Alkane Resources — Kaiser takes on the World

Since our last update note on 2 January, Alkane has announced:

This note updates our valuation of the company for each of these four announcements.

On 29 April, Alkane announced an update to its Kaiser mineral resource estimate, following an extensive infill drilling programme, which saw some of the best grades (eg 1m at 60.4g/t in hole KAI159 on the northern boundary of the deposit) and intersections (eg 162m at 2.13g/t AuE in the heart of the deposit) reported last. Higher grades were also encountered from surface – especially at the southern end of the deposit – while deeper drilling confirmed that it continued at depth. In general, the pattern of results for the later drill holes was towards wider, longer and deeper intersections, variously at high grades (eg hole KAI159, which recorded the highest grade of any hole at either Kaiser or Boda) when intersecting brecciated zones.

The revised estimate was based on a 1,100m strike length x 650m width (cf 1,750m strike length x 500m width at Boda) and used nominal drill hole spacing of 50m x 50m (the same as Boda), which allowed the majority of the deposit to be upgraded to the indicated category of resources, from inferred. Drilling depths averaged c 500m below surface (cf 1,000m at Boda) and ranged up to 800m. In total, the updated resource was calculated from assay results from 217 drill holes (cf 186 at Boda) for a total of 94,799m drilled (cf 145,458m at Boda), averaging 437m per hole (cf 782m/hole at Boda) and comprising 41,487m (44%) diamond core and 53,292m (56%) reverse circulation (RC) drilling. This total was almost exactly double the number of metres drilled at the time of Kaiser’s maiden resource in February 2023, and ranged in depth from a very approximate 500m above mean sea level to approximately 490m below. The detailed drilling also enabled the revision of the wireframe models. Cut-off grades of 0.3g/t AuE and 0.4g/t AuE for open pit and underground resources, respectively, were the same as those applied in February 2023. However, in the updated case, the resource was further refined via the application of a notional pit shell to determine which resources were open pittable and which were instead amenable to underground mining. In addition, there was a slight adjustment to metals prices – from US$1,770/oz Au and US$9,750/t Cu to US$1,950/oz Au and US$8,600/t Cu – for the purposes of calculating gold equivalent (AuE) grades and metal contents.

Exhibit 1 summarises the resource update at Kaiser relative to its maiden resource declared on 27 February 2023.

A number of features of the updated resource estimate are important:

The grade of the deposit, in particular, may be compared with the width-weighted averages calculated by Edison for the 201 holes for which it has data, as follows:

Readers should be aware that the uplift in grade in the updated resource relative to the average of the drill holes is typical for this type of deposit. Reserve grades are typically higher again to the tune of c 90% for gold grades and 22% for copper grades – albeit at the expense of approximately half of the deposit’s tonnage.

Valued at US$62.88 per measured gold ounce listed in Australia, US$24.84 per indicated ounce and US$7.87 per inferred ounce (see Gold stars and black holes, published in January 2019), our updated valuation of the Kaiser deposit is US$44.2m, or 10.9 Australian cents per share. On a like-for-like basis, this would imply a US$28.0m uplift relative to its valuation in February 2023, all other things being equal, albeit we had already somewhat pre-empted the upgrading of the deposit to indicated status by applying an average value of US$24.08/oz to Kaiser’s maiden resource (Exhibit 1). Nevertheless, the value of the updated resource may now be stated with a much greater level of certainty relative to that of the maiden resource. In addition, it should be noted that our valuations of US$62.88 per measured ounce, US$24.84 per indicated ounce and US$7.87 per inferred ounce were calculated in January 2019 when the gold price was US$1,208/oz. As such, they should be considered conservative in an environment in which the gold price is now approximately double that level.

The updated resource at Kaiser also adds to the existing resource of 6.4Moz (10.9Moz AuE) already delineated at Boda to give a combined total of 796Mt at 0.58g/t AuE for 14.7Moz AuE (8.28Moz Au, 1.46Mt Cu). This compares with its maiden resource and also the locally comparable resource disclosed by Newmont for Cadia and Newcrest for Cadia Ridgeway c 110km to the south as shown below:

Seen in national terms, the entire 14.7Moz AuE Boda-Kaiser complex is among the top three deposits in Australia in terms of resources and among the top 10 based on its gold inventory alone. Valued at the same US$62.88 per measured gold ounce, US$24.84 per indicated ounce and US$7.87 per inferred ounce, our updated valuation of the whole Kaiser-Boda complex is US$160.0m, or 40.0 Australian cents per share. Valued at US$24.08/oz, it is US$199.9m, or A$0.499/share. Moreover, early indications are that its metallurgy is extremely simple, requiring only a crush-grind-float-regrind-concentrate-ship flow sheet to process.

As per our note, Coming to fruition, published on 7 July 2022, assuming that 40% of its resources convert into reserves, the mineable inventory at Kaiser-Boda would be in the order of 319Mt – or 16 years of life at a mining rate of 20Mtpa, 21 years at 15Mtpa, 32 years at 10Mtpa or 64 years at 5Mtpa. At head grades of 0.49g/t Au and 0.17% Cu and metallurgical recoveries of 77.4% Au and 85.0% Cu, a processing rate of 15Mtpa would imply production of c 257koz AuE pa and EBITDA of c US$247m pa at a total initial open-pit cash cost of c US$729/oz AuE at Edison’s somewhat conservative real, long-term prices of US$1,794/oz Au and US$6,410/t Cu or c US$434m at current prices of US$2,400/oz Au and US$10,668/t Cu. Post-tax and capex (and pending the publication of Alkane’s own scoping study in May or June this year), we would value such a stream of income as at 1 July 2024 (ie the start of FY25) at US$183.6m or A$0.45/share) at our long-term prices on the basis of the discounted value of maximum potential future dividends to shareholders discounted at a rate of 10% per year.

Readers should note the similarity of this discounted dividend valuation of A$0.45/share with the resource valuations calculated in the paragraph below Exhibit 3 above, of A$0.400/share and A$0.499/share – both conferring confidence in the valuation and cementing it in the A$0.400–0.499/share range. At current metals prices, however, we value it at US$571.8m (or A$1.42/share), on a discounted dividend basis (all other things being equal):

In the meantime, as stated previously, Alkane is conducting its own scoping study regarding the potential future economics of a Kaiser-Boda mine. To this end, it has nearly finished costing the mooted metallurgical facility and its peripheral infrastructure. Moreover, the level of the work being conducted is such that a rapid transition to a feasibility study is possible. It also reports that it has already started the baseline process for permitting and expects to make an environmental application within the next two years.

Between FY20 and FY23, Alkane invested at least A$20m pa in exploration – a figure that will now fall materially as it returns to greenfields exploration and cheaper RC drilling. Nevertheless, during the mineral resource exploration programme at Kaiser, two significant reverse faults were located, which dislocated the main zone of mineralisation. As such, there is potential for further extensions to higher-grade mineralisation on the down thrust at the Kaiser west zone of mineralisation, south-west of the Kaiser fault, and east of the Solar fault, where mineralisation is statistically said to be ‘nuggety’. Exploration upside in these areas is supported by the results of earlier holes, including hole KAI090 (which intersected a bornite-chalcopyrite crackle breccia, including 122.4m at grades of 0.40% Cu and 0.42g/t Au from 576.6m and 28m at 0.84% Cu and 0.92g/t Au from 646m) and extra drilling will aid in improving the confidence of these domains to convert remaining resources from the inferred to the indicated category.

The Northern Molong Porphyry Project (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 New South Wales.

The Kaiser geology and mineralisation style is almost identical to Boda and possibly represents a deeper part of the system thrust over the shallower level Boda deposit. In addition, Alkane’s drill results at Kaiser-Boda have shown a similar stratigraphic sequence and style of alteration and mineralisation to Newmont’s Cadia Province mines 110km to the south. The Cadia complex hosts a mineral resource of 35.2Moz Au at a grade of 0.34g/t Au (including stockpiles and open pit resources – source: Newmont) plus copper, silver and molybdenum, and produced 597koz of gold in Newcrest’s FY23 at an all-in sustaining cost (AISC) of US$45/oz Au (net of by-product credits) to generate US$1,897m in total revenue and US$1,306m in EBITDA.

The NMPP now comprises five exploration licences: Bodangora, Boda South, Kaiser, Finns Crossing and Comobella (from Sandfire), covering 180km2, 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 7) and all close to road, rail, gas and water infrastructure. Significantly, 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 a magnetic anomaly. As a result, Alkane subsequently completed a 70-line kilometre IP survey over the 6km strike extensions of the BIC to generate drilling targets and four of these targets – namely Kaiser, Boda, Comobella and Glen Hollow – have now already been drill tested.

To date, exploration has identified the margins of major monzonite intrusive complexes that provide the primary control for porphyry and epithermal mineralisation, with significant intersections reported along the western margin of both the Kaiser Intrusive Complex and the BIC. Within these, 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.

Exploration around the Boda-Kaiser area within the NMPP has defined a 3.5km corridor of extensive calc-potassic alteration associated with gold-copper porphyry mineralisation. The corridor trends north from Boda Three to Boda for approximately 1km, where it rotates to the north-west from Boda to Kaiser for a further 2.5km.

Within this, the Kaiser porphyry system manifests itself in a series of near-vertical, north-west striking, intrusive related breccias hosted within a thick sequence of andesite lavas. Magmatic-hydrothermal breccias appear to be the focus for the calc-potassic alteration and gold-copper mineralisation at Kaiser, where the highest gold and copper grades are related to the transition from intrusive breccias to hydrothermal breccias. The majority of brecciation is found as ‘crackle breccia’, which can either have a hydrothermal matrix typically composed of calcite + actinolite + pyrite + magnetite + chalcopyrite + bornite or an igneous matrix. Copper mineralisation is also observed throughout the prospect outside the magmatic hydrothermal breccias within calcite + quartz + epidote dominant veins and as disseminations and patches, often intergrown with epidote. Locally, copper has been identified along the Kaiser fault zone in thicknesses up to 10m wide. As shown in Exhibit 6, two significant reverse faults bound and dislocate the main zone of mineralisation at Kaiser, where the west dipping Solar fault thrusts the Kaiser main zone over the Kaiser east zone. Located immediately north-west of Boda, the east Kaiser zone comprises potassic to inner propylitic alteration with up to 10% pyrite by volume, which can be found to hold gold grades over tens of metres and can average 0.2–0.3g/t in grade with occasional thin intervals of >10g/t Au.

In the meantime, the Boda deposit remains open at depth and along strike to the south and drilling continues to define the overall system, with extensions being tested south and at depth at Boda Two and Three, and north-west towards Kaiser. Exploration at Boda Two and Three continues to demonstrate many similarities to Boda, including an extensive zone of low-grade gold-copper porphyry mineralisation with breccias that zone to higher grades. However, it is dislocated by a series of imbricated thrust faults, resulting in deep distal propylitic altered volcanics with minor gold-copper mineralisation in the west being thrust over a central block of broadly calc-potassic altered volcanics with extensive gold-copper mineralisation. These blocks are further thrusted over the preserved upper level of the Boda Two and Three porphyry system in the east. Exploration potential remains to target high-grade mineralisation within these blocks that can be dislocated by up to 500m and recent drill hole results confirm that 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 gold-copper porphyry mineralisation with breccias that zone to higher grades. These breccias are in the process of being targeted. However, if intersections in this area ultimately increase to those implied by the deposit’s apparent 1,100m x 500m coincident gold-copper soil and magnetic high footprint with separate conductive IP anomalies, we calculate that a resource on a par with the existing one at Kaiser and Boda could be possible.

Note that, if the ultimate resource delineated at Boda 2–4 expands to 9,154koz (our estimate of the maximum reasonably possible, based on Alkane’s estimate of the potential dimensions of the mineralisation), we would value it at A$0.382/share. As before, readers are cautioned that such estimates are very far from being JORC code-compliant and experience would suggest they have an accuracy of approximately ±80%.

At the same time, Alkane is also continuing exploration at the Boda Four prospect. Composed of two linear magnetic highs approximately 800m long and up to 200m wide, this prospect is located 1km south and along strike to the BIC and is named the Boda South Intrusive Complex (BSIC). A total of 912m across three RC drill holes have been completed at the northern and central section of the BSIC at the Boda Four prospect, which intersected low-grade copper-gold mineralisation. As a result, more RC drilling is planned, focusing on the west and north-west flanks of the BSIC.

Regionally, recent exploration has also targeted the Driell Creek, Konigin and Murga prospects, all positioned within the same (inferred) 15km north-west-trending intrusive corridor.

On 27 February, Alkane announced that grade control drilling from the underground development at the Roswell deposit had confirmed significant high-grade gold mineralisation and lifted the initial underground ore reserve estimate for Roswell to 237koz. Including the planned open cut, therefore, total ore reserves for Roswell now stand at 450koz, while the mineral resource base for the TGEP was revised to 1.17Moz with internal ore reserves of 664koz (Exhibit 11).

The most significant features of the update are:

As at Kaiser, the predominant reason for the decline in the overall resource tonnage was the exclusion of any material outside the Roswell open-pit shell (hence the 100% of conversion of indicated resources to probable resources in the open-pittable portion of the resource) as well as the exclusion of any material deemed too distant from the extension of the resource below the Roswell open pit to continue to be classified as inferred (notwithstanding the fact that the material remains in situ).

As a result of the update, we may make the following observations about reserves and resources currently delineated at Roswell, San Antonio and McLeans relative to those required for the execution of the TGEP (Exhibit 11):

While the overall grades of the resources and the reserves of the three deposits appear to be lower than those required for the execution of the TGEP, it is worth recalling that the mineralisation at Roswell, San Antonio and McLeans is generally hosted in narrow veins of varying thicknesses in conjunction with discrete ore pods. All three deposits have sections with grades of 5–9g/t over wide intersections in such a way that producing the head grade required should simply be a matter of diligent grade control coupled with the use of discriminating mining techniques. Within this context, it is also worth noting that the legacy operation at Tomingley has a history of producing mined grades that have exceeded those expected from its geological models.

The Roswell extension towards San Antonio is continuing to be explored from underground by Alkane and is open to the south, while additional orebodies parallel to the San Antonio orebody remain open at depth. Otherwise, vertical development has been in hand for some time and management reports that it has already fired its first 23–24kt stope underground at Roswell. The next stope will be larger and the whole underground production team at Tomingley is expected to be migrated to the new mining area within the next six months, after which time the legacy operation at Tomingley will be run down. Thereafter, the Roswell orebody will be mined in a classic chequerboard style, ramping up to a rate of 1.1–1.2Mtpa by April 2025 and 1.5Mtpa by the end of CY25, such that production in FY26 should exceed 100,000oz Au.

Since our last update note, Alkane has announced financial results for H124 and operational results for Q324. Guidance for FY24 is for production of 60–65koz Au at an AISC of A$1,750–2,100/oz. Production in Q3 was lower than expected at Caloma 2. Despite being higher grade, the material mined had a higher than anticipated carbon content, which resulted in lower metallurgical recoveries owing to preg-robbing in solution. However, while unexpected, this transient phase in mining is now in the past. In future, the majority of ore processed will be derived from Roswell at a higher grade. In addition, Alkane has resampled the surrounding area at Caloma 2 to ensure that there is no repetition of the same phenomenon. As a result, Alkane has left its FY24 guidance intact and Exhibit 12 below demonstrates the minimum performance that we calculate will need to be achieved in Q4 for guidance for the year to be met.

At a gold price for the remainder of the financial year of US$2,441/oz, as a result of Alkane’s operational results to date and its H124 financial results, we have adjusted our FY24 financial forecasts to those shown below in Exhibit 13.

After its most recent acquisitions and disposals of shares in Calidus and Genesis, respectively, together with its holding in Sky Metals, we estimate that, as at the time of this note, the value of Alkane’s listed holdings is as follows:

As in previous reports, our valuation of Alkane 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 (real) rate of 10% per year, excluding exploration expenditure. In the wake of H124 financial results, Q324 operational results and after updating our gold price and A$/US$ foreign exchange assumptions to reflect current market conditions etc, our valuation of the dividend stream potentially available to Alkane shareholders from its immediate mining operations is now A$0.555/share to 1 July 2024 (cf A$0.546/share to 1 July 2023 previously). This increases to A$0.599/share once the value of residual resources, which we now estimate at 734koz with a current value of US$17.7m (A$26.6m), or A$0.044/share, is also included.

A graph of our updated expectations for Alkane’s EPS and (maximum potential) DPS stream and valuation from the present to the end of the life of its TGEP operations is shown in Exhibit 15, below.

Note that the DPS columns in Exhibit 15 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 cash flows that could be used for dividends to instead be reinvested into the business, either in the form of exploration or capital expenditure.

A summary of our updated valuation of Alkane in the light of the announcement of the updated resource at Kaiser, H124 financial results and Q324 operational results is as follows:

A number of features of the valuation are noteworthy:

Alkane had A$46.4m in net cash on its balance sheet at end H124, comprising A$57.3m in cash and A$10.9m in external borrowings. According to its 24 April quarterly update, it had A$28.4m in cash plus A$6.1m of gold bullion on hand and A$6.6m in listed investments as at end Q324. In addition, it had a project loan facility of A$50m provided to it by Macquarie Bank for the TGEP, which it subsequently increased to A$60m post quarter end. This facility was undrawn at the end of March as development activities up to that point had been funded from cash. However, A$23m was subsequently reported to have been drawn down from the facility in the current quarter (ie Q424).

In H124, Alkane generated A$31.1m in cash from operating activities, before investing A$63.0m into tangible and intangible mining assets, as it continued to fund exploration at its Kaiser and Boda deposits to increase the size and accuracy of their resource estimates and develop the TGEP. In addition, the company generated a net A$11.8m from the sale of investments (in particular its remaining shares in Genesis Minerals).

The first phase of major capex spending on the TGEP will conclude in Q3 CY24 (ie Q125). The second, lesser, c A$18m phase to divert the Newell Highway and increase the plant’s throughput will now commence and is expected to conclude late in CY25. Simultaneously, exploration expenditure, which has been running at c A$20m pa, should reduce as work reverts from detailed resource delineation to greenfields in nature and drilling reverts to the cheaper RC type (cf diamond). Concurrently, however, free cash flow from operations will contribute meaningfully to capex as higher-grade production from Roswell is ramped up. During this period, Alkane’s revenue will be protected via 94,100oz Au sold forward at an average price of A$2,833/oz to June 2027 (fractionally re-jigged this month) and put options to sell 140,799oz Au at a price of A$3,000/oz also out to June 2027, which will protect its revenue, allow for more accurate planning of marginal ounces and continue to leave the upside open to any future gold price rises (note that the intrinsic value of these derivatives has been incorporated into the revenue estimates of our financial models with reference to our gold price forecasts, but that the time value and the balance sheet value of the hedge book have not).