiser, Korridor, Boda, Boda Two and Boda Three prospect drilling

Source: Alkane Resources

Note that hole KSDD028 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.

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), we estimate that a resource of 5.2Moz gold (Exhibit 1) has an in-situ value of US$125.5m, or US$0.21/share, or A$0.31/share (cf our prior estimate in the range A$0.30–0.59 per Alkane share).

Alkane’s immediate imperative will be to define the extent of the mineralisation ahead of a PEA at end CY23 or early CY24. The deposit remains open at depth and along strike to the south and along strike to the north-west within the Boda intrusive corridor and drilling continues to define the overall system with extensions being tested south of Boda at Boda Two and Boda Three and north-west of Boda towards Kaiser via Korridor. Infill drilling to promote the resources delineated so far from the inferred into the indicated and measured categories is also being conducted.

Boda Two and Boda Three drilling results

The Boda Two and Boda Three prospects are defined by a 1,100m × 500m coincident Au-Cu soil and magnetic high footprint with separate conductive induced polarisation (IP) anomalies.

Alkane announced the results of three further DD holes drilled at Boda Two and Boda Three on 17 December 2021 and 25 February 2022. A summary of the three new holes is as follows:

Exhibit 3: Boda Two and Three drill hole assay results

From
(m)

To
(m)

Aggregate intercept
(m)

Average gold grade
(g/t)

Average Cu grade
(%)

Previously reported holes

128.4

0.12

0.13

KSDD047

197.0

1,099.0

102.0

0.16

0.14

KSDD048

94.0

1,314.0

463.9

0.24

0.15

KSDD049

108.0

1,234.0

704.0

0.20

0.10

Average new holes

423.3

0.20

0.13

Average all holes

216.9

0.16

0.13

Source: Alkane Resources, Edison Investment Research

Total metres drilled at Boda Two and Boda three currently amount to 7,064m (cf 2,953m previously), or an average of 706m per hole (cf 492m per hole previously). Multiple intersections have been amalgamated and grades averaged according to the width of the individual intersections. With three additional DD holes completed in the latest round of drilling however, there is mounting evidence that the grades and widths of mineralisation are greater than those implied by earlier RC holes.

Analysis and interpretation of Boda Two and Three drill results

While lower grade with generally narrower widths than at Boda, drilling at Boda Two and Three nevertheless demonstrates many similarities with Boda. Drill hole results confirm the mineralisation continues for many metres to the south of Boda and possibly much further with the potential for additional high-grade zones. They also demonstrate an extensive zone of low-grade Au-Cu porphyry mineralisation with breccias that zone to higher grades. These breccias are in the process of being targeted currently. In the meantime, our best estimate of the mineral inventory that may be encompassed by current drilling (using the same methodology as for Boda, above) is shown in Exhibit 4, below. This is also compared with the resource disclosed by Newcrest for Cadia Ridgeway c 100km to the south (Exhibit 7).

Exhibit 4: Edison estimates of the potential size of Boda Two and Three mineralisation

Source of underlying data

Edison

Alkane Resources

Newcrest

Characteristic (units)

Updated

(all holes)

Previous***
(all holes)

Alkane est. dimensions

Cadia Valley Ridgeway

Cadia Ridgeway underground actual**

Strike (m)

617

617

1,100

250

 

Ave est true width (m)

108

64

500

150

 

Est surface area (Mm2)

0.550

 

 

Ave est true depth (m)

527

318

*527

600

 

Est volume (Mm3)

37.4

13.2

289.9

22.5

 

Est density (t/m3)

3

3

3

3

 

Est tonnage (Mt)

112.3

39.5

869.6

67.5

151

Est ave gold grade (g/t)

0.16

0.12

*0.16

 

0.49

Est ave copper grade (%)

0.13

0.13

*0.13

 

0.32

Est ave AuE grade (g/t)

0.34

0.34

*0.34

2.0

0.84

Est contained gold (koz)

591

148

4,473

 

2,400

Est contained copper (kt)

148

53

1,130

 

480

Est contained AuE (koz)

1,236

426

9,384

4,340

4,925

Source: Edison Investment Research, Alkane Resources. Note: *Edison estimates. **From Newcrest reserve and resource statement, 31 December 2021. ***Previous gold equivalent resource inventory and grades calculated at US$1,818/oz Au and US$9,518/t Cu; updated estimates calculated at US$1,765/oz and US$7,670/t.

Applying the same methodology as previously at Boda (see Exhibit 1), our best estimate of the mineral inventory contained within the Boda Two and Boda Three prospects is 591koz Au at an average grade of 0.16g/t (cf 148koz at 0.12g/t previously). If intersections in this area ultimately increase to those implied by the deposit’s apparent 1,100m × 500m coincident Au-Cu soil and magnetic high footprint with separate conductive IP anomalies however, we calculate that a resource several times this size (see column entitled ‘Alkane est. dimensions’) may still be possible.

As before, readers are cautioned that such estimates are very far from being anything close to JORC code-compliant and experience would suggest they have an accuracy of approximately ±75%. In this context, we calculate a value for our current resource estimate of 591koz at Boda Two and Three of A$0.035/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). In the event that the ultimate resource delineated expands to 4,473koz (as potentially implied by the dimensions noted in the table above), we calculate a value for Boda Two and Boda Three of A$0.266/share (ie on a par with Boda).

Kaiser drilling results

No new drill hole results have been reported at Kaiser since our last note. Historical drilling has defined a broad area of extensive alteration with two main zones of calc-potassic alteration and associated Au-Cu mineralisation in the Kaiser Zone, centred over the Kaiser workings, and the Duke Zone, 200m to the north-east and parallel to it. These two zones exhibit many of the same characteristics as the Boda prospect, including their alteration assemblages and zonation with a similar north-west trend to the hydrothermal system.

To date, the area mapped by drilling at the Duke Zone is c 250m wide by over 800m in strike length and open along strike and at depth, with the potential for a large tonnage, low-grade shallow resource 0.7km to the north-west of Boda.

A summary of the holes drilled at Kaiser and Duke, to date, is as follows:

Exhibit 5: Kaiser drill hole assay results

From
(m)

To
(m)

Average intercept
(m)

Average gold grade
(g/t)

Average Cu grade
(%)

Average all holes

12.0

238.0

194.6

0.28

0.18

Source: Alkane Resources, Edison Investment Research

As before, multiple intersections have been amalgamated and grades averaged according to the width of the individual intersections. In addition, the DD holes reported widths of mineralisation that were materially in excess of comparable RC results, albeit similar to lower gold grades and slightly lower copper grades.

Analysis and interpretation of Kaiser drill results

On the basis of these results, our best estimate of the mineral inventory that may be encompassed by drilling at Kaiser is shown in Exhibit 6, below. Our mineral inventory estimate is also compared with the resource disclosed by Newcrest for Cadia Ridgeway c 100km to the south.

Exhibit 6: Edison estimate of the potential size of Kaiser mineralisation

Source of underlying data

Edison

Alkane Resources

Newcrest

Characteristic (units)

Updated
(all holes)

Alkane est. dimensions

Cadia Valley Ridgeway

Cadia Ridgeway underground actual**

Strike (m)

986

800

250

 

Ave est true width (m)

85

250

150

 

Est surface area (Mm2)

0.200

 

 

Ave est true depth (m)

315

*315

600

 

Est volume (Mm3)

26.3

63.1

22.5

 

Est density (t/m3)

3

3

3

 

Est tonnage (Mt)

79.0

189.2

67.5

151

Est ave gold grade (g/t)

0.28

*0.28

 

0.49

Est ave copper grade (%)

0.18

*0.18

 

0.32

Est ave AuE grade (g/t)

0.52

*0.52

2.0

0.84

Est contained gold (koz)

702

1,681

 

2,400

Est contained copper (kt)

142.2

340.6

 

480

Est contained AuE (koz)

1,320

3,161

4,340

4,925

Source: Edison Investment Research, Alkane Resources. Note: *Edison estimates. **From Newcrest reserve & resource statement, 31 December 2021. Updated gold equivalent resource inventory and grades calculated at US$1,765/oz Au and US$7,670/t Cu.

Applying the same methodology used previously as at Boda (Exhibit 1), our best estimate of the mineral inventory contained within the Kaiser prospect is 702koz Au at an average grade of 0.28g/t (see Exhibit 6, above), albeit we recognise that this could more than double to 1,681koz if the drilling widths intersected ultimately increase to close to the 250m width mapped by drilling to date (see column entitled ‘Alkane est. dimensions’).

As before, readers are cautioned that such estimates are very far from being anything close to JORC code-compliant and experience would suggest they have an accuracy of approximately ±75%. In this context, we calculate a value for our current resource estimate of 702koz at Kaiser and Duke of A$0.042/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 1,681koz, we would value it at A$0.100/share.

Northern Molong Porphyry Project background

The NMPP is 100% owned by Alkane, covers c 115km2 of the northern Molong Volcanic Belt and is around 80km to the north-east of its Tomingley Gold Mine, in Central West NSW (Exhibit 7).

Exhibit 7: Location of the Northern Molong Porphyry Project

Source: Alkane Resources

To date, Alkane’s drill results at Boda have shown both a similar stratigraphic sequence and style of alteration and mineralisation to Newcrest’s Cadia Province mines 110km to the south, although it is also more structurally complex. Nevertheless, the Cadia Province mines host a JORC-compliant mineral resource estimate of 37.9Moz Au at a grade of 0.34g/t Au and 8.5Mt of copper at a grade of 0.25% Cu plus silver and molybdenum and produced 765koz of gold in FY21 at an all-in sustaining cost (AISC) of minus US$109/oz Au (net of by-product credits) to generate US$2,180m in revenue, US$1,615m in EBITDA, US$1,796m in operating cash flow and US$1,232m in free cash flow (FY21 results).

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, denoted Kaiser, Boda, Comobella, Driell Creek and Finns Crossing, all within a 15km north-west to south-east trending corridor (Exhibit 8) and all close to road, rail, gas and water infrastructure. Significantly, the Boda anomaly correlates with a historical 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.

Exhibit 8: 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 and the Boda Intrusive Complex. 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.

As such, the Boda porphyry system manifests itself as 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. Exploration to date has identified that the north-east shoulder of Boda (see Exhibit 2) in particular has a shallow blanket of epithermal gold mineralisation associated with colloform quartz-carbonate veining and abundant pyrite, with gold grades as high as 18.6g/t (in hole KSDD042). 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. In 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).

Boda analogues, options and potential economics

The following table provides a summary of the physical and financial characteristics of Boda’s most immediate geological analogues:

Exhibit 9: Boda analogues

Caravel

Red Chris

Cascabel

Boddington

Cadia

Operator

Caravel

Newcrest

Solgold

Newmont

Newcrest

Region

Western Australia

British Columbia

Ecuador

Western Australia

New South Wales

Stage of development

Scoping study

PFS

PFS

Production

Production

Total resource

662Mt

1,170Mt

3,843Mt

838Mt

3,382Mt

Grade Cu

0.28%

0.37%

0.33%

0.11%

0.25%

Grade Au

0.39g/t

0.22g/t

0.60g/t

0.34g/t

Contained Cu

1.9Mt

4.3Mt

12.7Mt

0.9Mt

8.5Mt

Contained Au

14.9Moz

27.3Moz

16.4Moz

37.9Moz

Reserve

480Mt

558Mt

558Mt

1,300Mt

Grade Cu

0.45%

0.58%

0.11%

0.29%

Grade Au

0.52g/t

0.52g/t

0.65g/t

0.43g/t

Contained Cu

2.2Mt

3.3Mt

0.6Mt

3.9Mt

Contained Au

8.1Moz

9.4Moz

11.6Moz

19.0Moz

Mining method

Open pit

Open pit & block cave

Open pit & block cave

Open pit

Panel cave

Initial capex

A$576m

C$2,632m

US$2,746m

Initial capex intensity

A$48.00/t capacity

C$193.53/t capacity

US$108.00/t capacity

Discount rate

7% (real)

4.5% (real)

8% (real)

Post-tax NPV

A$995m

C$2,242m

US$2,907m

Pre-tax IRR

26.0%

*19.5%

25.3%

Life of mine

28 years

36 years

26 years

Payback period

<4 years

3.2 years

4.7 years

Throughput rate (Mt)

12.0–24.0Mtpa

13.6Mtpa

25.0Mtpa

40.1Mt

32.4Mt

Head grade

0.25% Cu

0.45% Cu + 0.53g/t Au

0.58% Cu + 0.52g/t Au

0.11% Cu + 0.65g/t Au

0.95g/t Au

Recovery

c 92.0% Cu

75–85% Cu + 48–76% Au

87.1% Cu + 72.1% Au

80.7% Cu + 84.5% Au

77.4% Au

Production pa

35–55kt Cu

48.6kt Cu + 148koz Au

132kt Cu + 358koz Au

32kt Cu + 696koz Au

106kt Cu + 765koz Au

Production CuE pa

35–55kt

79kt

212kt

164kt

276kt

Copper price (US$/lb)

***4.00

***3.30

***3.60

4.29

3.66

Gold price (US$/oz)

***1,700

***1,500

***1,700

1,788

1,796

Forex

***US$0.72/A$

***US$0.80/C$

N/A

US$0.7467/A$

Cash costs

US$2.20/lb

(US$0.40/lb)

**US$887/oz

AISC

(C$60/oz)

US$0.06/lb

**US$1,083/oz

(US$109/oz)

Open-pit mining cost

A$2.93/t

C$3.47/t mined

Underground mining cost

C$5.61/t mined

Average mining cost

US$3.73/t milled

Ore treatment

A$6.69/t milled

C$10.08/t milled

US$6.38/t milled

G&A

C$4.33/t milled

US$1.58/t milled

Site costs

A$14.42/t milled

C$21.01/t milled

US$12.12/t milled

Revenue (US$m)

*1,182

2,180

EBITDA (US$m)

*698

1,615

EBIT (US$m)

*577

1,416

Source: company sources, Edison Investment Research. Note: *Edison estimate in order to allow direct comparison. **As reported – note that Newmont reports ‘Costs applicable to sales’ according to US GAAP and AISC (which does not have a standardised meaning under GAAP) without reflecting any benefit from selling non-gold metals as a reduction to AISC; items marked ** should not therefore be directly compared across companies. Edison estimates that US$887/oz cost applicable to sales equates to a comparable US$653/oz net of by- and co-product credits. ***Assumed long-term rate.

Since Boda is at a relatively early stage of development, it does not yet have a reserves estimate. However, within this context, a number of features of Boda’s peers’ technical aspects are noteworthy:

While Boda is, at the current juncture, materially smaller than Cascabel and at a lower copper grade, it is almost directly comparable to Cascabel’s Tandayama-America deposit, which boasts a resource of 634Mt at grades of 0.24% copper and 0.19g/t gold.

On average, the copper head grade of its peers either is or is expected to be 21.7% higher than the resource grade.

On average, the gold head grade of its peers either is or is expected to be 90.0% higher than the resource grade. Note that this uplift is most apparent at Cadia (see Exhibit 9), which is probably the closest geological analogue to Boda.

On average, 40.1% of resources of its peers convert to reserves (which would imply a 17-year life for Boda at a mining and processing rate of 15Mtpa).

On average, 49.8% of resources of its peers are expected to be mined (which would imply a 21-year life for Boda at a mining and processing rate of 15Mtpa).

In consequence of these – and a number of other – observations, Edison has constructed a full financial model for Boda, albeit necessarily preliminary in nature, based on the following assumptions:

Boda will be developed as an open pit, initially, followed by a sub-level cave with a plant throughput rate of 15Mtpa over 20 years.

The mine will produce a gold-copper concentrate (to be refined in Asia) and gold doré; the moisture content of the concentrate will be 9% and 0.2% will be lost in transit.

Capital intensity will be US$108/t capacity implying ‘initial’ capex of US$1.62bn; however, this will be split approximately two-thirds towards the initial open-pit mine, development and plant complex (US$1.08bn) and one-third towards the subsequent underground mine development (US$0.54bn).

Sustaining capex is estimated to amount to a further US$0.8bn, incurred approximately equally at a rate of US$40m pa over each of the 20 years of the mine’s operation.

We estimate that approximately one-third of the resource will be mineable via open-pit methods, equating to c 206Mt or 14 years of production; the remaining six years of the life of the project will then be mined by underground methods.

Depreciation is assumed to be ‘straight line’ over the lives of the assets to which it relates (ie over 14 years for open-pit infrastructure and six years for underground infrastructure).

The head grade mined and processed will be at a premium to the resource grade and will amount to 0.49g/t Au and 0.17% Cu (premiums of 90.0% and 21.7%, respectively – see above).

Metallurgical recoveries will be 77.4% for gold and 85.0% for copper.

On-site costs will be:

US$2.44/t for open-pit mining.

US$4.11/t for underground mining.

US$6.42/t for ore treatment.

US$2.52/t for G&A.

US$0.13/t for tailings.

Off-site costs will be:

Treatment costs (TC) of US$79.00/t.

Refining costs (RC) of 7.9 US cents/lb copper and US$5.00/oz gold.

Port handling costs of US$12.00 per wet metric tonne (wmt) concentrate.

Ocean freight of US$44.30/wmt concentrate.

Payability is assumed to be 99.9% for gold doré, 98.0% for gold in concentrate and 96.5% for copper in concentrate (with an additional 1% copper deduction).

Fiscal terms are assumed to be a 30% rate of corporate income tax and a 4% state royalty.

Our long-term gold and copper price assumptions remain unchanged at US$1,524/oz and US$6,410/t (US$2.91/lb), respectively.

As a result of our assumptions, we calculate that Boda has the potential to produce 182koz gold per annum plus 21.3kt copper, or 271.0koz AuE, at costs as shown below (depending upon the accounting convention adopted):

Exhibit 10: Boda life-of-mine production and costs, by accounting convention

Accounting convention

Life of mine production

(koz)

Total cash costs

(US$/oz)

AISC

(US$/oz)

Co-product accounting

3,637koz Au + 425.5kt Cu

*720

*869

By-product accounting

3,637koz Au

277

666

Source: Edison Investment Research. Note: *Per ounce AuE.

On this basis we estimate that Boda’s income statement in the first full year of its operations will be as shown in Exhibit 11. Note that, in recognition of the fact that Edison’s long-term metal prices are relatively low, Exhibit 11 also includes columns which present the same result at consensus long-term prices and spot prices:

Exhibit 11: Forecast typical Boda income statement (US$000s unless otherwise indicated)

Boda income statement

Edison long-term prices

Consensus long-term prices*

Spot prices**

Net revenue (US$000s)

388,522

440,476

457,373

Cost of sales (US$000s)

172,876

172,876

172,876

Royalties (US$000s)

15,541

17,619

18,295

EBITDA (US$000s)

200,105

249,981

266,202

Depreciation (US$000s)

79,892

79,892

79,892

EBIT (US$000s)

120,212

170,088

186,310

Interest income (US$000s)

Interest expense (US$000s)

Net interest (US$000s)

0

0

0

Profit before tax (US$000s)

120,212

170,088

186,310

Tax (US$000's)

36,064

51,026

55,893

Effective tax rate (%)

30.0

30.0

30.0

Profit after tax (US$000s)

84,149

119,062

130,417

Shares in issue (m)

595.4

595.4

595.4

Derivatives (m)

7.5

7.5

7.5

Fully diluted shares in issue (m)

602.9

602.9

602.9

EPS (US$/share)

0.141

0.200

0.219

Fully diluted EPS (US$/share)

0.140

0.197

0.216

Source: Edison Investment Research. Note: US dollars (cf Alkane accounts in Australian dollars); *US$1,633/oz Au and US$3.63/lb Cu; **US$1,765/oz Au and US$3.48/lb Cu.

Before making an investment decision on Boda, Alkane will want to drill out the remainder of the deposit, including Kaiser and Duke. It will then enter an approvals process similar to the one currently underway for the Tomingley mine life extension. Using that as a precedent, Alkane management estimates that approval for mining at Boda will take a minimum of four years, but a more likely ‘fast track’ timeline of seven years and a realistic timeline of 10–12 years. On this basis, Edison has initially assumed that approvals for the Boda project will be forthcoming in approximately June 2031, with capex then commencing for the period FY32–34, before first production in FY34 and the first full year of production in FY35. Clearly there are a number of financing considerations to be taken into account, which it is beyond the scope of this note to pre-empt at this stage in the evolution of the project. However, all of the above being the case, we calculate an immediate value of Boda to Alkane of US$80.9m, or US$0.136/share or A$0.200/share, based on the present value of future dividends, discounted at our customary rate of 10% per annum. Moreover, this valuation rises to reach US$190.8m at the start of capex (FY32) and a maximum of US$544.3m, according to the following profile:

Exhibit 12: Boda future cash flow, dividend and valuation profile (US$000s)

Source: Edison Investment Research

Note that, at long-term consensus and spot prices, the equivalent immediate valuations of Boda to Alkane would be:

US$157.0m, or US$0.264/share or A$0.388/share, at consensus long-term prices.

US$183.1m, or US$0.308/share or A$0.452/share, at spot prices

Alternatively, Edison’s valuation is sensitive towards the (real) discount rate applied to future dividends to the following extent:

Exhibit 13: Boda valuation sensitivity to (real) discount rate

Discount rate

0%

5%

8%

10%

12%

Boda project valuation (US$m)

988.5

269.4

129.5

80.9

51.2

Ditto (US$/share)

1.660

0.453

0.217

0.136

0.086

Ditto (A$/share)

2.442

0.666

0.320

0.200

0.127

Source: Edison Investment Research

All of these results may be compared with Edison’s in-situ valuation of the entire Boda, Kaiser/Duke, Boda Two and Boda Three complex of US$156.6m or US$0.263/share or A$0.387/share, as follows:

Edison’s ‘base case’ valuation of the Boda complex of US$80.9m may be reconciled with our in-situ valuation if production is achieved in five years, rather than the 13 that we are currently assuming. Alternatively, it may be reconciled with our valuation of Boda alone (of US$125.5m or US$0.211/share or A$0.310/share) on the basis that production is achieved in seven years’ time.

Our valuation of the Boda complex using consensus long-term metals prices almost perfectly reconciles with our in-situ value, which could be taken as evidence that, at the current time, a 10% discount rate is an appropriate rate to apply to the project. All other things being equal however, we would expect the in-situ valuation to remain broadly unchanged (subject to changes in metals prices), whereas we would expect the valuation of the Boda project, based on Edison’s assumptions, to increase both with time and as the discount rate is lowered to reflect milestones being reached and the project becoming successively de-risked with time.

Our valuation of the Boda complex using spot metals prices reconciles with our in-situ valuation if either the appropriate discount rate is 13.9% or it is only able to achieve a head grade of 0.42g/t Au and 0.14% Cu (cf the 0.49g/t Au and 0.17% Cu assumed).

Roswell updated resource statement

On 2 May 2022, Alkane announced an update to its mineral resource estimate at Roswell. A comparison of the updated resource with the original is provided in Exhibit 14, below. Of particular note is the 262koz (or 193.2%) increase in the inferred category of resources, which may then be promoted to the indicated category of resources at a later date and ultimately into reserves:

Exhibit 14: San Antonio updated mineral resource estimate vs maiden resource

Category

Tonnage

(kt)

Grade

(g/t)

Contained gold

(koz)

Updated

Measured

0

0.00

0.0

Indicated

8,190

1.92

506.0

Inferred

5,890

2.10

398.0

Total

14,080

2.00

904.0

Previous

Measured

0

0.00

0.0

Indicated

7,871

2.07

523.8

Inferred

2,188

1.93

135.8

Total

10,059

2.04

660.0

Change (units)

Measured

0

0.00

0

Indicated

319

-0.15

-18

Inferred

3,702

0.17

262

Total

4,021

-0.04

244

Change (%)

Measured

N/A

N/A

N/A

Indicated

4.1

-7.2

-3.4

Inferred

169.2

8.8

193.2

Total

40.0

-2.1

37.0

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

The resource definition drilling programme at Roswell is ongoing as part of an extensive regional exploration programme aimed at providing future additional ore feed, either from surface or underground, to the Tomingley mill, approximately 3km to the north of Roswell. At the current milling rate of 1.0Mtpa, resources at Roswell alone are therefore capable of supporting 14.1 years of operations at Tomingley.

Roswell and San Antonio resources combined

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. To date, Alkane’s regional exploration programme has yielded broad, shallow, high-grade intercepts that confirm the potential for material project life extensions (subject to landholder agreements and regulatory approvals).

Alkane reported a maiden resource at Roswell on 28 January 2020 and an updated mineral resource estimate on 4 November 2020. Together, the Roswell and San Antonio resources now comprise a 21,399kt resource at an average grade of 1.90g/t, containing 1,310koz gold. These add to existing resources at Tomingley of 8,614kt containing 550koz and reserves of 2,373kt containing 144koz.

With the caveat that drilling is still ongoing, a comparison of the resources delineated to date at Roswell and San Antonio relative to Alkane’s targets is as follows:

Exhibit 15: Roswell and San Antonio updated resources versus target

Target

Actual

Uplift of actual vs target

Prospect

Band

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

14,080

2.00

904

127.1

5.1

138.7

San Antonio

Upper

10,200

2.80

918

7,319

1.73

406

-28.2

-38.4

-55.8

Lower

7,400

2.30

547

7,319

1.73

406

-1.1

-25.0

-25.8

Total

Upper

16,400

2.46

1,297

21,399

1.90

1,310

+30.5

-22.8

+1.0

Source: Alkane Resources, Edison Investment Research

Taken together therefore, it can be seen that the tonnage and contained gold delineated at Roswell and San Antonio combined already outstrips the upper limit of its exploration target for the two deposits.

In terms of mine life, at a milling rate of 1Mtpa, Roswell and San Antonio’s resources could therefore potentially add 21.4 years to the life of operations at Tomingley, to which end land acquisitions have taken place, an underground exploration drive from Tomingley to Roswell is being developed and consultation, permitting and licensing to facilitate expedited mining is underway with the relevant stakeholders and NSW government.

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 this basis we would value the Roswell and San Antonio resources combined (ie 1,310koz) at US$31.5m, or A$46.4m, or 7.8 Australian cents per share.

Exhibit 16 demonstrates the value that Alkane may immediately add to its operations via success at all of its prospects to the south of Tomingley (ie including El Paso) in the event that it hits the upper end of its exploration target (note that, in terms of ounces delineated, it is already within 368koz or 22% of achieving this milestone):

Exhibit 16: Alkane exploration targets’ potential value (US$m, A$m, A$/share)

Limit

Tonnage
(kt)

Grade
(g/t)

Contained gold (koz)

Valuation (US$/oz)

Valuation (US$m)

Valuation
(A$m)

Valuation
(A$/share)

Total*

Upper

23,800

2.19

1,678

24.08

40.4

56.9

0.100

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

Note that these valuations in Exhibit 16 are based purely on the in-situ value of the resources that Alkane is targeting for delineation. More important is what they offer in terms of confidence concerning the Roswell underground extension to the Tomingley mine life extension.

Tomingley mine life extension

On 3 June 2021, Alkane announced the formal extension of the life of its Tomingley operations to at least 2031 via the incorporation of the Roswell and San Antonio deposits (using both underground and open-cut mining methods) into its formal mine plan. Whereas reserves at Tomingley were previously only sufficient to support production of c 174koz over the three years until the end of CY23, the extended mine plan will:

Increase production to c 745koz overall during the period FY22–31 (inclusive) at an expanded feed rate of 1.5Mtpa, including:

50–60koz pa in FY22 and FY23.

Production escalating from 60koz pa in FY24 to:

100–115koz pa for FY25–27, and

55–65koz pa for FY28–31.

Have an average AISC over the life of mine of A$1,350–1,450/oz, based on existing and historical Tomingley open-cut mining costs.

Involve investment of A$87m (note that capex is expected to be funded from operating cash flow and debt without recourse to the equity markets, among other things, thereby minimising dilution). Note that this level of capex equates to a relatively low capital intensity of US$888 per average annual ounce of gold production (excluding the Roswell underground extension – see below).

With detailed plans and initial consultation now complete, the project is expected to be approved in mid-2022. Potential also exists to maintain FY25–27 production levels into FY28–31 and beyond via the subsequent extension of high-grade underground mining at Roswell (see Exhibit 18).

A comparison of the ounces to be mined under the extended mine plan relative to each deposit’s resource base is as follows:

Exhibit 17: San Antonio, Roswell resource conversion into mined oz, actual vs expected

Deposit

Mined ounces
(koz)

Total resource
(koz)

Minimum required
conversion (%)

Mineable oz implied at
67% conversion* (koz)

Variance
(%)

Variance
(koz)

San Antonio

240

406

59.1

268

+11.7

+28

Roswell

249

Roswell underground

188

Roswell total

437

904

48.3

606

+38.7

+169

Total

677

1,310

51.7

874

+29.1

+197

Source: Edison Investment Research, Alkane Resources. Note: *Pre-mining reserve:resource conversion ratio estimate for Tomingley – see our note, Boda bodes well, published on 8 December 2020. Totals may not add up owing to rounding.

Thus, at the projected production rates of c 100koz per annum, we can see that Roswell and San Antonio combined currently host a resource 197koz in excess of that required by the currently planned mining schedule – assuming a 67% reserve:resource conversion ratio – and that the Roswell deposit alone boasts an excess of likely mineable ounces that almost perfectly matches the 160koz requirement of the Roswell underground extension in FY28–31 (increasing production from c 60koz pa to c 100koz pa).

Mining

Open cut

The open-cut mining plan envisages three pits, joined at the pit crest on a north-south line, which are expected to be mined from the south (ie the San Antonio end) to the north (the Roswell end) with the Roswell pit being mined in two stages. In deference to environmental considerations, scheduling will require the San Antonio pits to be mined first (with most of the early waste being used to backfill the Caloma One and Caloma Two pits at Tomingley), so that waste from Roswell can be placed into them, leaving Roswell as the final, open void. Among other things, this will create a c 2Mt run of mine stockpile at its peak (ie more than one year’s milling capacity).

Underground

In the meantime, the NSW Government Resources Regulator granted approval for the development of an exploration drive from the existing underground Wyoming One operation at Tomingley to the Roswell deposit in May 2020, which will extend into the upper half of the currently planned stoping area, allowing both upwards and downwards development. Underground mining will be similar to that currently employed at Tomingley, using standard long-hole open stoping. However, in order to maximise recovery in the higher-grade, wider sections of the Roswell orebody, Alkane also intends to use paste fill from a hired plant using consolidated tailings. In the context of underground mining at Roswell, of note is the fact that approximately 33% of tonnes (and ounces) mined will be from material currently classified as inferred, based on the operating experience and reconciliations at the existing Tomingley operation. Nevertheless, in mitigation, a substantial grade control programme is planned in advance of stoping commencing.

Processing

Under its current approval, the Tomingley plant has permission to operate at a throughput rate of 1.5Mtpa of ore, which was sought to allow faster processing of oxide material from the original pits. Since the start of CY21, it has been running at a rate closer 1.0Mtpa. However, as part of the new project approval, Alkane will seek to increase its licence to 1.75Mtpa, which will allow it to regularly process sulphide rock at 1.5Mtpa, with the potential to increase capacity by up to 16.7% during periods of favourable operating conditions. The plant modifications required in order to achieve this enhanced throughput capacity include:

crushing down to 40mm, as well as modifying the crushing circuit so that the secondary crusher does not recycle,

adding a 1.5MW mill before the existing ball mill, with its own cyclone pack and feed pumps,

adding an additional Knelson gravity concentrator and upgrading the Acacia capacity,

upgrading the tailings thickening circuit, and

associated electrical and reagent upgrades.

Once the project is approved and developed, it will add an additional eight years and c 622koz of gold output to Tomingley’s life of mine production profile relative to our prior expectations and c 802koz if the Roswell underground extension is also put into effect, as now seems increasingly likely in the aftermath of its resource upgrade.

Exhibit 18: Tomingley extended mine life production compared to prior Edison forecast

Source: Alkane Resources, Edison Investment Research

Approvals process

For simplicity, a single Project Approval consent is being sought by Alkane for all extension activities. Since the capital investment value of the project is in excess of A$30m, it will require State Significant Development consent and, for this purpose, either the minister for planning and public spaces or the Independent Planning Commission is deemed to be the determining authority. Once Project Approval is obtained however, a number of other approvals will be required, including:

a Mining Lease from NSW’s Mining, Exploration & Geoscience Department (MEG),

a new or amended Environment Protection Licence (EPA),

roads approval for the relocation of the Newell Highway and Kyalite Road in the form of a works authorisation deed (WAD) from Transport for NSW and Council,

water approvals from the Department of Natural Resources Access Regulator (NRAR) and Department of Planning, Industry & Environment (DPIE), and

a stewardship agreement with the Biodiversity Conservation Division.

More details regarding the approvals process are available in Alkane’s 3 June 2021 announcement (Tomingley Mine Life Extended Beyond 2020). However, a summary of the key dates pertinent to the extension of the project is as follows:

Exhibit 19: Tomingley mine life extension dates

Milestone

Date

Residue storage facility construction commencement

Q2 CY22

Project approval

Q3 CY22

Newell Highway diversion commencement

Q3 CY22

Infrastructure works at Tomingley gold plant

Q3 CY22

Underground production at Roswell

Q1 CY23

Open cut production at San Antonio

Q3 CY23

Milestone

Residue storage facility construction commencement

Project approval

Newell Highway diversion commencement

Infrastructure works at Tomingley gold plant

Underground production at Roswell

Open cut production at San Antonio

Date

Q2 CY22

Q3 CY22

Q3 CY22

Q3 CY22

Q1 CY23

Q3 CY23

Source: Alkane Resources

The full financial and valuation consequences of the Roswell underground extension are considered in the ‘Alkane/Tomingley valuation’ section, below.

Quarterly, half-year and annual FY22 results

Q322 operational results and FY22 estimates

Since our last note, Alkane has announced operational results for Q2 and Q322, production results for Q422 and financial results for H122. Guidance for FY22 was for production of 55–60koz at an AISC of A$1,500–1,650/oz. In the event, production for the year was 66,804oz, notwithstanding the external effects of weather and the COVID-19 pandemic, at an AISC that ‘is expected to be slightly below guidance’ (note that this is very similar to the pattern it showed in FY21, when it also outperformed its guidance of 50–55koz at an AISC of A$1,400–1,550/oz by producing 56,958oz gold at an AISC of A$1,320/oz). As a result, Tomingley has now met or exceeded guidance in every year of its operation. In this case, the strong FY22 performance was attributed to above forecast mined grade from several areas, as well as selfless levels of flexibility exhibited by the workforce. At the same time, the group announced unaudited cash, bullion and investments positions of A$124.3m as at end-June 2022, composed of A$77.9m in cash, A$8.2m in bullion and A$38.1m in listed investments. In consequence of these disclosures, we have updated our operational forecasts for Q422 and FY22 to those shown below:

Exhibit 20: Tomingley quarterly operating results, Q420–Q422e

Q420

Q121

Q221

Q321

Q421

Q122

Q222

Q322

Q422e

FY22e

Ore milled (t)

204,269

254,423

235,217

237,455

201,437

247,884

257,384

261,675

270,947

1,037,890

Head grade (g/t)

2.20

1.56

2.50

2.40

2.16

1.79

2.42

2.27

3.03

2.39

Contained gold (g/t)

14,448

12,761

18,906

18,323

13,989

14,266

20,026

19,098

26,422

79,812

Recovery (%)

89.3

88.4

88.1

91.0

87.1

85.1

85.4

79.3

87.4

83.7

Gold poured (oz)

13,358

11,499

15,919

16,040

13,500

12.141

16,935

14,635

23,093

66,804

Gold sold (oz)

12,992

11,945

16,613

15,844

11,526

13,359

17,754

14,635

21,180

66,928

Gold price (US$/oz)

1,713

1,911

1,875

1,796

1,814

1,790

1,796

1,878

1,873

1,834

Forex (A$/US$)

1.5226

1.3987

1.2929

1.2943

1.2989

1.3613

1.3728

1.3806

1.4011

1.3790

Average realised price (A$/oz)

2,327

2,261

2,302

2,203

2,401

2,467

2,475

2,437

*2,624

2,501

C1 site cash costs (A$/oz)

981

1,178

720

803

1,199

1,531

1,089

1,193

1,124

1,211

AISC (A$/oz)

1,368

1,575

1,201

997

1,669

1,961

1,338

1,598

1,199

1,475

Source: Alkane Resources, Edison Investment Research. Note: *Excludes forward sales.

On the basis of these forecasts and Alkane’s H122 financial results, we have adjusted our FY22 financial forecasts for the group to those shown below in Exhibit 21:

Exhibit 21: Alkane underlying* income statement, H120–H222e (A$m, unless otherwise indicated)

H120

H220

H121*

H221

H122

H222e

FY22e

FY22e

(prior)

Revenue

34.098

38.451

65.252

62.581

76.911

85.407

162.318

136.446

Cost of sales

(16.500)

(16.400)

(24.087)

(21.226)

(35.423)

(42.591)

(78.014)

(76.806)

Gross profit

17.598

22.051

41.165

41.355

41.488

42.816

84.304

59.639

Other net income

0.111

(0.201)

0.350

3.015

0.808

0.808

(0.090)

Administration expenses

(4.993)

(5.276)

(7.215)

(4.778)

(5.504)

(5.504)

(11.008)

(7.367)

Exploration and evaluation expenditure expensed

0.000

(0.329)

0.000

0.000

0.000

0.000

Impairments etc.

0.000

0.000

0.000

0.000

48.334

48.334

0.000

Gain/(loss) on disposal

0.000

(0.317)

(0.002)

(0.955)

13.909

1.400

15.309

Share of profit/(loss) of associates

(0.473)

(0.397)

(0.020)

(0.020)

Depreciation

(1.429)

(7.722)

(9.226)

(12.028)

(14.171)

(16.311)

(30.482)

(24.524)

EBIT/(LBIT)

11.318

8.207

24.599

26.212

84.844

22.401

107.245

27.659

Interest income/(cost)

(0.109)

0.498

(0.495)

(2.246)

(1.318)

0.073

(1.245)

0.147

Loss after tax from discontinued operations

0.000

(0.583)

*0.000

0.000

0.000

0.000

PBT/(LBT)

11.209

8.122

24.104

23.966

83.526

22.474

106.000

27.806

Income tax

3.743

2.826

7.485

7.018

25.295

6.742

32.037

8.342

Effective tax rate (%)

33.4

34.8

31.1

29.3

30.3

30.0

30.2

30.0

Profit/(loss) for the year

7.466

5.296

16.619

16.948

58.231

15.732

73.963

19.464

Non-controlling interest

0.189

(0.189)

Minority interest (%)

1.1

(1.1)

Adj. profit/(loss) for the year attributable to shareholders

16.430

17.137

58.231

15.732

73.963

19.464

Basic adjusted EPS (A$/share)

0.0146

0.0091

0.0277

0.0288

0.0978

0.0264

0.1242

0.0327

Source: Alkane Resources, Edison Investment Research. Note: *Excludes ‘profit/(loss) after income tax expense from discontinued operations’ of A$22,134k relating to the demerger of Australian Strategic Materials (ASM).

One feature of note in our updated forecasts is the A$48.3m derecognition gain reported in Alkane’s H122 financial results and its (estimated) gain on disposal of A$15.3m, which arose as a result of Alkane’s sale of Genesis shares to the value of A$18.8m in H122, with the result that its residual holding was reclassified to financial assets at fair value. Excluding these ‘exceptional’ gains, our underlying pre-tax profits forecast for FY22 is A$42.4m (cf A$27.8m forecast previously).

Genesis Minerals sale

In late November 2021, Alkane sold 126m shares of its holding in Genesis Minerals for proceeds of A$18.8m and a gain on disposal of A$13.9m. After a rights issue and a 10 for 1 consolidation, this left Alkane with a residual holding of 31.7m shares, of which it sold 20.0m in Q322 for proceeds of A$34.4m and (we estimate) a gain relative to the position’s holding value of A$1.4m. In the aftermath of these sales, we estimate that Alkane has a residual holding in Genesis of 11.77m shares. Together with its holdings in Calidus Resources and Sky Metals, we estimate the value of its listed holdings, as at the time of this note, to be as follows:

Exhibit 22: Alkane Resources listed investment holdings

Holding

Ticker

Percentage interest (%)

No. of share held

Share price
(A$/share)

Valuation
(A$)

Valuation
(US$)

Valuation (A$/share)

Valuation (US$/share)

Calidus

CAI AU

9.5

38,302,744

0.63

23,939,215

16,276,322

0.0402

0.0273

Genesis

GMD AU

4.7

11,770,484

1.34

14,242,286

9,683,360

0.0239

0.0163

Sky Metals

SKY AU

1.6

6,000,000

0.06

342,000

232,527

0.0006

0.0004

Total

38,523,501

26,192,209

0.0647

0.0440

Source: Edison Investment Research, Alkane Resources.

Alkane/Tomingley valuation

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 Q322 operational results, Q422 production results and H122 financial results, our valuation of the dividend stream potentially available to Alkane shareholders from its immediate Tomingley operations is now A$0.508/share to 1 July 2022 (cf A$0.328/share to 1 July 2021 previously). However, to this must also be added the value of residual resources at the end of the life of operations in 2031, which we now estimate to be 1.0Moz with a current value of US$23.7m (A$34.9m), or A$0.059/share, to bring our total valuation of Tomingley to A$0.567/share (cf A$0.369/share previously) including cash.

A comparison of our updated expectations for Alkane’s EPS and DPS stream and valuation from the present to the end of its life of operations is shown in Exhibit 23, below:

Exhibit 23: Alkane life of operations’ forecast EPS and (maximum potential) DPS (A$/share)

Source: Edison Investment Research

Note that the DPS columns in Exhibit 23 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 and given the likely capital requirements of the NMPP, we would expect the majority of any dividends that could be paid to shareholders instead to be re-invested into the business, either in the form of exploration or capital expenditure.

Combined valuation of Alkane

A summary of our updated valuation of Alkane in light of both the announcement of a maiden resource at Boda (see Exhibit 1) and H122, Q322 and Q422 financial, operating and production results, respectively (see Exhibits 20 and 21), is as follows:

Exhibit 24: Alkane Resources valuation summary (Australian cents per share)

Previous

Current/updated

Asset

Existing assets valuation

Contingent assets valuation

Potential total

Existing assets valuation

Contingent assets valuation

Potential total

Tomingley plus cash

37

37

57

57

Roswell underground

6

6

8

8

El Paso and ongoing Tomingley extension exploration

3

3

2

2

Investments in Calidus and Genesis*

15

15

6

6

Boda exploration

30–59

59

31

31

Boda Two & Three exploration

1–11

11

4–27

27

Kaiser & Duke exploration

4–9

9

4–10

10

Spot gold price level cf long-term forecast

16

16

12

12

Total

52

60–104

156

94

30–59

153

Source: Edison Investment Research. Note: *At prevailing share prices of A$0.625/share for Calidus and A$1.21/share for Genesis. Totals may not add up owing to rounding.

A number of features of the valuation are noteworthy:

The liquidation of a portion of the Genesis Minerals position has resulted in a higher cash position as at end-June 2022 of c A$77.9m, compared to A$38.0m as at end-December 2021; this is now deemed theoretically distributable by Alkane and hence contributes towards the ‘Tomingley plus cash’ component of the above valuation. Nevertheless, it is worth noting that the sum of the ‘Tomingley plus cash’ and ‘Investments in Calidus and Genesis’ components of the valuation has increased from 52c/share to 63c/share.

While our potential valuation of Alkane of A$1.53/share is broadly unchanged relative to our prior note (see Boda resource estimate within five months, published on 16 November 2021), the proportion accounted for by ‘existing assets’ has increased materially, from 33.3% to 61.4% of the total, reflecting much higher confidence in our valuation and much higher share price underpinning. As such, Alkane’s share price of A$0.68 could be interpreted as being more than 100% covered by the value of ‘existing assets’, with no value whatsoever currently being afforded to the company’s share price by investors for ‘contingent assets’. In this context, we would also note that the announcement of the resource increase at Roswell increases the probability that our ‘Roswell underground’ valuation – currently included as a ‘contingent asset’ – will shift into ‘existing assets’ in the near future. The announcement of a maiden mineral resource at Kaiser should similarly have the effect of moving the valuation of this asset from ‘contingent’ to ‘existing’ assets in Q4 CY22. Moreover, with Tomingley providing near-term, intermediate cash flow, we believe that these valuations may be achieved with limited/minimal dilution in the form of future equity issues.

Financials

Alkane had A$17.0m in net cash on its balance sheet as at end-H122, composed of A$38.0m in cash and A$21.0m in external borrowings. As at end-Q422, the cash component of this equation was reported to have increased to c A$77.9m after the company’s sale of 20m shares in Genesis Minerals for A$34.4m in February (see above). In addition, it had c A$8.2m of bullion on hand and, we estimate, an updated A$38.5m in listed investments in Calidus, Genesis and Sky Metals. 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 six to 12 months.

Exhibit 25: Financial summary

A$000s

2018

2019

2020

2021

2022e

2023e

2024e

2025e

30 June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

129,973.6

93,994.9

72,549.0

127,833.0

162,318.1

140,056.4

161,793.8

260,736.2

Cost of Sales

(51,080.9)

(53,656.4)

(32,868.0)

(45,313.0)

(78,014.2)

(63,528.6)

(85,327.0)

(150,500.0)

Gross Profit

78,892.7

40,338.5

39,681.0

82,520.0

84,303.9

76,527.8

76,466.8

110,236.2

EBITDA

 

 

70,378.7

32,971.7

29,412.0

70,527.0

73,295.9

69,161.1

69,100.1

102,869.5

Normalised operating profit

 

 

31,658.3

25,808.8

20,171.0

49,940.0

43,621.9

36,989.1

58,135.1

91,904.5

Reported operating profit

31,658.3

25,808.8

20,171.0

49,940.0

43,621.9

36,989.1

58,135.1

91,904.5

Net Interest

(579.0)

(418.8)

389.0

(2,741.0)

(1,244.7)

858.7

738.4

1,158.5

Joint ventures & associates (post tax)

0.0

0.0

0.0

(870.0)

(20.0)

0.0

0.0

0.0

Exceptionals

0.0

0.0

(646.0)

1,741.0

63,643.0

0.0

0.0

0.0

Profit before tax (norm)

 

 

31,079.3

25,390.0

20,560.0

46,329.0

42,357.2

37,847.8

58,873.5

93,063.0

Profit before tax (reported)

 

 

31,079.3

25,390.0

19,914.0

48,070.0

106,000.2

37,847.8

58,873.5

93,063.0

Reported tax

(6,919.9)

(2,266.1)

(6,569.0)

(14,503.0)

(32,037.3)

(11,354.3)

(17,662.0)

(27,918.9)

Profit after tax (norm)

24,159.4

23,123.9

13,991.0

31,826.0

10,319.9

26,493.4

41,211.4

65,144.1

Profit after tax (reported)

24,159.4

23,123.9

13,345.0

33,567.0

73,962.9

26,493.4

41,211.4

65,144.1

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Discontinued operations

0.0

0.0

(583.0)

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

24,159.4

23,123.9

13,991.0

31,826.0

10,319.9

26,493.4

41,211.4

65,144.1

Net income (reported)

24,159.4

23,123.9

12,762.0

33,567.0

73,962.9

26,493.4

41,211.4

65,144.1

Basic average number of shares outstanding (m)

506

506

547

595

595

595

595

595

EPS – basic normalised (A$)

 

 

0.05

0.05

0.03

0.05

0.02

0.04

0.07

0.11

EPS – diluted normalised (A$)

 

 

0.05

0.04

0.02

0.05

0.02

0.04

0.07

0.11

EPS – basic reported (A$)

 

 

0.05

0.05

0.02

0.06

0.12

0.04

0.07

0.11

Dividend (A$)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

10.3

(-27.7)

(-22.8)

76.2

27.0

(-13.7)

15.5

61.2

Gross margin (%)

60.7

42.9

54.7

64.6

51.9

54.6

47.3

42.3

EBITDA margin (%)

54.1

35.1

40.5

55.2

45.2

49.4

42.7

39.5

Normalised operating margin (%)

24.4

27.5

27.8

39.1

26.9

26.4

35.9

35.2

BALANCE SHEET

Fixed assets

 

 

138,275.0

172,196.0

129,077.0

203,161.0

258,493.0

289,911.0

303,536.0

302,661.0

Intangible assets

93,136.0

103,894.0

32,745.0

57,794.0

104,374.0

124,374.0

134,374.0

144,374.0

Tangible assets

36,266.0

51,038.0

62,322.0

99,411.0

111,729.0

123,147.0

126,772.0

115,897.0

Investments & other

8,873.0

17,264.0

34,010.0

45,956.0

42,390.0

42,390.0

42,390.0

42,390.0

Current assets

 

 

93,306.0

76,501.0

59,096.0

33,054.0

91,585.5

79,271.9

108,650.0

180,025.8

Stocks

19,153.0

4,816.0

7,647.0

11,648.0

10,895.3

5,372.0

6,205.8

10,000.8

Debtors

2,030.0

1,998.0

2,940.0

1,894.0

2,223.5

3,453.4

3,989.4

6,429.1

Cash & cash equivalents

72,003.0

69,582.0

48,337.0

18,991.0

77,945.6

69,925.4

97,933.8

163,074.8

Other

120.0

105.0

172.0

521.0

521.0

521.0

521.0

521.0

Current liabilities

 

 

(27,430.0)

(21,762.0)

(14,238.0)

(18,179.0)

(45,560.5)

(38,171.5)

(39,963.2)

(45,319.9)

Creditors

(9,299.0)

(8,007.0)

(9,425.0)

(11,082.0)

(12,610.5)

(5,221.5)

(7,013.2)

(12,369.9)

Tax and social security

(6,929.0)

(9,317.0)

0.0

0.0

(24,813.0)

(24,813.0)

(24,813.0)

(24,813.0)

Short-term borrowings

0.0

0.0

(2,090.0)

(3,294.0)

(3,294.0)

(3,294.0)

(3,294.0)

(3,294.0)

Other

(11,202.0)

(4,438.0)

(2,723.0)

(3,803.0)

(4,843.0)

(4,843.0)

(4,843.0)

(4,843.0)

Long-term liabilities

 

 

(13,647.0)

(13,059.0)

(19,522.0)

(26,471.0)

(38,990.0)

(38,990.0)

(38,990.0)

(38,990.0)

Long-term borrowings

0.0

0.0

(4,515.0)

(5,922.0)

(17,404.0)

(17,404.0)

(17,404.0)

(17,404.0)

Other long-term liabilities

(13,647.0)

(13,059.0)

(15,007.0)

(20,549.0)

(21,586.0)

(21,586.0)

(21,586.0)

(21,586.0)

Net assets

 

 

190,504.0

213,876.0

154,413.0

191,565.0

265,527.9

292,021.4

333,232.8

398,376.9

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

190,504.0

213,876.0

154,413.0

191,565.0

265,527.9

292,021.4

333,232.8

398,376.9

CASH FLOW

Operating cash flow before WC and tax

69,941.3

33,135.8

28,173.0

72,065.0

137,726.9

69,071.1

69,010.1

102,779.5

Working capital

(9,498.0)

(5,172.0)

(3,481.0)

(2,840.0)

4,028.7

(3,095.6)

421.9

(878.0)

Exceptional & other

1,277.0

1,454.0

3,704.0

4,632.0

(63,643.0)

0.0

0.0

0.0

Tax

(6,919.9)

7,047.9

(249.0)

0.0

(7,224.3)

(11,354.3)

(17,662.0)

(27,918.9)

Net operating cash flow

 

 

54,800.5

36,465.7

28,147.0

73,857.0

70,888.3

54,621.1

51,769.9

73,982.5

Capex

(9,224.0)

(19,621.0)

(46,122.0)

(59,477.0)

(42,800.0)

(43,500.0)

(14,500.0)

0.0

Acquisitions/disposals

0.0

4.0

(20,068.0)

1,522.0

0.0

0.0

0.0

0.0

Net interest

(579.0)

(418.8)

389.0

(2,741.0)

(1,244.7)

858.7

738.4

1,158.5

Equity financing

(5.0)

0.0

39,442.0

(31.0)

0.0

0.0

0.0

0.0

Exploration and Evaluation

(10,969.0)

(11,578.0)

(20,132.0)

(26,642.0)

(31,271.0)

(20,000.0)

(10,000.0)

(10,000.0)

Other

(4,317.0)

(7,442.0)

(9,522.0)

(18,129.0)

51,900.0

0.0

0.0

0.0

Net cash flow

29,706.4

(2,590.1)

(27,866.0)

(31,641.0)

47,472.6

(8,020.2)

28,008.3

65,141.1

Opening net debt/(cash)

 

 

(41,969.0)

(72,003.0)

(69,582.0)

(41,732.0)

(9,775.0)

(57,247.6)

(49,227.4)

(77,235.8)

FX

311.6

169.1

0.0

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

16.0

0.0

16.0

(316.0)

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(72,003.0)

(69,582.0)